Levelling up: what might it mean for Scotland?

Proposals to address the highly uneven economic performance of regions of the UK typically focus on the North-South divide in England. But the levelling-up agenda has implications for Scotland too, not least some striking inequalities across different parts of the nation.

The idea of ‘levelling up’ is usually presented as a drive to tackle the UK’s economic divide between, on the one hand, London and the South East, and, on the other, the cities and towns of the North of England (many comprising the so-called ‘red wall’ of constituencies that the Conservatives won from Labour in the 2019 general election).

But the levelling-up agenda has important implications for the economies of the devolved nations too and chimes with the comments of a former first minister of Scotland who considered London to be the ‘dark star’ of the economy.

It also opens up controversial debates about the boundaries between ‘reserved’ powers (those controlled by Westminster) and ‘devolved’ powers (those controlled by Edinburgh, Cardiff and Belfast). As in England, it also poses questions about what role devolved or local bodies should play in driving economic change.

Regional inequalities in Scotland

Addressing persistent uneven regional economic growth has been identified as one of the UK government’s central policy objectives. This week it launched its Levelling Up White Paper, which sets out what this policy agenda means in more detail, and some of the ways in which the government will try to level up across the UK.

As others have written, the UK has high levels of regional economic inequality on a range of different inequality metrics. Regions, here, are defined by a hierarchical nesting of local areas using the International Territorial Level (ITL) classification, with ITL1 regions being the largest (for example, London or Scotland), which nest smaller ITL2 regions within them (for example, Inner London – East or South Western Scotland) and, in turn within those, smaller ITL3 regions (for example, Hackney and Newham or Glasgow).

Figure 1: GVA per head

Source: Office for National Statistics (ONS)

As Figure 1 highlights, Scotland performs relatively strongly compared with many other parts of the UK, with a GVA per head index that ranks fourth behind London, the South East and East of England. UK GVA per head in 2019 was £29,599 (at current prices) compared with £26,968 in Scotland. In contrast, GVA per head in Wales in the same year was £21,295 and £20,727 in the North East of England.

On many other indicators, from productivity to labour market outcomes, a similar story emerges. But there is still a gap in relative economic performance. Nevertheless, the core debate in the levelling-up agenda in Scotland doesn’t just focus on closing any gaps in certain areas of economic performance between Scotland and the UK, but also on closing gaps in economic performance within Scotland.

Figure 2: Map of GDP per head across Scottish regions

Source: ONS
Note: Use the slider to toggle between years

Indeed, inequalities within Scotland are nearly as stark as they are in the UK as a whole. In the most recent statistics (from 2019), Edinburgh is ranked tenth of UK ITL3 areas by GDP per head. In comparison, East Ayrshire and North Ayrshire mainland is in the bottom ten.

Similarly, employment rates for working age adults in some parts of Scotland – such as Orkney – are over 80%. But in other parts of the country – Dumfries and Galloway, for example – employment rates are around 67%.

On a smaller geographical scale, these inequalities are only seen to widen. Of course, the smaller the area that we consider, the more likely it is that some of the variation might be driven by differences in where people work and live. But even acknowledging such caveats, it is hard not to conclude that there are significant spatial inequalities within Scotland’s regions.

The map below highlights the contrasts in inequalities within Glasgow and Edinburgh, according to the Scottish Index of Multiple Deprivation (SIMD). The SIMD looks at the extent to which a small area is deprived across seven domains: income, employment, education, health, access to services, crime and housing. It ranks data zones – 6,976 small areas in Scotland – from most deprived (ranked 1) to least deprived (ranked 6,976). The map shows where these data zones rank either in the lowest 10% or highest 10% in Scotland.

Figure 3: Scottish index of multiple deprivation

Panel A: Glasgow

Panel B: Edinburgh

Source: Scottish government

What are the drivers of regional inequalities in Scotland?

Tackling such wide inequalities, whether within or between regions, has been an objective of successive governments, both in Westminster and Holyrood, for many years. Large parts of industrial Scotland were covered by the 1934 Special Areas Act, which provided financial aid to encourage new firms to locate in areas struggling from depression (and to support existing firms in these areas). Similarly, concerns about the economic challenges facing Scotland’s highlands and islands prompted the creation of the Highlands and Islands Development Board in 1965, established to promote the creation of jobs and give grants to businesses and community projects.

So, these debates are not new. One implication is that it is important to recognise that many of the trends in today’s economic data are the result of long-term structural factors that have shaped the regional dispersion of gains (and losses) over decades.

Like many parts of the UK, a number of towns and cities in Scotland are still recovering from huge upheaval in the latter part of the 20^th century. Heavy industry that had dominated the industrial landscape – from shipyards through to steel plants and coal mines – went into a sharp decline. In Glasgow, employment in manufacturing fell from over 400,000 in the early 1950s to under 150,000 by the mid-1980s.

It is no surprise that there is a high correlation between the locations of industry during the 20^th century and those parts of Scotland with higher levels of deprivation and weaker labour market outcomes today.

Industrial structures are key to understanding regional economic performance. Aberdeen became Europe’s energy hub following the discovery of North Sea oil in the 1960s. This led to households in the North East of Scotland having among the highest levels of income in the UK.

Figure 4: Gross disposable household income per head

Source: ONS

But in recent times, and as the North Sea oil and gas industry reaches its twilight years, activity has fallen back. There is now a debate about how to support the transition away from oil and gas into new industries, including renewable energy sources.

But this is easier said than done, particularly given the high skill, high productivity jobs associated with the North Sea, which are not easily replaced in the local economy. Balancing potential risks from economic ‘scarring’ (persistent negative impacts on individuals, the economy and society) with ambitions to achieve net-zero emissions of greenhouse gases will be a constant theme of policy debates to come.

Figure 5: PAYE employment, 2014 = 100

Source: ONS

Another important dynamic in the levelling-up debate is rural areas. Scotland has around a third of the UK’s landmass, but less than a tenth of the population. The Highland Council region, with a population of just over 230,000, has a landmass 20% larger than Wales. Population density is nine people per square kilometre. In London it is over 5,500.

Rural economies look quite different to the economies of urban areas, both in terms of scale and composition. In rural Scotland, agriculture, fishing and tourism play a much more significant role. Rural economies also face their own challenges, including generating economies of scale and connecting to major markets, and from the higher costs of providing basic services. These all make operating a business in a rural area more challenging. But against this, levels of personal wellbeing and life satisfaction are typically higher.

One particularly important feature of Scotland’s rural areas is the demographic trends of these communities. Rural Scotland has some of the highest median ages of the population of any part of the UK. In Dumfries and Galloway and Argyll and Bute, the median age is 50. In Glasgow, it is 36.

Figure 6: Population change

Source: National Records of Scotland

Of course, and as with all such trends, there are ‘winners’ too. Edinburgh has become Scotland’s economic powerhouse, attracting increasing shares of economic activity to the east of the country (see Figure 7).

Figure 7: Regional GVA, 1998 = 100

Source: ONS

What are the policy implications?

The levelling-up agenda provides an opportunity to look again, not just at how the gap between Scotland’s economic performance and that of the UK as a whole might be narrowed, but also how inequalities within Scotland can best be tackled.

In the 2021 budget, the UK government committed to invest £170 million through its levelling-up fund in Scotland. In the white paper, mention is also made of an innovation accelerator being supported in the Glasgow city-region (with, alongside the West Midlands and Greater Manchester, £100 million identified for this).

But funding for regional policy is complicated by the nature of how powers are shared between the Scottish and UK governments. The Scottish government is responsible for many of the tools that economists believe can be key to tackling regional inequalities. These include infrastructure spending, skills, economic development and regeneration, education and digital. The Scottish government plans to publish a new National Strategy for Economic Transformation in 2022.

At the same time, many of the broader macroeconomic and taxation powers that could have an impact on regional inequalities are controlled by the UK government. These include the ability to negotiate trade deals, the majority of labour market policies, tax policies for business, and the UK’s principal innovation support funds and so on.

This would normally be complicated enough, but with the new focus on levelling up, Westminster has promised to take a much more direct approach to tackling regional inequalities in the devolved nations than it has done in the past.

Since devolution, the UK government has traditionally shied away from spending money in areas where legislative competence is devolved to Belfast, Cardiff and Edinburgh (though City Deals are perhaps one exception). But in light of their approach to the allocation of levelling-up funding – and building on provisions in the Internal Market Act that governs the operation of the single market in the UK – it would seem that this is no longer the case.

Instead, the UK government has committed itself to working directly with local authorities in Scotland (only consulting with the Scottish government when appropriate) on where to spend on priorities to deliver on its levelling-up agenda.

As anyone who follows Scottish economic policy debates will appreciate, this has attracted controversy. Most contentious are the plans for the new UK Shared Prosperity Fund, which is due to replace the European Union structural funds that came to an end with Brexit.

In the past, these funds were administered by the devolved administrations with programmes aligned with the priorities of the Scottish government. But the new Shared Prosperity Fund is to be administered by the UK government. On what priorities we do not yet know, but the very fact that it will be Westminster allocating the funding, and deciding on the merits of proposals, is a significant change in the policy landscape in Scotland.

Given that the devolved nations are highly protective of their powers, these developments seem to be leading to a period of ‘competitive’ rather than ‘co-operative’ economic development policies.

What can we conclude from all of this?

First, and as is clear in the case of Scotland, levelling up should be as much about tackling inequalities within regions (often at a very small scale) as it is about inequalities between regions.

Second, many of the factors that have contributed to the inequalities we observe today in the UK have been decades in the making, and they reflect economic trends only partially in the control of policy-makers. Tackling structural imbalances in an economy will require huge investment over decades.

Third, if the levelling-up agenda is to make headway in a devolved context, the powers to make a difference are not universally in the gift of one government but are instead shared across multiple tiers of government.