Insights

Five essential steps to addressing deep regional economic inequalities

During the next couple of months millions of Britons who voted for a Conservative candidate at last month’s General Election will start to see details of what they voted for. The Chancellor, Sajid Javid, will deliver his first budget and begin the process of turning promises into projects.

Governing is about choices, not catchphrases, and there are plenty of choices that this government will make that will break from the recent past. This is deliberate. The Johnson government is keen not to look like a fourth-term administration heading into its second decade in power. A change of leader, a large intake of new MPs and a fresh message will count for little outside the Westminster bubble unless economic policies also change.

There are welcome signs that they will — in particular, the more sensible fiscal rules that differentiate between investment and current spending. Yet it is the commitment to use the levers of the state to address deep regional inequalities that looks set to be a defining feature of this government’s economic policies.

There has been much talk in recent weeks about changing the methodology for assessing how public spending decisions are analysed, the famed Green Book. But while such methodology should always be under review as economic thinking evolves, let’s not overstate how material a barrier this has been. A combination of globalisation, subsequent movements of people into, and around, the UK, as well as overt political choices, have had a far more significant role in generating regional inequalities than the evaluation bible used across Whitehall.

So what are the things to focus on if the government is to level up economic output rates, inward investment and opportunities? Adherence to five principles would help avoid some obvious pitfalls.

First, successful rebalancing of the economy requires long-term thinking. Employers and investors seeking to partner with the public sector will do so only if they believe that there is political commitment, from all sides, to this agenda. Regional policy will be an expensive failure if it does not trigger a complementary reaction by the private sector. Business leaders considering whether rebalancing is a fad or the future will look carefully for signs that they will not be left high and dry if the political winds change.

One of the ways to signal commitment is to ensure that senior roles with responsibility for allocating resources are included in any relocation of public sector workers, not simply large volumes of junior, clerical roles. The preference for the latter, and the headline potential from large numbers, has undermined previous relocation efforts where important decision-makers remained in London.

Second, economic development in the regions should be built around establishing world-class hubs, not piecemeal projects divvied out across the country. The aim should be to generate “agglomeration benefits” where universities, finance, private sector employers and public sector institutions work together to establish globally relevant and competitive industrial hubs. This cannot be parochial or sub-scale, or these hubs will be viable only alongside a protectionist industrial policy with high trade barriers. That would be inconsistent with a global Britain seeking to broaden and deepen its trading relationships.

Third, rebalancing should not focus simply on tangible capital projects where government ministers can turn up in hard hats and hi-viz jackets. There are also intangible and human disparities between the richest and poorest parts of the UK. Addressing these will be essential for an economy where services make up almost 80 per cent of output. Part of the reason for the poor statistics on economic output is the existence of hollowed-out communities, where younger workers have left and reinforced existing skills disparities. Further educational pathways, vocational training and partnerships with local businesses generate less photo opportunities, but more life opportunities.

Fourth, the public sector must complement existing expertise rather than try to start from scratch. The regions have plenty of highly productive, innovative companies – what is needed is a circular economy where the state, financial services and complementary suppliers join them to generate critical mass. Providing the incentives to support this is key. Enabling local authority pension funds with billions of pounds’ worth of assets under management, like those in Merseyside and Yorkshire, to invest in local infrastructure bonds will help reinforce this circularity of capital.

Finally, the flux generated by Brexit presents the chance to extend the government’s industrial strategy to outline which industries are of strategic importance to be UK-owned or domiciled, with those where production is best imported or available for sale to foreign owners. This has a regional angle that the recent uncertainty surrounding British Steel has shed light on. The public largely fail to see why the country’s banking system, disproportionately located in London, was bailed out during the financial crisis, yet when other, more regionalised industries such as steel face existential crises, the government appears more reluctant to offer support. This has been a blind spot for successive governments. With the seismic changes sweeping through the global car industry, allied to the potential impact of greater frictions in UK-EU trade after Brexit, there will be expectations to use the state’s rebalancing efforts to support the automotive industry. Pre-empting these issues before they crystallise would be very sensible.

Politics and economics have converged to support a rebalancing of the economy. This is hugely welcome. But poorly delivered this will be a colossal waste of resources and will give interventionist regional policy a bad name for years to come. That would be a mistake that the UK economy can ill-afford to make.

A version of this piece was published in The Times.

Simon French

Economics & Strategy