The government is planning to rip up decades-old public spending rules in an effort to boost economic wellbeing in the north and the Midlands.
Under proposals being drawn up before the spring budget, ministers will reassess how officials calculate the value for money of government investments in transport infrastructure, business development and initiatives such as free ports.
Investment decisions would be less focused on overall national economic growth and, for the first time, Whitehall resources would be allocated on the basis of improving the wellbeing of people in the north, or narrowing the productivity gap with the south.
The change is seen as key to fulfilling Boris Johnson’s election pledge to unlock an investment bonanza in communities that voted Conservative at the election for the first time.
Mr Johnson’s chief adviser, Dominic Cummings, has criticised Treasury rules for favouring rich areas of London and the southeast. Under the department’s existing value for money criteria an investment has to be shown to maximise economic return in terms of a measurement known as gross value added (GVA). The criteria, set out in the Treasury’s Green Book, affect everything from transport infrastructure projects to the promotion of scientific research and development.
Last year a paper by academics at Cambridge and Manchester universities argued that the policy had contributed to a disparity between the least and most productive regions that was “extreme” by the standards of most developed countries.
A change in methodology could affect, for example, where the government opens free ports, tax-free zones intended to encourage economic activity after Brexit. When Mr Cummings was told by officials that plans for free ports in deprived coastal communities would simply divert businesses from other areas he is understood to have said that that was his intention.
A senior Treasury source told The Times: “It is a very big thing. You have to think about the outcomes you want to achieve and work backwards.
“The traditional way to look at it is the simple GVA per head. There is a question of whether you change that to take into account wellbeing productivity discrepancies. It is an exciting debate and you’re going to hear a lot more about it in relation to the budget.”
The source added that it would not affect the fiscal rules that Sajid Javid, the chancellor, set out during the election: “We still need to be fiscally prudent. The truth is that if you spend one pound in one area that is a pound you don’t have to spend somewhere else.”
Lord O’Donnell, the former cabinet secretary, described the plan as an “excellent idea”. He said there was clear evidence that increasing incomes up to £80,000 a year was associated with higher levels of happiness, after which additional earning made almost no difference to wellbeing.
“It would be daft not to incorporate models of wellbeing into this,” he said. “A traditional cost-benefit analysis merely looks at what constitutes an economic gain without examining the effect of that gain on different groups of people.
“It means it is far harder to justify an infrastructure project that would link up northern towns and cities than it would be to justify a similar project in the south of the country.”
Lord O’Neill of Gatley, a former Treasury minister who is now vice-chairman of the Northern Powerhouse Partnership, said he had long believed that the present system “does not make any sense”. “By definition, it adds to the attraction of projects in heavily populated, economically vibrant areas — usually London,” he added.
The Treasury said: “We work across government to ensure investment is focused on where it is needed across the UK and delivers value for money for the taxpayer.”