Alexandra Jones is Chief Executive of Centre for Cities.
In last summer’s budget speech, George Osborne set out his long-term vision of building a “higher-wage, lower tax, lower welfare economy” in the UK, promising to give Britain “a pay-rise” while also announcing major cuts to welfare spending.
It’s a theme that the Chancellor has returned to a number of times since last July – reiterating his promise to boost wages and cut welfare in his Party conference speech last October, and again in his first major speech about the economy this year. Indeed, the “high-wage, low-welfare economy” has replaced the “long-term economic plan” as the Government’s watchword on how it intends to reform the national economy.
However, a new report published recently by Centre for Cities reveals the complexity of achieving this ambition. The report, Cities Outlook 2016 examines how the Chancellor’s vision is currently playing out in cities across the country – offering some promising signs for the Government, but also highlighting serious obstacles to overcome if it is to succeed in boosting wages and reducing welfare spending over the next four years.
First, the good news: the report shows that UK cities have seen impressive jobs growth in recent years, with around three-quarters of all new jobs (nearly a million) being created in urban areas between 2010-14. The Chancellor will also be heartened by the fact that almost a quarter of UK cities are already delivering the “high-wage, low-welfare” economy that he wants to build across Britain, offering insights for national and local leaders about policy priorities for places which are currently struggling.
However, less encouraging for the Government are the report’s findings on urban wages. The average annual salary of city residents dropped by five percent between 2010-14 – a decrease of £1,300 per person – reflecting the ongoing productivity problem with which the UK continues to grapple.
Another major issue is the continuing geographical divide across the country, with the report highlighting that almost all the “high-wage, low-welfare” cities are located in the South East of England, while most places with low wages and high welfare spending are in the North and the Midlands.
This is not new: the North/ South divide is longstanding, and it’s important to note that individual cities such as Manchester and Leeds continue to see significant economic improvement. But it’s also clear that the Government needs to sustain its efforts to rebalance the economy, both through initiatives like the Northern Powerhouse initiative, and by devolving more powers to cities – to help them strengthen their local economies and address skills gaps in their workforces.
However, much more surprising than the findings about Northern cities is the report’s revelation that welfare spending is rising fastest in successful, economically vibrant cities in the South East – mainly as a result of increasing spending on housing benefit payments, which are over 50 per cent higher in high-wage cities. So while welfare spending decreased in low-wage places like Liverpool and Glasgow between 2010-14, it grew by four percent in cities such as Reading, Cambridge and Milton Keynes in the same period, all of which are among the UK’s top ten cities for average wages.
These places are feeling the pressure of their own success, which has pushed up demand to live there without increasing the availability of homes at affordable prices – causing the number of renters, the rents they pay, and consequently housing benefit payments, to all increase dramatically.
So alongside the Government’s important agenda to boost wages and jobs in Northern and Midlands cities, it also needs to help tackle the challenges facing successful cities where welfare spending is increasing fastest. If these places are to prosper, and reduce benefits spending at the same time, the Government and local authorities need to urgently address the housing crisis.
The Prime Minister’s announcement earlier this month about plans to directly commission new homes shows that housing has moved to the top of the Government’s agenda. But more needs to be done to support local leaders and developers to build more homes, make better use of existing stock, and improve local transport – helping people to access jobs and businesses to grow. As part of this work, the Government should consider giving cities stronger incentives to address the housing crisis themselves, by allowing them to retain more revenues such as stamp duty, or keep some savings from any reductions in housing benefit that new homes could generate.
George Osborne has vowed that this Government will be the “builders” of the national economy. Putting that promise into action will be vital if the Chancellor is to achieve his ambition of creating a “high-wage, low-welfare” economy across the country.