As we all know, the Government gained the support of a majority of working-class voters at the 2019 election and in the process won a swathe of hitherto solidly Labour seats in the north and Midlands (but not in Scotland). These voters may have been satisfied that Boris Johnson had got Brexit done and had returned democratic control to somewhere culturally and physically nearer to voters than Brussels. The fact, for instance, that control over migration is now fully in British hands has led to this issue dropping off the top of the list of their concerns. The assumption now is that red-wall voters wanted levelling up as well.
Understandably keen to keep these voters, and the 50 or so ‘red wall ‘ seats gained since 2017, the Johnson administration prioritised levelling-up as an objective to reduce geographical disparities across the UK. This represents a realignment of British politics, ending a middle-class based Tory party with its voting base mainly in southern and rural England. It also appears to signal the end of at least a rhetorical adherence to free-market economics in favour of government intervention to achieve greater geographical and hence class equality.
The Levelling-Up White-Paper
It has taken two years but at last the Government’s plans were revealed in its February 2nd Levelling Up White paper. This 300-page blockbuster (with an additional 50-page technical annex) throws the kitchen sink at the problem but provides an unclear picture of what it plans to achieve and especially how it might be achieved. What does seem very likely is that such a muddle of plans, schemes, strategies, roadmaps, reviews, projects, visions, frameworks, principles, targets, registers, reforms, settlements, covenants, guarantees, facilities, reliefs, bids and pots, will do little more than they have in the past to reduce the gap north-south gap in productivity. It is a pity that the current practise of forcing local authorities to competitively bid for limited pots of money hs not been abandoned in favour of straightforward funding in response to need.
The overall programme is organised around 12 missions with associated legally binding targets, monitoring and reporting, backed by a new department of Levelling Up and a cabinet committee. In traditional civil service manner, the targets are mostly vague enough to leave room for argument about whether they have been attained even if the plans survive future changes in government. Mission 1 for instance is that “by 2030, pay, employment and productivity will have risen in every area of the UK, with each area containing a globally competitive city, and the gap between the top performing and other areas closing.” Other missions promise improvements in R&D, transport and digital infrastructure education, skills, life expectancy, wellbeing, pride in place, housing, crime and local leadership. The last of these provided the main headline with an intention to considerably extend the use of local mayors.
Despite the length of the report there is little evidence supporting the view that mayors will make a difference. The report says that “the benefits are clear” but a decade ago when the first mayors were created under the Localism Act the DCLG Impact assessment said that “evidence on the effectiveness of mayors is inconclusive”. Experience since then may have improved this view but the White paper merely lists a few achievements of existing mayors without any attempt to compare this with cities without mayors. The chart below shows that the Tees valley economy has continued to decline as a share of the UK total since the energetic and well-regarded Tory mayor was elected in May 2017. It is unfair to expect any mayor to turn around an economy in such a short period but the chart reveals the size of the task. The new Tees Freeport, which will develop a derelict steelworks site, may make a difference with new wind-power production and other activities, but beyond that the conditions which caused past slow growth in the area will largely remain.
One Hundred pages of history and geography
The White paper covers far too much and loses focus, as well as confusing readers on what can and will be achieved. The first 100 hundred pages is a history and geography of regional disparities in the UK and a rather uncritical review of academic explanations for these disparities. Starting the history of urbanisation at Babylon in 7000BC has been the source of much mirth and symbolises the lack of focus on the report’s main task. There appears to be little understanding of why cities exist – they are service sectors which became temporarily combined with manufacturing industry in 18th and 19th centuries for reasons connected with historical limitations in transport and energy supply. After electricity became available industry had less need of concentration, which is why late industrialisers like Germany have a wider spread of industry and less regional inequality. By the 20th century industry was leaving the cities in the ‘urban-rural shift’ only to depart the UK altogether as the lifting of capital controls and the availability of cheap labour abroad led to globalisation.
The lack of understanding of the economic history prevents a clear approach to future policy. It helps to understand that the steady loss of jobs from manufacturing in the industrial areas has held back the northern and midland regions and cities for most of the post-war period. The history since the 1960s has been one of declining manufacturing. London lost a million manufacturing jobs and was a declining city until the 1980s but became the first large UK city to emerge as a purely a service centre with renewed growth potential. Once liberated from declining manufacturing and able to focus on finance and related activities in an increasingly finance-oriented world, London has gone from strength to strength. The main regional cities, Leeds, Manchester Birmingham, Newcastle finally lost the last of their manufacturing drag anchors in the final year of the twentieth century and have since prospered as major service centres. Conversely the second-order cities, Liverpool, Bradford, Sheffield, Hull, Wolverhampton or Gateshead have been slower to convert and, in any case, will never be the principal service centres of their regions. This is important because the success of Birmingham or Manchester is easily put down to their mayors or to high-profile policies like the Northern Powerhouse rather than to the slow out-working of economic history.
There is none of this in the white paper. Instead, its potted account of academic theories mixes the relevant with the irrelevant and the merely fashionable. For instance, the once fashionable idea that clusters of related activities are important in promoting competitiveness is given credence and indeed becomes a key driver of northern recovery in its key policy of “targeting” £100m of investment in “three new Innovation Accelerators, private-public-academic partnerships which will aim to replicate the Stanford-Silicon Valley and MIT-Greater Boston models of clustering research excellence and its direct adoption by allied industries”. There is no mention of the demise of almost all of the UK’s great manufacturing clusters, in cotton, wool, jute and linen textiles, in ceramics, metal goods shipbuilding or carpets. Nor any discussion that clustering works best where very local information flows are important as in financial markets, but may now become less important in a world of the internet, zoom meetings and working from home.
Building strengths in local universities and research centres may not be enough. Despite Manchester’s strength in universities, Astra-Zeneca has recently moved its HQ and R&D base from Cheshire to Cambridge. Strengthening academic-business links in Manchester or Birmingham may pay dividends but building industrial eco-systems is a complex matter and surely requires more thinking-out than is indicated here. An account of why AstraZeneca forsook the north to move to the greater south-east would have sharpened the focus of this report (but would have rather punctured its over-optimistic tone).
There appears to be little new money, so the hundreds of listed initiatives are mainly those already in the pipeline and continuations of those applied over recent years in which regional disparities have continued to widen. New money was already planned in some areas, especially R&D which the Government is taking seriously as a means of making a success of the post-Brexit economy. The UK has been an R&D laggard for decades and efforts are being made with a target that spending on R&D should reach 2.4% of GDP by 2027. Since spending in the USA, Japan, Germany and Scandinavia is already well above 3% this is a long way from closing the international gap. There is no recognition that business R&D spending in the UK is low because we have so little manufacturing industry to undertake the spending.
The new levelling up promise is that most of this new money for R&D will go to areas outside the London-Oxford-Cambridge nexus which currently attracts most of it. It is far from clear how this will be achieved or whether there is a cost in orienting research to areas away from these UK’s great intellectual powerhouses. The intention may be good but delivery will be difficult and expensive. It is hard to be confident that HMG will put enough into this to see it through to success. Developing the equivalent of Boston’s MIT in say Manchester would be expensive and as far as the White Paper is concerned appears to be beyond the Government’s ambitions.
So much of what is listed in the report has been tried before with limited success over recent decades and earlier successes are ignored. The Paper’s review of previous regional policy initiatives brings forth limited lessons. Surprisingly the great period of regional policy from 1963-76 is hardly mentioned. During these years 250,000 manufacturing jobs were diverted from the South East and West Midlands to the northern and peripheral regions. Firms were prevented from locating in the South East and West Midlands through a regime of ‘industrial development certificates’ and attracted to the development areas with generous capital and employment grants. The policy was discredited because some of the plants later closed, including car assembly at Linfield in Central Scotland and artificial fibres plants in Northern Ireland. The policy really came to an end because unemployment had risen throughout the UK by the mid-1970s and it became politically impossible to relocate jobs from one area of high unemployment to another. Many of the closures occurred not for local reasons but because of the absurdly overvalued level of sterling in the early 1980s. Carrots and sticks worked in a way that market forces subsequently have not. High wages and land values in the South East and the opposite in the North East, Wales or Northern Ireland have not levelled up productivity or living standards as economic theory might superficially suggest. Firms have instead relocated production to parts of the world where labour costs are many times lower than in any part of the UK.
One huge factor missing from the analysis here is the national dimension. The over-valuation of sterling from 1980 to 2008 helped the UK to de-industrialise to a greater extent than any other European economy. The inclusion of Eastern Europe into the EU in 2004 opened up a huge new source of low-cost labour with wage levels often a third of those in the UK and no restrictions on trade. Once most manufacturing jobs had gone, employers were able to bring in labour from the new EU member states to expand the service sector. The UK has had a good record of private sector job creation since the early 1990s but over this period LFS data shows that more than two-thirds of these jobs have been occupied by those born abroad. The impact was to depress wages in low-paid jobs and to reduce pressure for inter-regional migration within the UK.
With the real value of sterling now back to the levels of the 1960s, after major depreciations in 2008 and 2016, and low wage immigration now controlled, the macro-economic environment is now very different from previous decades. This in itself should help to level up the UK regional economies. Indeed, the evidence is that London’s share of UK value added has ceased growing and that the rest of England has improved for the first time in several decades.
Source of data: ONS Regional Accounts
The reduction of the headline rate of corporation tax from 30% of profits in 2006 to the current level of 19% by 2011 has helped to maintain a good flow of foreign direct investment through both the Brexit and Covid periods. Since half of business R&D in the UK comes from foreign-owned firms this should form an important part of the levelling up strategy. Instead, the current plan is to raise the tax rate in one huge hike in 2023 to 25%. It is a good example of incoherent policy with an important national tax rate pulling in the opposite direction from the government’s regional strategy. Perhaps not surprisingly, this is not touched upon in the White Paper.
What needs to be done to equalise regional productivity?
A stronger UK economy with its newly competitive exchange rate and new trade arrangements provide the context for a revival in manufacturing. Early into the post-Brexit period it looks as if the UK has maintained most of its markets in the EU. New trade agreements with the rest of world, especially in Asia, should widen the possibilities for trade. For instance, the newly-started trade talks with India should reduce the trade-destroying 150% Indian tariff on Scotch and Northern Irish whisky. The task is then to build a new manufacturing base round high-wage, high-productivity and high-tech activities and to ensure that most of these locate in the north, midlands and in the devolved regions. The managerial failures that destroyed the car and shipbuilding industries were shown up when well-managed Japanese car plants in Sunderland and Derby succeeded where British-run companies could not. The UK’s almost complete lack of business schools through the 20th century has been rectified and many managers now have experience of working in well-managed foreign-owned firms. The Japanese firms have also shown that the old problems of trade unions and poor labour relations have gone way. The way seems open for a northern recovery.
The key influence on regional wages and hence productivity is shown in the chart below. Over four-fifths of the disparities in average wage levels between areas in England, Wales and Northern Ireland is explained by the distribution of graduates working in the private sector. Public sector graduates have little influence on average wages since teachers, doctors, nurses and administrators are employed and paid irrespective of local economic competitiveness. Firms employing high proportions of graduates are necessarily engaged in high-productivity and often high-tech activities and able to pay the high wages required to attract graduates.
Chart: Average wages v percentage of employees who are graduates working in the private sector
Source: Unpublished research by Graham Gudgin and Neil Gibson with data from Census of population and New Earnings Survey
The chart illustrates the huge challenge facing low-wage economies in the UK. The Tees Valley and Durham would, for instance, need to raise their proportion of graduates from 8% of private sector employees to 18% in order to emulate Milton Keynes. How could this be achieved? Improving local education standards is it itself no good. Too many of the graduates move away, first to distant universities and then to well-paying jobs across the UK. The task is to create local demand for well-paid graduates. Attracting foreign-owned firms is one route but far more domestic high-productivity firms need to be created and expanded. Any policy for local growth, including local mayors needs to focus on this challenging task.
This report is well intentioned and informative. It may effect a sea-change in the focus of government but unfortunately seems unlikely to move the dial significantly in regional prosperity. It demonstrates how not to do effective policy. Instead, it details a lot of activity and gives the impression that much is being achieved. This may be the case but the purpose of a new strategy is improvement and here we are at a loss to have any sense of the likely degree of future change.
In many ways this huge White paper gives more an impression of hyperactivity than a serious strategy. Despite a serious effort to introduce targets and monitoring there are unlikely to be any civil service consequences for failure but there will be of course for the inhabitants to the areas which are not levelled up. Even then, the consequences may not be huge since ONS data shows that regional disparities in living standards are much less than in productivity. Much income is redistributed through the tax and social security systems and public services are provided irrespective of Local ability to pay (especially in the devolved regions). On top of all this are the huge differences in housing costs which undermine living standards in the south and especially in London, but leave many in the midlands and north with free income to spend on other things.
What was needed was much shorter and more focused report doing two key things. The first is a honest assessment of the difficulties in equalizing productivity across areas which have experienced current levels of inequality for decades if not centuries. This will require much more attention to national economic policy issues that this report was so keen to avoid.
Second is a simple assessment of public service provision across the regions. If there are significantly fewer GPs per head in some less attractive areas then the government can rectify this. The problem is that it costs money, both to pay wages and also perhaps to provide inducements for doctors to work in areas in which they prefer not to live. If the money is unavailable then we need an honest debate about how it might be raised.
To finish on a positive note, we should recognize the efforts made in the White Paper to improve pride in place. The evidence in the report indicates that life satisfaction is higher in rural areas and small towns throughout the UK. Much has been done to improve places. The clean-up of the coalfields has been impressive and few can now see where the pits and spoil heaps once blighted the landscape. Less has been done in our old industrial cities although good examples exist of how to renovate and revive 19th century terraced streets. The report recognizes how challenging is the task of instilling local pride and making cities attractive. The demise of the coalfields and urban industry has left demoralized communities, with low expectations especially among white working-class boys. The task of restoring morale is huge and the evidence of increasing drugs-related deaths is dispiriting, but at least this report is a start.