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Will Tanner is Director of Onward and a former Deputy Head of Policy in Number 10 Downing Street.

“Our plan now, this new Government I am leading, is to unite our country and level up.” So said Boris Johnson in his first speech as Prime Minister more than two years ago. Today the Government finally sets out that plan in the form of the Levelling Up White Paper. But why does it matter?

The political argument for levelling up is straightforward. The Conservatives assembled an electoral coalition in 2019 that is both more likely to live in poorer places and more working class than even the Labour Party. Those votes, in the Prime Minister’s words, were “lent”. They need to be repaid. If the Conservatives want to retain their majority, it is politically essential that levelling up delivers.

The moral case is simple. The last few decades have been good for some places and people, and very bad for others. The gap between the UK’s richest and poorest regions has grown. Returns to graduate labour have increased and returns to vocations have diminished. The social fabric of coastal and industrial towns, particularly, has deteriorated. Civic pride has been squandered.

But the economic case is less intuitive. Economic orthodoxy would say that the best thing governments can do for growth is to get out of the way. To neoclassical economists, levelling up is the economic equivalent of pushing water uphill: eye-wateringly expensive and ultimately futile.

This conventional wisdom is seductive to centre right thinkers given it prioritises market forces and downplays the role of the state. But it is also a narrow view of how economies work in practice, and short-sighted about the damage regional disparities can do to growth. Here are five reasons why levelling up is not just morally and politically sensible, but economically the right thing to do too.

1. More regionally balanced economies are richer overall

The UK is one of the most interregionally unequal countries in the industrialised world. Only Romania and Poland have larger productivity gaps between regions. In the UK, three times the share of people (35 per cent) live in areas where the average income is 10 per cent below the national average than in Germany (12 per cent). As Philip McCann has painstakingly evaluated, the UK scores among the worst economies on 24 measures of spatial equality, covering regional GDP, productivity and disposable income, and at all levels of geography.

Regional productivity disparities between the UK and 18 EU regions

 

Source: Industrial Strategy Council

This matters because more balanced economies tend to be stronger overall. Among the G20 there are no large countries more regionally imbalanced than the UK and also richer than the UK per head.

The reverse is also true; all large countries which are richer than the UK appear to be more balanced. This suggests that far from water trickling down hill from superstar regions like London, the opposite may be true. The UK’s overall productivity level may be being undermined by the decoupling of London from the rest of the economy.

2. The UK has been actively imbalancing itself for decades

An argument frequently made against levelling up is that it means cutting down tall poppies to grow green shoots elsewhere. This would obviously be a mistake. Levelling up will clearly fail if it pits places against one another and fails to learn from our success stories.

But we should also recognise that the current system suffers from an inadvertent Matthew Effect that directs growth-enhancing spending to already-successful places and away from places more likely to suffer market failure. To extend the analogy, the poppies get all the fertiliser.

This is evident almost everywhere the government takes a role in the economy. In recent decades, London has received nearly three times as much transport spending, five times as much affordable housing funding, and five times as much cultural spending as the average region.

The effect of this is two-fold. First, to accelerate the widening gap between the capital and the rest, and, second, to increase pressure on housing and infrastructure in the places that are most opposed to further development – London and the South East.

3. The UK’s drivers of innovation will exacerbate divides further if left unchecked

Productivity arises from innovation, defined broadly, both at a national and regional level. The development of new ideas, processes and technologies leads to spillovers that drive up the output per hour of workers and firms and living standards rise as a result. But the UK’s innovation economy is heavily skewed towards the Greater South East, meaning these spillovers are also geographically concentrated.

This is most apparent in R&D funding. Half (47 per cent) of the core government research budget is spent in just three cities: Oxford, Cambridge and London, and the capital receives twice as much R&D funding per capita than the UK average. According to some studies, this gap amounts to a £4 billion a year gap in R&D spending for the UK’s least prosperous regions.

Spending on R&D by NUTS1 region within the UK, 2016 (split by market-led (business) and non-market-led (government, university and charity))

Source: Richard Jones and Tom Forth

The effect of this on economic performance is considerable. Last year, Onward showed that 72 per cent of R&D intensive jobs created in the last decade were created within the regions containing London, Oxford and Cambridge, despite those places representing just 20 per cent of the population.

But the prize is even bigger: a recent BEIS-sponsored report estimated that spending the entirety of the uplift of R&D spending outside London, Cambridge and Oxford would boost GDP by 0.8 per cent by 2040, compared to spending the money equally around the country.

4. Modern economies make levelling up more important, not less

These challenges are exacerbated by the way the global knowledge economy drives inequality and undermines high levels of growth – in relation to the competitiveness of workers, the power of firms, and the connectivity of places.

Returns are increasing for high-skilled knowledge economy workers. Robert Reich wrote in the 1980s of an emerging divide between ‘symbolic analysts’, routine production workers and in-person service workers. David Goodhart divided them more snappily as ‘head, hand, heart.’ Our skills system has not kept pace with these rapid changes to the structure of the labour market, and workers in low productivity places are increasingly unable to access the highest paying jobs.

The structure of modern firms presents challenges, with tech companies adopting platform models that operate differently from previous industrial titans. David Autor has highlighted the rise of ‘superstar firms’ who benefit from network effects and the highly scalable returns to intangible capital identified by Jonathan Haskel and Stain Westlake. Superstar firms present a challenge for workers by reducing wage competition, and can worsen regional inequalities by concentrating economic activity without shouldering the tax burden to support investment elsewhere.

Knowledge economies also reward places with high levels of connectivity. AnnaLee Saxenian’s study of why Silicon Valley beat Boston’s Route 128 to become a global tech hub points to the dense and nimble network of relationships between workers, firms, and universities. In the UK, these networks are weak – characterised by Andy Haldane as a ‘Hub (London) with No Spokes’. We have world beating companies and universities, but we don’t connect them with other clusters or places in the way that is rewarded by the new global economic structure.

5. The UK’s cities underperform relative to international competitors

This lack of networks is particularly true of Britain’s second-tier cities, which punch well below their weight. Places like Birmingham, Manchester, and Glasgow are significantly less productive than peers like Brussels, Marseille, and Madrid, and don’t see the agglomeration effects that you would expect based on their size and available labour market.

As work from the Centre for Cities has highlighted, if all cities were as productive as those in the Greater South East, the British economy would be 15 per cent more productive and £225 billion larger. While transport connectivity has often been cited as the key barrier to productivity, Onward’s research has pointed to factors like skills and R&D intensity as more significant contributors to this gap.

Conclusion

For all these reasons, the Government is right to want to change the economic geography of the UK. It is true that the UK’s regional differences are longstanding. It is true that they will be hard to shift.

But that does not make the challenge any less urgent, morally, politically or economically. Levelling Up is not about reducing everyone to the lowest common denominator. It is about bringing everyone up to their potential.

As Margaret Thatcher said once, “People think that at the top there isn’t much room. They tend to think of it as an Everest. My message is that there is tons of room at the top.” We have done it before, as shown below. We must do it again.

UK regional productivity differences between 1901 and 2017

Source: Industrial Strategy Council