Is “leveling up” regional inequality in the UK a priority? The budget to be delivered on March 15 by Jeremy Hunt, chancellor of customs, should help answer these questions. Unfortunately, new work shows the challenge is more difficult than first thought.
It turns out that Britain has two regional problems, not one, and, as a result, a huge national problem. A long-standing problem is the relative weakness of areas outside London and the South East. Since the financial crisis of 2007, we have seen something new, however, which is a slowdown in previously dynamic areas. Regional inequality has not gotten worse since then. But this is not because of the rising rate. The country is suffering worse than the rise of regional inequality: national stagnation, even the engine of growth that it used to be.
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Tackling regional economic inequality in the UK, authored by Ed Balls, former shadow chancellor of customs, analyzes the long-term challenges. Capital losses: London’s role in the UK productivity puzzle from the City Center focused on the post-financial crisis slowdown in the country’s most prosperous regions. The analysis draws a general conclusion: the country needs a radical liberalization of control over land use.
As the first note of this paper, there are several reasons to be concerned about the regional inequality triggered by deindustrialization over the past four decades. One is that these inequalities are related to different living standards, life expectancy and educational attainment. Others are linked to the “geography of discontent”, shown in the Brexit vote. Finally, low productivity levels in large parts of the country mean relatively low productivity for the UK as a whole.
So what can be done? This report concludes that the low number of university graduates in lagging regions is no longer a constraint. Also not common lack of finance. More tangible constraints are weak transport infrastructure, failure to support innovation clusters outside the South East and barriers to migration to London and the South East, due to expensive housing.
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Then there are things to do. Notably, it would make sense to invest more in university education in science, technology, engineering and mathematics, put more resources into infrastructure, especially transportation, and increase government spending in potential clusters of high quality 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 the least productive areas. This is also consistent with the findings of the report in London. But the most surprising finding is that productivity growth in London has been like the rest of the country since the financial crisis – dismal. Productivity growth per worker in London fell from 3.1 per cent a year between 1998 and 2007 to just 0.2 per cent afterwards.
The most immediate cause is that the “superstar sectors”, such as finance, professional services and information and communication, stopped growing as fast as in their economic rivals abroad. Besides, that was clear before Brexit (although that stupidity didn’t help). A second explanation is that the commercial property costs of many sectors are more productive. Finally, the “affordability crisis” at home is hindering immigration, both from within the country and from abroad. That will then weaken the benefits of agglomeration that London used to create in the past.
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The state, then, in a double bind. It has deep regional inequality, which is a legacy of rapid productivity growth in London and the South East, while the rest of the country is deindustrialising. Then, after 2007, London was also economically stagnant. Thus, regional disparities, although still very large by European standards, stopped worsening. But this “cure” is worse than the disease: it has undermined the overall performance of the economy and, among other things, starved the country of the resources needed to overcome challenges, including regional inequality.
Loosening planning controls should help London grow faster. So a better post-Brexit settlement for London’s specialist sectors. But giving the capital more control of its fiscal resources, as a report from the Center for Cities suggests, is likely to clash with the need to spend more in weak areas. Now that all regions of the UK economy are in bad shape, the difficulty of dealing with regional problems is greater than ever. Leveling down is the worst answer to leveling up challenges.
martin.wolf@ft.com
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