THE North must attract more private investment for economic recovery and reduce its reliance on the state, the Chancellor warned on the eve of visiting the region.

Alistair Darling, who will oversee a meeting of ministers and regional leaders in Gateshead today, said the region had a “large public sector”

and needed to diversify.

The comments come ahead of a widely-predicted “decade of austerity”, with big spending cuts likely to hit the North-East particularly hard, because so many workers are employed by the State.

The growing share of the North-East economy swallowed up by the public sector – 57 per cent is one estimate – has sparked allegations that it increasingly resembles the Soviet Union.

Meanwhile, the Chancellor also denied that Scotland had grown wealthier on much higher public spending – under the notorious Barnett Formula – saying: “It’s more complex than that.”

Speaking to The Northern Echo, at Westminster, Mr Darling said: “I think the key for the North-East, and for the whole of the North of England, is that it has got to look at encouraging more private sector involvement.

“One of reasons I wanted to see Northern Rock come through this is that just under 20 per cent of workers in the North-East is employed in the financial services sector.

“It’s an example of how the economy has diversified over the last few years – the heavy industry is going, although it has got a large public sector.

“The public and private sectors complement each other, but the main thing must be to get more private sector firms ready to come into the North- East – because that is the best way of increasing the amount of wealth.”

Back in July, a House of Lords committee demanded the urgent scrapping of the “unfair” Barnett Formula, because it deprived the poorer parts of Britain of billions of pounds by lavishing spending on Scotland.

Anger has grown because Scotland receives £876-perperson more than the North- East, yet income per head north of the border is 96 per cent of the national average – compared with 79 per cent in the North-East.

The formula delivered a £500m cash injection to rescue plans for the new £2.3bn Forth Bridge, on the edge of Edinburgh, while the long campaign to upgrade the A1 has run into the sand.

The Treasury is already two months late delivering its response to that report, but Mr Darling denied it was uncertain what to say, saying the response would come “pretty shortly now”.

On the Barnett Formula, Mr Darling said: “I’m well aware about the question of the dualling of the A1, and reasons for that, but I’m also aware that the Government has spent quite a lot of money in the North-East, both in transport and other ways.”

‘Recession is over, but . . .’

UNEMPLOYMENT will continue to rise into next year, Mr Darling warned – despite preparing to announce today that Britain is officially out of recession.

Figures are expected to show that the British economy grew by 0.2 per cent in the third quarter of the year, ending a year-long run of falling output.

But Mr Darling said he expected the jobs recovery to be much slower, after a “shock to the system” that he compared to a nasty dose of flu.

He also pledged “the same determination to win the recovery that we had to defeat the recession” – which is where today’s Regional Economic Council, in Gateshead, comes in.

The council was set up a year ago, bringing together the regional ministers, businesses, trade unions and regional development agencies to fight the economic crash.

It meets each quarter, in different locations around the country, boasting Mr Darling and Business Secretary Lord Mandelson.

Mr Darling said: “About a year ago, we were looking into the abyss. The banking system was frozen.

“It was clear we had reached the astonishing situation where the bank doors would be shut and the machines would be switched off. Twelve months on, people are a lot more confident, but you have to look at what’s happening over the trend – you can’t just look at one set of figures.

“If you speak to a member of your family who has a very bad dose of flu, they don’t get up the next morning and carry on as if nothing has happened.

“Unemployment is rising – although at a far lesser rate than we thought at the beginning of this year – and, unfortunately, people will continue to lose their jobs into next year.”