Eighty years of pain: the UK’s unequal and divergent economy

Recent work by the Centre for Cities has forensically unpicked what we already know: there is an economic gap between London and the rest.  And it is widening.  This is no post-recession anomaly.  Quite the reverse: this is the long term settled economic geography of the UK –  unequal, unbalanced and divergent.

Successive government’s have struggled with solutions.  From the Barlow Commission in 1940, through Beveridge, the industrial policies of Labour’s Wilson government, regeneration of the 80s and onto the last government’s regionalism, characterised by the regional development agencies (RDAs).  At best, all of this has merely slowed the pace of the growing gap.

In the future, we can either slot into this historical policy bandwidth, with little real chance of disrupting this settled picture.  Or we  start to consider something more radical.

At present, the government would argue that it is on the case, through their plans to hand more Whitehall powers to cities over growth.  The local enterprise partnerships (LEPs), city deal policies and local growth plans are touted as being radical, capable of unleashing the ‘potential for cities to stimulate growth and create jobs around the country’.

Now these are a good thing.  No doubt.  However, they follow a similar historical policy tone.  For instance, in terms of the city deal negotiations, the cards remain stacked in favour of a dominant and dominating Whitehall. LEPs are actually just centrally funded mini RDAs. And the growth plans are just economic regeneration-lite.

Lord Heseltine’s report – No stone unturned in pursuit of growth – was lauded by many commentators.  However, while recognising that London was a ‘functional monopoly’, Heseltine, left some big stones in situ.

Firstly, he did not ‘unturn’ a private capital investment model which favours international trading and return through financial vehicles, over domestic investment in industry and manufacturing. This is key to any economic rebalancing.

Furthermore, he left the post-credit crunch period of huge and spiralling bailouts and quantitative easing unturned.   This benefited the financial institutions based in the City of London.  It did little to change the pattern of investment in the rest of the country.

Secondly, he touched but hardly unturned the oppressive fiscal centralisation which plagues the country.  Central government’s share of public spend in Germany is 19%, but it’s a whopping 72% in the UK.  For example,  New Economy Manchester has detailed, that of all the £22bn of public funds spent in Greater Manchester, central government controls how £16bn is spent and has significant say over the rest.

This ongoing public and private investment context coupled to an oppressive centralism fuels a London economic vortex.  And this is before we even get into the economic role that the state assets, cultural, heritage and other national institutions play by being located in London.  Of course an economically vibrant London is a good.  But even with this vibrancy, London is not always socially delivering for Londoners.  It has significant housing and inequality issues.  Therefore, alongside an economic vortex which is widening the gap with the rest of the country, we also have the same vortex widening the gap within London itself.

Heseltine rightly flagged up the need for place-based policies.  However, he supports the Governments approach to cuts and thus ignores how place policy is being stymied by local government cuts which have hit the poorest places harder.  So, faced with a diminishing set of public inputs to economic success, his work, is less ‘no stone unturned’ and more about turning a blind eye to entrenched centralism, and an UK economic investment geography and mindset which works against many people and many places.

To correct this, some argue for a muscular regionalism or localism, in which public capital is more evenly spread or beefier LEPs, or a federalism through a northern council.  This would indeed speed up the regions a tadge, but is likely to merely slow, not stop the divergence; this is an issue about private capital not just public capital or governance.  Some also argue for regional investment banks.  This offers more promise.  But the state and financial institutions in the City would need to get right behind it, and it would require a shift in ingrained practice.

The default setting is hope for some of the above.  Many cities are working vigorously, trying to get some elements of central public spending repatriated, aiming to compete better, emulating London, rather than whingeing.  But we must be wary of what we wish for.  A greater local control over diminishing resources, whilst the London vortex remains intact, will do nothing for the systemic issues outlined above.  Indeed, I can hear Whitehall breathing a sigh of relief having got the whingeing northerners and Brummies off their backs!

CLES will be working up ideas in coming months, but it is evident that we need a reinvigorated debate.

• We need to accept that the present economic model has a longstanding and entrenched trajectory which is unlikely to deliver spatially or socially. Following variations of past policy won’t work.
• We require a meaningful fiscal decentralisation for the major cities, including an increase in borrowing limits and full local control over council tax and business rates.
• We need active central state with a national industrial strategy, and not just sectors but with a spatial planning edge.
• This industrial strategy needs to be wedded to a national investment strategy (including local/regional investment banks).
• A fundamental constitutional settlement between central and local government ensuring reform cannot be changed by a tinkering Whitehall.  Central and local government must work as co-directors of the nation.

The 80 years of economic divergence is settled and will need a radical policy shift to disrupt it.  Without that, the prospects will be more pain for many decades to come.