What does the Levelling Up White Paper mean for Economic policy?

February 2, 2022

The UK is the most regionally unequal country in the OECD save Ireland and Slovakia. That is the policy context under which the Levelling Up White Paper has been published and provides the backdrop for the missions outlined in the White Paper, to be delivered by 2030.

The missions bearing formally on the economics space are

  • By 2030, pay, employment and productivity will have risen in every area of the UK, with each containing a globally competitive city, and the gap between the top performing and other areas closing.
  • By 2030, domestic public investment in R&D outside the Greater South East will increase by at least 40%, and over the Spending Review period by at least one third. This additional government funding will seek to leverage at least twice as much private sector investment over the long term to stimulate innovation and productivity growth.

There are of course other important targets that bear on economic decision-making, including improving digital and transport infrastructure, but in this initial analysis, I will limit thoughts to these, coupled with a comment on the mission related to local leadership:

  • By 2030, every part of England that wants one will have a devolution deal with powers at or approaching the highest level of devolution and a simplified, long-term funding settlement.

The missions are strong, and the 2030 date falls nicely between short-termism and an end so far away that it is practically, and politically, irrelevant.

More important than the end date, though, the White Paper places a significant emphasis on data collection and data-driven evaluation. The lack of this mechanism has been a problem bedevilling regional policy in the UK for many years. The Government will be creating an effective successor to the Audit Commission by empowering a new institution to monitor and evaluate progress. Data collection efforts have been tried before (for example Blair’s neighbourhood statistics), but the stated centrality of data in this approach is a step forward.

And data will be particularly necessary given the scale of the challenge the White Paper sets itself, which is to, over the long-term, reduce the gap between the most prosperous and least prosperous regions in the UK.

Such an approach is needed given the scale of the UK’s economic relative underperformance. For example, according to Eurostat data, in 2000 the post-communist German state Saxony-Anhalt was poorer than the West Midlands, Essex, Yorkshire, Shropshire and Staffordshire, the Tees Valley and Durham, and Lincolnshire. It is now richer than all of them except the West Midlands. In the 10 years after the financial crisis, the UK had the second slowest productivity growth in the G7.

The Levelling Up White Paper sees this underperformance as primarily the result a failure of economic geography, and particularly a failure outside the South East and London. This is broadly the correct diagnosis. For example, the Centre for Cities estimates, conservatively, that the UK economy is £83 billion (or 4 percent of the UK economy) smaller than it should be because of the relative underperformance of places outside the South East. For example, Manchester is 63 percent less productive than Munich. To quote Michael Gove, the UK economy has for too long been “like a jet firing with one engine”.

This is a problem that has long been neglected by British governments, which administers one of the most unequal and centralised states in the world. The White Paper really does set out a step change.

Where the White Paper will need to be built upon is implementation. Despite promising a reorientation in decision-making, the White Paper makes few commitments above the 2021 Spending Review, for example. The only two major new investments are three £100 million Innovation Accelerators and a £1.5 billion Levelling Up Home Building Fund, the latter provided through loans. The Government could do more. As Policy Exchange has outlined before the reality of low interest rates has given the UK extensive fiscal space to invest and fund infrastructure. This fiscal space should be used to invest more in research and development and upgrade local transport links beyond the plans proposed in the White Paper.

There is a commitment to re-direct Local Government Pension Schemes toward local investment, which is welcome. Encouraging pensions to invest locally, such as done in parts of Canada, has brought economic success. There are also interesting proposals around Dormant Assets, and the Government is right to explore the creation of a Community Wealth Fund with those additional resources.

The White Paper helpfully proposes that more research and development funding be delivered outside of London and the South East, but this should not reduce the amount currently allocated in those areas. There is no point Levelling Up, as the White Paper says, if it also serves to level down centres of global innovation.

The second concern is really more of a caveat. The Government’s broader political strategy is clearly to make the case for Levelling Up red wall seats and left-behind areas in the North and Midlands. However, this does not necessarily track in all cases, and, of course, there are productivity gaps in the South, in coastal towns in particular. A geographical and institutional focus is important, but as Andy Haldane points out in his seminal “Hub and No Spokes” speech, the firms with the highest productivity growth in the last 10 years are spread geographically and sectorally. The Government could speak more as to how, regardless of region, these success stories can be harnessed, particularly on knowledge diffusion (a metric on which the UK performs less well than competitors). It will be particularly important for Ministers to also drive the Levelling Up agenda in the South too, and it is ideal that a number of southern counties are being considered for County Deals.

The third element where the White Paper will need to be developed further is in economic governance. Helpfully, the White Paper outlines a devolution framework to extend mayoralties and ‘governors’ across the United Kingdom. As the White Paper itself says, “local leaders have lacked the powers and accountabilities to design and deliver effective policies”, and that the centre “under-utilises local knowledge”. In this sense, the White Paper has an idea of why regional policy has failed to work in the past at a local level. It is good to see the Government take up proposals outlined in Policy Exchange’s Modernising the UK report, including deepening devolution agreements with combined authorities.

What is needed now is a serious economic strategy to make that devolution work. There are proposals to ‘trail-blaze’ further devolution in Manchester and the West Midlands. These deals should strongly consider devolving certain fiscal powers, while also simplifying funding streams and negotiating clear criteria.

Indeed, one area where ideas need more fleshing out is economic accountability for the short-term. The missions are high-level, and they will need to be supplemented by targets for the near term. We have all seen how ‘devolve and forget’ has resulted in Scotland embrace a high-tax, low-growth strategy facilitated by a higher-per-capita grant from Westminster. That cannot happen in English devolution deals if they are to bring economic growth. Instead, armed with the new data mechanics and a new independent monitor, the Government should establish clear yet flexible metrics for success in conjunction with local authorities. Negotiations should reflect the three key ingredients at the root of the White Paper’s vision: creating the right incentives, information and institutions. This will encourage economic growth over the long-term while also ensuring that taxpayer’s money is used most effectively in service of local priorities.

If the United Kingdom is going to embrace a pro-growth agenda over the coming years, it is essential that Levelling Up deliver on its economic objectives. That is going to require resources and leadership in both Whitehall and City Hall. Re-orienting economic decision-making could have a massive positive impact on the British economy, but it needs to be sustained. It is vital that the Government builds on this work now.

For more of our analysis of the white paper, please click here


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