THE North-East is like a communist state because its increasing dependence on public spending "crowds out" private enterprise, according to a controversial study.

The report claims public spending as a proportion of the regional economy has risen from 53.8 per cent in 1998/9 to 58.7 per cent this year.

The figure is the highest for any English region.

Government expenditure accounts for only 32.6 per cent of gross domestic product (GDP) in the South-East and only 34 per cent in London.

The Centre for Economics and Business Research (CEBR) warned the 58.7 per cent figure in the North-East was comparable to "Eastern European countries as they emerged from communism".

It concluded: "There is a risk that parts of the UK are becoming so dependent on public spending that it can crowd out private enterprise in these regions.

"Public spending in these regions is high because they are doing less well economically but, on the other hand, a high public spending share can make a revival of the private sector difficult to achieve."

But the claim was ridiculed by the Treasury, which said it made no apology for rising investment in health and education, or for the cost of the New Deal for the jobless.

A spokesman said: "Crowding out is unlikely to occur since it only takes place when excessive government spending leads to a rise in interest rates.

"As a result of the decision to give the Bank of England independence, and the strong fiscal position meeting the fiscal rules, interest rates are set nationally at a low and stable level."

The CEBR said much of the difference between regions was explained by so-called "social protection" spending - on state pensions and benefits - and by the big increase in public-sector jobs.

This accounted for 20.3 per cent of GDP in the North-East, compared with 9.6 per cent of GDP in London. The England average was only 13.31 per cent.

The North-East also had the highest spending on health - 9.73 per cent of its GDP compared with an average of 6.91 per cent.

Only Sweden and Denmark had a similar public spending pattern to the North-East. The likes of Hungary and Slovakia had cut their state spending since the fall of communism.

The CEBR reached its conclusions by adjusting public expenditure figures released last month to take account of the varying size and cost of living across different regions.

The public expenditure share of GDP for the UK as a whole had risen by three per cent since 1998/99 - a larger rise than in any other major economy.