The UK economy has two regional problems, not one

Is “levelling up” of regional inequalities in the UK a priority? The Budget to be delivered on March 15 by Jeremy Hunt, chancellor of the exchequer, should help answer that question. Unfortunately, recent work suggests the challenge is even more difficult than widely thought.

It turns out that the UK has two regional problems, not one, and, as a result, a huge national problem too. The longstanding problem is the relative weakness of areas outside London and the South East. Since the financial crisis of 2007, we see a new one, however, namely the slowdown of these previously dynamic regions. Regional inequality has not become worse since then. Yet this is not because of levelling up. The country is suffering something worse than rising regional inequality: national stagnation, with even the former growth engines spluttering.

Tackling the UK’s regional economic inequality, co-authored by Ed Balls, former shadow chancellor of the exchequer, analyses the longer-term challenge. Capital losses: The role of London in the UK’s productivity puzzle from the Centre for Cities focuses on the post-financial crisis slowdown of the country’s most prosperous region. These analyses do come up with one common conclusion: the country needs a radical liberalisation of controls on land use.

As the first of these papers notes, there are several reasons for concern about the regional inequalities that were triggered by deindustrialisation over the past four decades. One is that these inequalities are linked to divergent standards of living, life expectancy and educational attainment. Another is that they are connected to a “geography of discontent”, shown in the Brexit vote. Finally, low levels of productivity in large parts of the country mean low relative productivity for the UK as a whole.

So, what might be done? This report concludes that low shares of university graduates in lagging regions are no longer a constraint. Nor is a generalised lack of finance. More plausible constraints are weak transport infrastructure, failure to support innovation clusters outside the South East and constraints on migration to London and the South East, due to costly housing.

There are then things to be done. Notably, it would make sense to invest more in university education in science, technology, engineering and mathematics, put more resources into infrastructure, especially transport, and increase government spending on high quality potential clusters of research and development located outside the South East.

One of the points this report makes is that migration tends to go in the “wrong direction”, from the most productive to less productive regions. This is also consistent with the findings of the report on London. But the most striking finding of the latter is that productivity growth in London has become just like that of the rest of the country since the financial crisis — dismal. The growth of productivity per worker in London slumped from 3.1 per cent a year between 1998 and 2007 to just 0.2 per cent thereafter.

A proximate cause is that “superstar sectors”, such as finance, professional services and information and communications, ceased to grow as quickly as in competing economies abroad. Moreover, that was already clear before Brexit (though that folly cannot have helped). A second explanation is that the cost of commercial property crowded out more productive sectors. Finally, an “affordability crisis” in housing deters immigration, from within the country and from abroad. That would then have weakened the agglomeration benefits that London used to create in the past.

The country, then, is in a double bind. It has deep regional inequality, which is the legacy of a long period of rapid productivity growth in London and the South East, while the rest of the country was deindustrialising. Then, after 2007, London became economically stagnant, too. So, regional inequality, though still very large by European standards, stopped getting worse. But this “cure” is worse even than the disease: it has worsened the performance of the economy as a whole and so, among other things, starved the state of resources it needs to deal with its challenges, including regional inequality.

Releasing planning controls should help London grow faster. So would a better post-Brexit settlement for sectors in which London specialises. But giving the capital more control over its fiscal resources, as the report from Center for Cities suggests, is likely to clash with the pressing need to spend more in weaker regions. Now that all regions of the UK economy are doing badly, the difficulties of tackling regional problems have become even greater than they used to be. Levelling down is the worst possible answer to the challenges of levelling up.

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