James Blagden is a researcher at Onward.
Levelling up is a new name for an old idea. This is the view, articulated by the Prime Minister last year, that talent exists everywhere, but opportunity does not. The South East of England is disproportionately prosperous and productive and the way that government invests makes this worse. Levelling up is the corrective.
But research released today by Onward demonstrates just how much accumulated decision-making the Chancellor will need to unwind if he wants to make a dent on the problem. Officials have been presiding over an approach to spending which has been “levelling down” poorer areas for decades.
There is a clear correlation between higher levels of GDP per capita and more balanced growth across a country. Among the G20, there are no large countries which are more regionally imbalanced than the UK and also richer than the UK. The reasons for this are straightforward: more balanced economies are less likely to be misallocating resources, causing parts of the country to experience shortages in skills or other inputs, while others overheat.
The productivity gap between London and the South East, on one hand, and the rest of the country, on the other, has widened since the turn of this century and became entrenched after the Financial Crisis. To give an example of just how vast this gap now is: in real terms, every English region (apart from the South East) is currently less productive than London was 20 years ago. In Yorkshire, gross value added per hour is £4.50 lower than London in 1998.
One reason for London pulling ahead is that it benefits from agglomeration effects. In other words, people and firms working and operating in close proximity facilitates easier movement of goods and knowledge.
Generally speaking, the larger the city, the more productive it is. We see this so-called agglomeration effect in the northern European economies of France, Germany, Scandinavia and the Benelux region. Not so for the UK. Although similar positive spillover effects are present and strong in London, this does not hold across the rest of the country. Counter-intuitively, British cities do not become more productive as they increase in size.
Transport is a major factor in enabling agglomeration. Reducing the travel time to your workplace or nearest town centre can have a dramatic impact. Areas in which the average travel time to a major employment cluster (containing over 5000 jobs) is less than 20 minutes by public transport are £14,000 more productive (GVA per filled job) than areas in which the journey time is over an hour.
There is a temptation to view the growing regional divide as some inherent characteristic of the UK economy. But this neglects the successive waves of policy and investment decisions that have failed to adequately invest in the foundations of growth in regions outside London and the South East.
In fact, spending to improve productivity is lower in less productive regions, and higher in regions that are already more productive.
For example, capital spending on transport in London was around £6,600 per head between 2007/8 and 2018/19 – more than three times higher than in the East Midlands (£1,880) or South West (£1,980) and nearly three (2.75) times the average in the rest of England (£2,400).
The same is true of R&D funding, which is nearly twice the level per head in London than the UK average – £3,900 compared to a national average of £2,300 over the period 2001 to 2017. The share of the core research budget spent in just three cities, Oxford, Cambridge and London, rose from 42 per cent in 2002/3 to 46 per cent in 2017/18.
Meanwhile, London receives five times as much affordable housing spending than the rest of England. The Housing Infrastructure Fund gave £115 per head in the East of England, £97 in London, £95 in the South East – but just £10 in the West Midlands and £4 in Yorkshire.
On cultural spending, London received around half (47 per cent) of the total spending in England over the period 2010/11 to 2017/18, nearly five times the average in the rest of England (£144). Metaphorically, the government is only watering the plants if they grow.
To fix this, the Chancellor should first review the Treasury’s Green Book methodology to take into account the relative returns to local economies from infrastructure projects and adjust Benefit Cost Ratios (BCRs) to account for the economic and social benefits of balanced growth. We can’t continue with a system that favours prestige mega-projects such as Crossrail over developing infrastructure in other parts of the country which generate much greater relative returns.
We also need to build up capacity outside the richest areas. Areas with stronger devolved governments (like London) are better able to generate good bids and develop schemes. The GLA has devolved budgets and TFL benefits from control over passenger revenues. Consequently, the Government should continue to devolve transport powers to areas outside our largest cities.
Finally, the Government should use the innovation budget to ramp up R&D spending which is more industrially focused. The US and China spend 45 per cent and 56 per cent, respectively, on later phase development – the sort of stuff that is most useful to industry. In Britain, this figure is just 13 per cent. Far more of our spending is on early stage, pure research. More research funding designed to complement business investment in R&D would particularly help areas like the East and West Midlands and the North West.
While there are lots of other things we need to do, rebalancing the types of spending that do the most for growth would be a good start in levelling up and helping the private sector grow in poorer areas.
Officials have presided over an unfair status quo for decades: it’s time for change to get growth going across all parts of the UK.