6 minute read 25 Feb 2020
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Beyond Brexit: ‘Levelling up’ the UK

By

Mark Gregory

EY UK Chief Economist

Committed to using economics to drive informed decision-making in the public and private sectors. Helping rebalance the UK economy. LinkedIn Top Voice. Sports mad. Loyal supporter of Stoke City FC.

6 minute read 25 Feb 2020

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Our latest Regional Economic Forecast reveals the UK economy is expected to strengthen over the coming months but the geographic imbalances between the North and South of England will widen over the next three years unless a new approach to policy is adopted.

The forecast for England’s regions, cities and towns warns that imbalances in growth between different places within regions will also continue to increase, with larger cities pulling further away from towns and other smaller neighbours. Gross Value Added (GVA) in the largest cities in England is expected to grow at 2.2% annually on average compared to growth of 1.6% for towns.  

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Mark Gregory shares the key findings from the regional economic forecast:

Mark Gregory shares our policy recommendations for driving balanced economic growth:

Once more into the breach …

No-one should be in any doubt about how challenging ‘levelling up’ the UK economy will be. Despite the launch of at least 40 geographic policy initiatives over the last five decades, the UK remains one of the most regionally unbalanced developed economies. There are no easy solutions.

Our analysis of growth in GVA in England between 1997 and 2019, covering 13 years of Labour government and a decade of Conservative-led administrations, illustrates the scale of the task. Change of government had no discernible impact on outcomes — the share of the UK economy accounted for by the four most southerly regions increased from 60% to 63% in this period and every region except London experienced a fall in its share of total English GVA. In those 22 years, London’s economy grew by 3.2% each year on average compared to the growth of 2.1% each year on average achieved by the English cities in our leading cities group. The growth in the towns and communities in England of 1.8% was significantly lower than the rate achieved in the leading cities and 56% of the rate of growth in London. Even this figure hides further disparities. Growth during the period was 1.4% on average in the towns of the North East and Yorkshire and the Humber, less than half the level achieved by London.

… swimming against the tide

And things are not going to become easier. Our latest forecast shows that the trend for the leading cities to grow faster than towns and for the South to outpace the North is set to continue with the current policy programmes. Applying the EY ITEM Club forecast to England’s regions, we expect that the gap between the North and South will widen over the next three years with London, the South East and the East of England being the three fastest-growing regions, while the North East, Yorkshire and the Humber and the South West will be the slowest-growing locations.

The leading cities will outperform their regions in economic growth terms right across England and in no region will towns grow faster in aggregate than the region as a whole. GVA in the leading cities in England will grow at 2.2% annually on average up to 2023 compared to growth of 1.6% for towns. We expect the gap in growth between the leading cities and towns will be most marked in the East Midlands, North East, Yorkshire and the Humber and the North West.

The story on forecast employment growth is very similar. Employment will grow in our leading cities at 1% annually, 50% faster than the 0.5% growth forecast in towns. In every region the growth in employment will be highest in the largest cities and lower than the regional average in the towns. The West Midlands, North East and Yorkshire and the Humber, the areas expected to be the focus for ‘levelling up’, will be the regions with the slowest-growing labour markets. The risk for ‘levelling up’ is clear - if there are more opportunities in cities and the temptation for people to either move or commute to pursue these opportunities will be strong, potentially weakening town economies.

Leading cities GVA growth in 2020-23

2.2%

Leading cities will continue to outperform with Gross Value Added (GVA) expected to grow 2.2% annually on average compared to growth of 1.5% for towns

Recent city-centric initiatives such as the Northern Powerhouse and Midlands Engine have been successful in boosting the economic performance of some locations, but the impact has not been felt across the whole country. If we are to succeed in ‘levelling up’ the economy, a more radical and segmented approach is now urgently required.
Mark Gregory
EY UK Chief Economist

While the EY ITEM Club expects some positive momentum to build in the economy, specific factors risk limiting growth in the parts of the country that are priorities for policy. The future trading arrangements with the EU appear likely to mean more friction at customs and this, together with the general slowdown in trade, is likely to hit manufacturing — the sector disproportionately important to many towns in the North and Midlands — relatively hard. These areas also rely relatively more than those in other regions on public expenditure and are therefore still adjusting to lower levels of public spending resulting from austerity measures. Future policy will need to be sufficiently powerful to overcome these headwinds.

An agenda for change

Economic history leaves us in no doubt that if we are to succeed in ‘levelling up’ the UK economy, a different and more radical approach is required. In this report we assume that the objective of ‘levelling up’ is to improve economic and social conditions right across the country, but with a focus on the places in the North and Midlands that have grown more slowly than the national average for a long period of time.

Start by putting ‘levelling up’ at the centre of policymaking

Regional policy in the UK has typically been pursued as a distinct strand of activity outside of the mainstream of overall Government policy. This has meant that policies in other areas have often conflicted with geographic initiatives. To create the best possible opportunity to succeed in ‘levelling up’, it must be located at the centre of Government to allow policies across the whole of Government to be evaluated for their potential impact on place.

Develop policies for ‘place’ from the bottom up

There is a need to find the correct balance between achieving the benefits of scale and scope while reflecting local circumstances. This requires a different process to the top-down nature of policy historically. The starting point should be the analysis of local economic circumstances together with meaningful engagement with the local community to set direction. These bottom-up assessments will be used to develop a national strategy for ‘levelling up’ that is based on local strategies, rather than one that is handed down from the centre.

The geographic imbalances in the UK are long-standing and it’s clear that there is no silver bullet or easy solution. This will take concerted and integrated policy thinking by government, as well as business, academia, and other stakeholders.
Debbie O'Hanlon
EY UK&I National Markets Managing Partner

Flex the approach

One of the clearest lessons from attempts at rebalancing over the last 30 years is that there is no single model applicable to all circumstances. We need to recognise that a variety of approaches will be required, and these should be used to provide the structure for aggregating local plans up to the national level via whatever intermediate stages are necessary for individual places.

Seeking to maximise the benefits of agglomeration has been a central feature of recent policies. The benefits of agglomeration are well known, and policy should continue to seek to maximise these while recognising the need to use a wider range of approaches. This may mean that strategies are developed that are based on the sector strengths of places, or the potential to strengthen clusters across a set of places, or tailored approaches to address the specific challenges of coastal towns.

Align initiatives to need

By working from the bottom up, it will be possible to identify the gaps that exist in areas such as infrastructure, skills, housing and also resources, at a more disaggregate level. The aggregated analysis of local plans will provide the basis for resource allocation decisions. The starting point should be a presumption in favour of allocating a greater share of resources on the basis of local decision-making rather than large scale top-down schemes.

One of the big challenges is that the imbalances in growth are partly the result of sector dominance in certain regions and are therefore partly structural. Future policy will need to be sufficiently powerful to overcome these headwinds.

Tilt the playing field

The recent initiatives to improve geographic economic balance in the UK have been successful in boosting performance in some locations but have not affected performance significantly across the country, especially in some of the places with the lowest economic growth rates. If we are serious about improving growth rates more widely then more targeted intervention might be required. Our sector forecasts show the public sector, manufacturing and technology sectors are the most important for rebalancing. First, the Government needs to ensure that public spending plans do not unduly impact the places facing the most challenging economic conditions.

Second, the Industrial Strategy has the potential to support targeted initiatives. As EY’s research on foreign direct investment (FDI) with the Centre For Towns demonstrated, compared to services sector projects, significant manufacturing investment does flow to a wider range of places. Extending the Industrial Strategy to drive manufacturing activity at a local level, offers the potential to boost growth in a wide range of places.

Third, manufacturing cannot single-handedly drive nationwide geographic rebalancing. The technology sector is fast growing and concentrated in the South of England. For a sector that has the potential to operate virtually, and across geographic boundaries, there does appear to be potential to use technology to drive greater geographic balance. A faster roll-out of high-speed fibre would be a key prerequisite but this strategy would need to be broader and include skills development, support for training, and applications development that enable people to work virtually.

Summary

  • Leading cities will continue to outperform with GVA expected to grow 2.2% annually on average, compared to growth of 1.6% for towns. Large city employment will grow twice as fast than in towns
  • EY report calls for ‘levelling up’ to be front and centre of policymaking, with five key recommendations

About this article

By

Mark Gregory

EY UK Chief Economist

Committed to using economics to drive informed decision-making in the public and private sectors. Helping rebalance the UK economy. LinkedIn Top Voice. Sports mad. Loyal supporter of Stoke City FC.