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Hard economic reality: Pt 3 Will the attempt to level up actually level down?

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IN THE THIRD of my mini-series examining the economic challenges facing the UK I look at ‘levelling up,’ the policy goal central to this Government’s agenda – aimed at broadening prosperity out of London and the South East to, as the media describe it, ‘the left behind’ regions and towns.

Trying to create regional wealth is a noble ideal but will the Government’s solution work and if not how could levelling up be achieved?  In this short essay I will make the case the approach that this Government is taking to regional disparity is almost entirely examining the problem from the wrong end of the telescope. Indeed, it might ultimately exacerbate the regional wealth differences, bake-in decline and risk being counter-productive.

‘Levelling up’ is not a new idea. It is actually a rather clever rebranding of an old idea. An idea that was all the rage in the Wilson and Heath years which was such a success, yeah? The building of the Humber Bridge, famously described from ‘nought to nought’, the relocation of Government departments, the white heat of the new technology and all that optimism.

However, regional economics wasn’t exactly a triumph then and was tossed into the dustbin for good reason. However, as a marketing tool it is potent as the result in the Hartlepool by-election bears witness, but to understand the real drivers of regional wealth difference one must first understand what creates prosperity.

As a generalisation up to the 1960’s wealth distribution across the UK was more evenly spread than it is today. Companies and public bodies often paid ‘the London weighting’ a 10-20 per cent premium to offset the higher cost of housing in the Capital. 20 per cent extra wouldn’t get you far today when the average house price in the capital is north of half a million. Indeed, using ONS data average GDP per head is now 70 per cent higher in London than the UK average, a figure that has been gradually widening over the last 25 years.

The decline of the regions is relative, not absolute. All parts of the UK, rich and poor, are materially more prosperous than a generation ago but the gap has undoubtedly widened. The reasons are many but as a gross generalisation it is probably fair to say the growth of the service economy has played to the South East’s strengths while the North has been hit disproportionately by de-industrialisation. This thesis is well understood.

Ultimately it has been the inability to find new significant strategic advantage as the old industries have closed that has led to the North’s relative decline and in some cases a tragic negative loop leading to despair and a feeling of hopelessness.

This is not new. The process has been going on since the 1960’s – possibly before – and the general response from Government has been to do exactly what the current administration is doing – spend in the regions. A cursory look at the chart below suggests, however, the non-English “nations” do rather well out of Westminster as does London. It is the forgotten English regions that seem to languish.

Identifiable public spending by region or nation £ per head 2019-20 

 

Source ONS

It is certainly true the non-English regions do particularly well but that is only part of the story and has it done them any good? The chart below is illuminating and critical. Looking at relative regional wealth per head London dominates to a quite extraordinary extent but London also has by far and away the smallest public sector relative to the size of the economy.

Indeed, there is an almost perfect inverse correlation between the wealth of a region and the size of its public sector. The richer the region the larger the private sector. In other words a large public sector seems to crowd out private initiative and bakes-in decline. A small public sector is thus a virtue for prosperity.

Regional / national GDP per head and size of regional / national public sector 


Source: ONS

It should be fairly obvious that a vibrant private sector is the basis of wealth, local and national, but if it is true the Whitehall policy of throwing money at the regions may actually be counter-productive then while it might provide a short-term fix of local unemployment in the longer term it may actually be making rejuvenation even harder.

On that basis Johnson’s plan is, sadly, doomed to fail. He will allocate billions in schemes heralded as the saviour of this or that, but it will almost certainly be largely wasted.

There is an irony, however, the very thing that made and broke northern wealth in the first place – strategic advantage and its passing – may well come back to benefit the north. If this be so its rejuvenation will be despite Government not because of it.

Large scale heavy industry may largely be a thing of the past but interconnectivity, homeworking, IT and the ability to work almost anywhere might just play to the so-called forgotten regions’ advantage.

The ability to set up e-commerce from the Dales, or a travel aggregator in Ayrshire or niche precision engineering firm in Doncaster has never been greater. On-shoring of critical infrastructure is gathering pace given the fragility of global supply chains and more importantly the increasing aggressiveness of China. Industry is making a comeback albeit it in a different way to before.

Britain has perhaps the most advanced logistics network in Europe and the vast majority of the population enjoy strong broadband. The cost of property outside London and a few hotspots be it residential, commercial or industrial is a fraction in the Britain’s quieter spots. The seeds are there for regeneration.

Then the disaster of lockdown and the insane political choices of the London Mayor making travel around the City almost impossible might well result in some deciding to up sticks and relocate elsewhere in the UK. It only takes one Apple or Dyson, or dare I say a Nissan, to rejuvenate an area and rather than the pull being all to London it might be the tables begin to even up just a bit.

Rather than waste billions on vanity and in the changed post-Covid world highly questionable large scale infrastructure projects – or state sponsored attempts to be fund manager with ’Green Banks’ or Infrastructure funds – surely it’s far better to trust the people? They have the ideas, imagination and creativity. Increasingly location is irrelevant in the high tech, just-in-time, service economy.

So to succeed you don’t want public sector largess. Well intentioned as it may be it ties up productive capacity in the public sector and can be largely counter-productive. What you do want is connectivity, local clusters, and a pleasant and culturally strong environment. It’s about ideas, confidence, engaging locality and a willing and able labour pool, not grand projects, second rate back office public sector jobs or fiscal bungs badly spent.

Next up – ‘levelling up’ the public sector – the real drag on productivity  

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Photos of Middlesbrough Transporter Bridge by mountaintreks and roboroborob from Adobe Stock.

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