Levelling with electors

Levelling with electors

Whether or not you believe anything will follow, give 'Levelling up' the United Kingdom a go. It’s a stand-out from recent White Papers (all credit to Andy Haldane, the former Bank of England economist who went to head the government taskforce). Too many “missions” maybe, and of course a good government story; but the analysis is well worth reading. Apart from its references to serious economic work (including, to declare an interest, research carried out by Frontier Economics on innovation and investment), the main report shows unusual willingness to learn from other countries, even European ones. There’s still more, however, to be learnt from Germany.

The contrast between the UK’s Greater South East and its poorer regions may not be as dramatic as it was between East and West Germany at reunification, but it is stark. And long-lived. In folk memory, “the North” never recovered from its harrying - laying waste - by William the Conqueror. Or from the dissolution of the monasteries, which drove it into another rebellion against the new rich of “the South”. But you don’t have to read Elizabeth Gaskell to be reminded that the northern and midlands cities that grew with the industrial revolution had plenty in economic clout, trade and civic pride to rival the south east.

However, here as in East Germany, an industrial past is no guide to an economically successful future. As the White Paper points out, Britain’s northern cities are not only outclassed by London, but lag noticeably further behind their leader than “second cities” do in other major economies. And the gap between north and south has been widening.

For all the inner city programmes of the past half-century, some of this difference has only been reinforced by public policy, particularly in transport. Governments invested to support the capital’s fight for world leadership in financial services, and to revive East London. Now the “missions” in the White Paper urge the rebalancing of transport investment, but there have been too many announcements, withdrawals and reannouncements of transport projects, for the north to take any of this on trust.

And that’s not just politics but economics, too. In the days when economic theory maintained that returns declined with scale, there was hope that private investment would take itself further afield in search of better pickings, spreading prosperity widely, and public investment would follow suit. Now, as the White Paper points out, we have a better understanding of how agglomeration effects act as a powerful pull towards the Greater South East, making it harder for transport projects for the north to pass Treasury value for money tests.

So the White Paper emphasises the need to enhance the two elements of economic capital in poorer areas, physical and human. Actually, it adds another four elements: financial (business support) and intangible capital (innovation and patents), but also social and institutional capital too. 

The analysis is greatly enhanced by an understanding of the importance of social capital, even if it makes for a very broad agenda. Meanwhile, institutional tinkering is always popular with politicians, and fair enough, some highly devolved countries have less inequality. But it’s questionable whether creating a lot more mayors to lobby for their cities would make for more equal economic outcomes. Deprivation doesn’t come in manageable chunks, as the White Paper notes, but is widely dispersed, with a string of seaside towns on the east coast left as far behind as any city centre, and with causes less easy to address. And satisfaction with your area isn’t closely correlated with economic performance, so tinkering might even make things worse.

Inevitably, the rhetoric is all about growing the economic pie rather than reslicing it, and indeed it would be a win-win for north and south to raise economic performance where it is weakest. But to meet any of the White Paper “missions”, public spending needs to be tilted away from the south east. And the medium-term rate of economic growth forecast by the Treasury (below 2 per cent) leaves no room for this to be done purely out of new money. 

German reunification came at a cost that has been estimated at two trillion euros between 1990 and 2014, by which time the transfers had been heavily wound down. Nearly half of that came from making social benefits more equitable, which are of course already equalised in the UK, but the rest still amounted to a shift of resources from West to East way beyond anything contemplated in the UK.

Unifying Germany was a cause for which West Germans were willing to pay, at least for a time, a price openly expressed as a surcharge on incomes. The electors of England’s Greater South East already pay, if less obviously, their own unification tax through the higher public spending formulae for Scotland, Wales and Northern Ireland. 

It’s far from clear how much more they are prepared to hand over, and the Treasury’s reluctance to cough up has already been noted. At some stage government needs to level with voters in the south east and say there isn’t a free lunch. Those queuing for hip operations or commuter trains won’t be thrilled to learn the money is needed further north, but the inconvenient truth can’t be hidden. And if or when any of the spending shifts in discretionary spending to poorer areas actually take place - even, for example, switching research grants away from Oxford and Cambridge - all the arguments about national excellence and global competition will resurface.

Finding more money isn’t easy, but the German experience teaches us something else: how it’s still easier it is to give people money than it is to make them more productive. The gap between West and East has narrowed, but by more in terms of per capita income than value-added. Despite all the new funding and their great industrial history, the cities of East Germany still lag behind the cities of the West, with fewer jobs in high-tech, high-earning sectors. 

So that reinforces a key message. Productivity is the core challenge on which Government needs to focus. Above all, perhaps, on fostering new industry clusters which will increase returns to scale outside the south east. To do this successfully, Government needs to be acutely alive to the possibilities in the areas in which they are most needed.  Some of these - particularly in the climate change industries, but also life sciences, fintech and medtach - are listed in the White Paper. But there are some odd omissions. In the east of England, leading-edge advances in food technology and agricultural robotics, with the ability to pull up low-performing rural areas, certainly deserve more attention. To have any chance of success with levelling-up, with little to spend and limited political air cover, the Government needs to nourish every economic cluster it can find.

Guest Author: Baroness Sarah Hogg, Former Frontier Economics Chairman