The Instruments of Regional Policy

Abstract

The first weapon of the government is to introduce a systematic regional variation in its expenditure on capital and/or current account. Such a policy is usually designed to secure a balance between aggregate demand and supply at the regional level. The result will be that the government runs a budget surplus in some regions and a budget deficit in others. This would normally occur even without an explicit regional dimension in the government’s expenditure policy, so long as rates of taxation rise and rates of expenditure (on welfare payments, etc.) fall with increases in regional income. The explicit regional dimension in expenditure policy tends to increase these surpluses and deficits still more. The important question is their appropriate size, and this depends in turn on the policy objectives sought. Thus, given the goal of minimising regional unemployment differentials, deficits should be larger the greater the predicted level of unemployment and the smaller the value of the regional employment multiplier (which in turn is smaller the greater the region’s marginal propensities to import and save).