What do we owe a place? How the debate about left-behind places is challenging how we distribute public funding and the problems it should address

The article “The revenge of places that don’t matter (and what to do about it)” by Andrés Rodríguez-Pose (2018) resonated with many readers because it captured the injustice felt by people living in left-behind places. They think that progress passes by the place they call home, which no longer holds a future for them or their children. This sentiment is eloquently described in “There is nothing for you here” by Fiona Hill (2022). These places may have experienced an economic slowdown or population decline or a reduction of their quality of life compared to other places. Public and private services may have retreated and infrastructure may be slowly crumbling. People living in these places feel ignored by the government because either it failed to acknowledge these problems or failed to fix them. Some economists, however, argue that these problems cannot be fixed and that allocating more funding to these places is a bad idea because it would generate lower economic returns than investing in more successful places. To the residents of these places, this may feel like adding insult to injury by acknowledging the problems and refusing to fix them. Maybe it should not come as a surprise that so many people rallied around the term “left-behind places”. Policies that boost innovation and transport connections often end up favouring more affluent places. R&D and patenting are highly concentrated in a few very productive regions. As a result, these regions are more successful in attracting research funding and benefit more from tax policies that encourage R&D. Selecting transport projects that generate the biggest reduction costs tends to favour places with a large population and high incomes, as local incomes are used to translate reduced travel time into cost reductions. This is not to say these criteria are wrong, but that the projects selected in this way can be portrayed as benefitting large affluent places more than small, poor places. Experts arguing that public funding should not go to poor places, but to more productive (and thus affluent) places because in these places the return on investment will be higher, has helped to fuel narratives that elites in the capital are depriving the real people in real places of their fair share of funding (Müller 2016). A wide range of populist and Eurosceptic parties have pushed this narrative and have seen substantial electorate gains exactly in the places that have experienced economic decline or stagnation (Dijkstra et al., 2020; Rodríguez-Pose et al, 2023a). These parties argue that only they care about the people in left-behind places and only their policies will ensure a better future for them. In France, for example, the Rassemblement National argued for a de-metropolisation of France to help the smaller cities and towns. The spatial distribution of funding can generate strong emotional reactions and political debate. For example, in the Netherlands, a debate has emerged about how much funding should go to the Randstad, which includes Amsterdam, the Hague, Rotterdam, and Utrecht, and how much to the rest of the country.1 While some people are convinced that their region does not receive enough funding, others may feel equally strongly that exactly the same region has received too much funding for too long. Big transfers between regions, especially when they become quasi-permanent, can lead to political tension. Transfers that offset a temporary setback, such as a short-term increase in unemployment due to a factory closing can be seen as insurance. All regions could be exposed to such a short-term shock and, therefore, they pool their resources and provide funding to the affected regions to help offset the increased costs. This works for short-term shocks. When the same regions keep receiving large transfers, people living in richer regions, who are paying for the bulk of these transfers, may argue for more fiscal decentralisation, a more federal country and even outright independence. These changes would give the richer regions more control to reduce or even abolish these transfers. The political parties that argue in favour of the independence of Flanders and Catalonia or the UK leaving the EU do not focus exclusively on reducing these transfers, but these transfers do make it easier to convince people they will be better off once they are independent or out of the EU. To decide whether a region receives too much or too little public funding, we need to answer two questions. How much funding does it receive currently? How much funding should it receive? The debate about funding is typically held in relative terms. People argue about which places need more or less funding. To frame this debate, however, we should start from the current (absolute) level of expenditure. The current level of expenditure affects that arguments can be used to justify either increasing or decreasing it. The second question is fundamentally about what values should guide our decisions. Should we be focussing on efficiency or inequality? Should we favour autonomy or reducing disparities? How should we assess fairness? Does it depend on providing all places with the same funding or does it require the same or equivalent outcomes? No single value can guide all decisions, the goal is to understand which values to use, and when. National public expenditure and investment are carefully monitored and data are regularly published. The sub-national distribution of public expenditure and investment, however, is rarely properly measured. Such a distribution does face a number of methodological obstacles. Public expenditure is large and complex. For example, in the EU public expenditure is around 46% of GDP. It contains many categories that have no obvious sub-national dimension, such as interest payments on national debt, national defence and general public administration. The expenditure of sub-national governments can be attributed to the area they govern, but the expenditure of the central government is more complicated to disentangle. Public expenditure can be allocated to the place where it was spent or to the places that benefited from the expenditure. For example, does a hospital or a school only benefit the place where it is located in or also the places where its patients or students live? Other types of expenditure are easier to allocate. For example, unemployment benefits can be allocated to where the recipient lives. Public investment in the EU is around 3% of GDP and thus much smaller than public expenditure. It is typically dedicated to specific projects, which should make it simpler to regionalise. However, only a small number of EU countries publish the regional breakdown of total public investment. For example, Poland has estimated a regional distribution of total government gross fixed capital formation and Spain has published data on investments by local and regional governments, but not central government (EC 2022). To regionalise investment, we need to decide whether to attribute it to the place where it was spent or where the benefits were felt. For example, a bridge for a high-speed train that only passes through the region (and does not stop there) will generate few benefits for that region. These methodological difficulties are further compounded by the political sensitivity of this distribution. However, a democracy can only function properly if the actions of the government can be scrutinised and debated. Therefore, it is paramount that a regional and local breakdown of public expenditure is calculated and published annually. This work should start with the publication of expenditure by regional and local governments. The OECD has an ongoing project, the Regional and Municipal Government Finance and Investment Database (REGOFI and MUNIFI), where they collected disaggregated data on government finance for each region and municipality.2 This work should be followed by a regionalisation of central government expenditure that is most relevant for regional economic development and local quality of life. Using the first level Classifications Of The Functions Of Government, these would be economic affairs (which includes transport), health, education and social protection. To the extent possible, this classification should consider the geographical distribution of the benefits of this expenditure. Only when we know the current distribution of public funding, can we decide how it needs to change. The debate about what is a fair distribution of public expenditure within a country is not new, but population decline, stagnating economic growth and austerity have given it a new urgency. To assess what is fair, we need a benchmark. Here, I present six stylised benchmarks. Autonomy: Using GDP as the benchmark would distribute public expenditure according to economic activity. This would amount to treating each region as a separate country without any automatic sharing of resources. It could be described as sovereignty, independence or simply zero-solidarity. It implies that tax revenue stays in each region and is not shared with other regions. Efficiency means allocating public funding to projects where the return on investment is estimated to be highest. This approach is frequently used for innovation funding and transport projects. Continuity: To some, the past provides the most important benchmark. Continuity means that a region should receive the same amount of public funding over time, regardless of changes in its economic fortune, population or the current disparities in per capita funding. Equality of input: Using population as a benchmark would redistribute funding from rich to poor regions. The bigger the income gaps, the bigger the redistribution would be. It ensures that all places can spend the same amount of funding regardless of income, need or opportunity. Equality of output: Here, the benchmark is to ensure that everyone receives the same benefits and the same level of service regardless of where they live. For example, providing the same unemployment benefits in all regions. Many services are provided for identical costs in all regions, such as postal services, broadband, education and health care, despite the higher costs of providing these services in some locations. Anti-disparity: This benchmark goes beyond the equalisation of input or outputs. It aims to reduce or limit disparities by providing the most funding to the regions that are worst off. There is considerable debate on how to define worst off, but many policies rely on low economic development, high unemployment or high poverty. Sweden3 and Norway4 both have a strong local government financial equalisation system. These systems combine input equalisation and output equalisation. Norway calls the former income (for example, tax) equalisation and the latter equalisation of expenditure needs. The first part compensates municipalities for differences in their tax base, while the second part takes into account the higher cost of service provision in some municipalities, so-called involuntary cost differences. The aim of these mechanisms is to provide everyone with an equivalent access to services regardless of one’s place of residence. The German constitution has an article (107) that calls for equalisation of funding between Länder, that is, input equalisation. In addition, it gives the federal government the right to create legislation to maintain the uniform living conditions, that is, output equalisation. Output equality thus shifts funding from places where providing these services is cheap (often urban) to places where this is expensive (often rural). In some cases, this benchmark shifts funding to urban places, for example when teachers, nurses or civil servants are paid more in cities to compensate for the higher costs of living. Three examples of anti-disparity policies are EU cohesion policy, the Rebuilding East Germany policy and the UK Levelling Up policy. All three aim to reduce disparities in economic development, but also more broadly in access to opportunities and quality of life. An anti-disparity policy will require substantially more funding than an output equalisation policy, but it is not a permanent policy. Output equalisation policies are designed to compensate regions for higher operation costs of service provision. This policy is not expected to reduce these higher provision costs, it is only designed to offset them. By contrast, anti-disparity policies are expected to reduce disparities in the medium term. Once disparities have reached an acceptable level, the additional funding would no longer be needed. Each of these benchmarks can be linked to a particular philosophy, political persuasion or priority. Autonomy can be linked to Tiebout’s work (1956) arguing that people can “vote with their feet”. This theory argues that if municipalities offer different tax rates and different baskets of goods and services, people will move to the municipality with their preferred mix of taxes and services. Empirical research, however, indicates that this only applies to the affluent (Latimer, 2023). Efficiency appeals to those who want to maximise growth, while continuity appeals to conservatives. Equality of input may attract people arguing that all places should have a level playing field in terms of public funding. Equality of output would be appealing to fans of Rawls’s theory of justice (2005). Behind the veil of ignorance, you do not know if you will be born rich or poor, whether you will live in place with high or low quality of public services or high or low unemployment rates. Thus, a benchmark that ensures all places offer a similar quality of public services and benefits should fit well with this theory. An anti-disparity approach should appeal to those who are concerned that territorial polarisation may lead to political polarisation. The benefit of these benchmarks is that it provides a clear structure for a debate about the spatial distribution of public funding. 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