How is regional inequality affecting the UK’s economic performance?

The UK is highly centralised and there are significant economic inequalities among towns, cities, regions and nations. Policies for levelling up need to be more devolved, backed by effective institutions and based on a coherent long-term strategy.

The UK – England in particular – has some of the deepest spatial inequalities and regional productivity divergence among the OECD countries. These differences have been increasing for over three decades, with London’s productivity now more than one and a half times the UK average.

For most of the 1980s, the productivity levels of the capital’s economy were typically up to 128% of the UK average. From around 1988 onwards, these gaps have rapidly increased to the point where London’s productivity today is around 170% of the UK average.

The geography of discontent

The political shocks that the UK has experienced in recent years – including the implementation of austerity (cuts to public services and investment), the 2016 Brexit vote and voting shifts in the so-called ‘red wall’, particularly in the 2019 general election – are in many ways a result of these vastly different inter-regional experiences.

They have given rise to a profound ‘geography of discontent’. Indeed, inequality between places has become the most important distributional concern throughout the country, irrespective of political loyalties.

These extreme inequalities need to be tackled urgently if we are to improve the UK’s economic performance. As Martin Wolf (Financial Times) recently concluded, ‘regional policy must be at the heart of any sensible strategy for growth’.

Inequality is both a city and regional problem, with most cities outside the South East underperforming compared with the UK average, as well as to equivalent places in the OECD. There are a range of issues contributing to this – the usual agglomeration processes are not evident in many UK cities, nor is there any systematic, widespread and large-scale knowledge diffusion beyond London and the wider South East.

Knowledge-intensive and highly skilled activities tend to be heavily geographically concentrated in particular places, unlike in other countries. This trend is reinforced by publicly funded research and development (R&D) also becoming increasingly spatially concentrated in these same areas.

As Andy Haldane (Royal Society of Arts) has commented, the UK broadly exhibits the features of a ‘hub with no spokes’, with many parts of the country lacking any genuine involvement in knowledge, innovation and R&D-related activities.

Churn, centralisation and the hoarding of power

The UK is also characterised by political centralisation, together with rapid institutional churn and instability, particularly in regional and economic policy. This phenomenon appears to have worsened in recent years, and it demonstrates increased short-termism with policy continually chopped and changed for decades.

In the 1980s, the Conservative government set up urban development corporations to improve land and property markets in urban areas. New Labour in the late 1990s and 2000s tried to tackle regional inequalities by creating regional development agencies (RDAs) across nine regions of England, with a budget of approximately £2 billion a year for 12 years.

After 2010, the coalition government scrapped RDAs in favour of local enterprise partnerships (LEPs), which have now also been abolished by the current government.

But strong institutions matter and a clear, consistent approach to building them has been missing. They also need to be in place for the long term, based on sensible economic geographies, at appropriate scale and with the right powers and resources to drive economic growth.

At the heart of UK governance lies the centralisation and hoarding of power in its so-called ‘Westminster model’. This creates many problems for the regions – not least policies dictated to regions from typically uncoordinated Whitehall departmental strategies.

The UK’s economic woes are linked to this high level of political instability and policy churn, which has also contributed to low business confidence. This has been particularly pronounced since the 2016 referendum on the UK’s membership of the European Union (EU).

Since then, the UK has had five prime ministers and seven chancellors of the exchequer, including three prime ministers and four chancellors in 2022 alone. For big city regions with mayors, this coincides with their entire period in office as the first elections were held in 2017.

At the same time, there has been related churn in Whitehall departments and in strategies for economic growth. But there have also been notable differences in approach by governments of different parties to the challenge of establishing a functioning layer of regional, or city-regional, administration.

As one recent report from the Bennett Institute for Public Policy documents, there has been an extraordinary amount of policy reversal and churn on this question in recent decades. This succession of ministers and strategies has seen a series of institutions at the national, local and sectoral levels established and subsequently abolished.

For example, barely a year after the publication of the 332-page White Paper Levelling Up the United Kingdom and a detailed framework for devolution, at the Conservative Party conference in October 2023, the prime minister announced a series of ‘town boards’ and a ‘towns taskforce’ to boost local economic growth in ‘left-behind’ towns.

According to Rishi Sunak, ‘we need to change our economic model – away from cities’. But at the same time, the government was negotiating a series of investment zones in UK cities, because ‘if Manchester succeeds, so will Bury’.

These are not only competing initiatives launched into an already crowded field, but they also involve yet another set of institutions at the local level, entirely contradicting the plea for long-term stability and strong local institutions in the government’s own White Paper.

Devolution to the rescue?

A key element of the potential governance and policy responses to these productivity challenges is the devolution agenda. But there are disagreements about the extent to which it will have an economic impact. Across the OECD, devolved governance appears to bear little relation to national growth rates, although it is associated with more spatially balanced productivity growth.

But there is also much evidence to suggest that the UK’s major regional productivity inequalities are themselves intrinsically related to the country’s extreme centralisation. Over-centralisation leaves central government with too much direct control and micromanagement, and too little knowledge of local and regional needs.

This drives a bias towards short-term and large-scale interventions while undermining institutional capacity-building at lower levels of government. The objective should be to devolve to the level where locally driven strategies and resources can be most effectively transformed into outcomes.

At this level, key functions – such as economic development, planning and infrastructure – can be combined with the delivery and coordination of public services.

There is now widespread agreement on the importance of tackling spatial inequalities and the issues linked to over-centralised governance. Further, Labour’s acceptance of the metro mayoral and combined authority model means that there is now a political consensus over both the institutions and the economic geography.

This means that there is some prospect that the deep political divisions that have driven policy and institutional churn in this area may abate, bringing the rare possibility of a more consistent and long-term approach to English devolution.

Similarly, the question of whether mayors should be given new financial levers – for example, in the shape of hotel or airport taxes – is now being considered more seriously in political circles in relation to English devolved authorities.

This is potentially an important shift given the ingrained wariness of this idea in relation to England, certainly in comparison with the powers awarded (particularly after 2015) to Scotland and Wales.

Stimulating the UK’s second cities to thrive

Importantly, a new direction of travel has been signalled by the trailblazer deals agreed with the West Midlands and Greater Manchester. These provide more flexibility in allocating budgets and new joint governance arrangements over further education, trade and welfare-to-work policies.

As set out by the Resolution Foundation in its Ending Stagnation report, it is crucial that England’s second and third largest cities are better supported to grow and thrive, and these new arrangements are a step in the right direction.

But they need to be part of a long-term devolution strategy, rather than yet another piecemeal step. Similar institutions and powers in other places should also be a part of such a strategy.

In other words, deeper devolution arrangements should be accelerated in our largest city regions but also developed elsewhere. Again, there is important progress being made with new mayoral authorities agreed in East and North Yorkshire, the East Midlands and in the newly expanded North East Authority.

As these governance arrangements are rolled out across England, more thought is still needed in remaining areas with less obvious or smaller economic geographies. For political as well as economic reasons, all places need at least a basic level of infrastructure and services for them to function and contribute.

Without this, we lose both connections between places and a universality that binds people together. The alternative, which we have witnessed in recent years, is the ‘revenge of the places that don’t matter’ and a voter backlash that still threatens to undermine institutions, strategies and local and national democracy.

For existing and newly established mayoral combined authorities (MCAs), the next government will need to think seriously about how these arrangements can be coordinated more effectively with economic growth and efforts to improve productivity.

This will require thought about R&D and innovation policies, as well as further and higher education. Building capacity and accountability will be critical as each of these agendas develop – both in new institutions at the city-regional level and in the centre, where greater coordination and place-based thinking are required.

This agenda potentially offers more continuity besides a broad consensus on institutions and devolution. Recent announcements on building electric vehicles in Sunderland and battery factories in Somerset, together with the extension of investment zones built on R&D and skills in key sectors, also suggest that there won’t be too much of a conceptual or practical jump to the ‘securonomics’ industrial strategy promised by the Labour Party.

Likewise, the ‘six capitals’ agenda – set out originally by the Bennett Institute and then adapted in the White Paper on levelling up – remains a good framework for further consideration and development of place-based policy in the UK. This also underpins place-based research at the Productivity Institute.

Alongside a continuation and strengthening of the institutional reforms begun under the coalition government and extended under successive governments, this will help to create the long-term stability that can underpin and drive further productivity improvements. Altogether, it’s long overdue.