Productivity—output per hours worked—is the foundation of prosperity and life chances. Higher productivity, which requires investment in both labour and capital, raises living standards through higher wages and assets. Those assets are not just financial or real estate but also intangible ones like skills or social trust.
As high-performing countries such as Germany show, a more productive economy needs sufficient fiscal firepower as well as coordination and cooperation between national, regional, and local levels. After unification in 1990, fiscal transfers from West to East Germany totalled about £70bn a year over nearly 30 years. This reduced the 40 per cent productivity gap to 15 per cent. It massively boosted the worse-off areas, and led to output per person in certain eastern German regions now exceeding that in certain northern English regions where, according to research by the National Institute of Economic and Social Research, productivity is less than half of that in London.
This fact alone shows how broken the British economic model is, stuck in a vicious circle of low investment, low productivity, low skill, low wage and low growth. UK productivity growth has flatlined since the 2008-09 financial crisis. Since then, according to figures published by the Office of National Statistics last month, output per hour growth was the second slowest across G7 advanced economies. NIESR forecasts that over the period 2023-27 the economy will grow by just 1.25 per cent per annum.
None of this is helped by an overcentralised system of governance where lower levels lack the decision-making powers and resources which are concentrated in Westminster and Whitehall. London and the metropolitan parts of the South such as Cambridge or Oxford are doing well enough, but the rest of the regions are falling further behind.
For over a decade, we have seen deepening disparities between regions. On a host of measures, from income and asset inequality to life expectancy, people in suburban, rural and coastal areas in the Midlands and the North are doing a lot worse than those living in urban, metropolitan areas in the South.
The Levelling Up White Paper is a good start to tackle some of these inequalities. But the government has to implement three reforms that are vital for sustained regional regeneration.
A long term skills plan:
First, a long-term strategy that combines a holistic approach with the right scale of investment, instead of a patchwork of policies and endless churn, as we have seen for too long. This means No 10 will have to overrule the Treasury’s refusal to commit new spending.
For instance, £3 billion pledged on skills over the next three years is not much of a “skills revolution” as it barely returns expenditure to 2010 levels. A quick win is to triple the funding for mixed HE/FE colleges in deprived towns such as Grimsby, Southend, or Blackpool—places that voted Brexit because after decades of neglect the people who live there want an economy that benefits everyone.
The government could also bring together business, trade unions and local government to provide significantly more apprenticeships and more vocational entry opportunities to the labour market, especially in areas of skills shortages such as health and social care. Adults need lifelong learning grants as part of a system of education and training that goes well beyond the sticking plaster of “skills bootcamps.”
2. Institutions to boost investment:
Second, the UK is in dire need of some institutions with a long-term outlook that can boost greater investment, especially capital investment in productive activities such as high-tech manufacturing jobs and high-quality service jobs. The National Infrastructure Bank located in Leeds is a beginning, but more than infrastructure projects are needed to regenerate our regions: financing energy-efficient, socially affordable housing, providing assistance to small businesses and helping with export finance are just some examples of how a National Development Bank has supported thriving economies like Germany and South Korea. The point is not to pick “winners” but rather to help unlock greater private investment.
3. Regional devolvement of power and funding:
Third, regional regeneration has to involve local design and delivery. Knowledge about local needs and comparative advantage is key, as is accountability to local citizens. The greater powers to metro-mayors and new mayors announced in the “Levelling Up” White Paper are necessary but not sufficient. Local councils need more decision-making powers and resources that are independent of the Treasury.
The current system of partial business rate retention is too limited and it benefits already affluent parts of the country. While the government’s pledge in the October 2021 budget to increase local government expenditure by 3 per cent is welcome, it does not begin to compensate for the cuts since 2010 and the rising costs associated with social care. Full business rate retention should be considered, or a share of income tax receipts.
Local government is emasculated and emaciated, lacking the power and resources to address the deep gaps in local and regional capital markets and labour markets. Little wonder that over two-thirds of all Foreign Direct Investment and venture capital flow into London and the metropolitan South-East.
The UK has one of the poorest productivity performances and highest inequalities among the OECD’s 38 advanced economies. Regenerating our regions requires a decentralised economy and governance system. If policymakers return to the same economic structures post-pandemic that failed to resolve the productivity problem pre-pandemic, then the UK is set for another decade of low skill, low wage, low productivity and low growth. We must and can do better.