Questions and answers about coronavirus and the UK economy
Questions and answers about coronavirus and the UK economy

#economicsfest: Where next for the UK’s ‘levelling up’ agenda?

The policy goal of ‘levelling up’ parts of the country where economic performance is weak and which have somehow been ‘left behind’ has been made more urgent by the pandemic. Achieving this ambition requires policy innovation and sustained political commitment.

Even before coronavirus, there was much talk of the need to revive the fortunes of the UK’s ‘left behind’ towns, cities and regions. Many of these same places have been hit hardest by the pandemic – and so the ‘levelling up’ policy agenda, designed to close gaps in regional economic performance, is now at the heart of the government’s Covid-19 recovery plan.

But what does levelling up mean in practice? And how should it be implemented? These are the questions that Torsten Bell (Resolution Foundation), Raquel Ortega-Argilés (University of Birmingham) and Marianne Sensier (University of Manchester) discussed at this year’s Bristol Festival of Economics panel discussion on ‘Levelling Up the Left Behind, Myth or Possibility?’, chaired by Andy Bounds of the Financial Times.

Watch back here.

The panel expressed cautious optimism that the gap between those places that are ‘ahead’ and those that have been left behind could be closed, but they also highlighted the need for sustained political commitment for this to succeed.

What are the inequalities that levelling up policies seek to address?

The levelling up agenda aims to address the significant inequalities between different regions of the UK. Such economic gaps exist in many developed economies, but they are more pronounced in the UK than in comparable countries (McCann, 2019Agarwala et al, 2020). During the discussion, Raquel Ortega-Argilés pointed out that productivity levels in some areas of the UK are ‘no better than in some of the poorest parts of former East Germany’.

Given the clear levels of disparity, it is natural to ask what shape these various inequalities take. One of the most striking trends across regions in the UK is the sizeable differences in regional productivity levels.

During the discussion, Torsten Bell noted that as regional productivity gaps have been growing since the 1990s (before which regional inequality was low), this is currently the single biggest problem the government faces in levelling up. The gaps in terms of gross value added (GVA) – a metric used to measure productivity at the regional level ¬– have not worsened significantly since the 2008/09 global financial crisis, but they have remained high. Currently, the difference in GVA per head between London and the Northern regions is around £26,000.

Levelling up policies must therefore promote the spread of productivity growth across the country, and specifically close the productivity gap between the South East (especially London) and other parts of the UK.

Other regional economic inequalities relate to employment and income gaps, although both have already been closing steadily. Torsten Bell pointed out that even before the pandemic, there were substantial differences in employment levels between some regions. For example, there was a 10% employment gap between the North East (71%) and South West (81%) regions.

Concerns around existing inequalities in employment between regions were also raised by Marianne Sensier. In recent research (with Fiona Devine), she finds that the resilience and recovery of UK regions after the 2008/09 economic crisis varied extensively. The South East had been the most resilient region, while the North East and Yorkshire and Humberside were among the least resilient (alongside Northern Ireland). The study finds that the most resilient places were those with a workforce with higher-than-average levels of qualifications, and a larger share of managers or professionals in the population.

Physical infrastructure is a further dimension of regional economic inequalities (Coyle and Sensier, 2018Agarwala et al, 2020). Recent research shows that the cost-benefit analysis used by the Treasury to determine investment has ‘reinforced the regional imbalance of the UK economy’. What is needed is a strategic approach to infrastructure investment that tilts the spending towards disadvantaged areas.

Infrastructure makes significant contributions to the economy in terms of GDP and employment, but also by building networks for connecting individuals, businesses and society in general (Institution of Civil Engineers, 2020). Given the inequitable distribution of economic consequences felt by the pandemic across regions (especially in employment), infrastructure could be a tool for levelling up, both more immediately by generating employment, and over the longer term by expanding economic, social and productive capabilities.

Who has been ‘left behind’ and how?

An important part of designing effective levelling up policies is discerning exactly where the left behind areas are, and how they relate to the inequalities that arise at the regional level. In the case of regional productivity levels, Torsten Bell indicated that the differences arise not because workers in the South East are, in real terms, simply more productive in their jobs than workers in other regions, but because of the kind of jobs that exist there.

This focus on the structural causes of regional inequalities indicates what levelling up might mean in practice. Marianne Sensier stressed that  addressing regional inequalities is about levelling up opportunity across the country, which is currently by no means evenly spread (Institute for Fiscal Studies (IFS), 2020).

It is worth pointing out, however, that analysing inequalities across regions does not necessarily correspond perfectly to determining those who have been left behind. In other words, there are also differences within regions. Torsten Bell emphasised a pronounced divide between smaller towns and rural areas, and cities. As cities have increasingly become places of high employment over the last decade, urban employment gaps have been reducing.

What shape might levelling up’ take and what should be the role of government?

To address regional imbalances in productivity, one suggestion is centred on rethinking the distribution of high productivity jobs across regions of the country. Many jobs outside the South East are low-paid, low-productivity jobs. Raquel Ortega-Argilés suggests one path could be to direct the training of high-skilled workers to other regions. One example of this is the relocation of  HSBC’s head office to Birmingham, which could work to counteract the high concentration of banking headquarters in London.

There are two important questions surrounding the levelling up process related to the heavily centralised nature of government and the concentration of wealth and influence in London and the South East:

  • Who should be involved as decision-makers in the levelling up process?
  • How can levelling up be financed?

Here, the panel turned their thoughts to local taxation. They discussed the possible benefits of linking levelling up and local taxation.

First, local taxation could be a tool to promote civic engagement and empowerment in voting and shaping decision-making. It could also increase transparency of the spending process: by making it clearer to voters where funds are being directed, higher levels of civic interest could be achieved.

Marianne Sensier also indicated the potential for a tax system that redistributes across regions to provide greater access to opportunity in communities across the country.

The concept of local taxation also encourages long-term planning decisions and investments at the local level. As Raquel Ortega-Argilés suggested, these can be long-term decisions that complement investments undertaken at the national level. The importance of giving space to longer-term planning was echoed by Marianne Sensier, who highlighted the importance of ‘patient capital’, a type of capital investment oriented towards long-term projects. With these investments, investors forgo ‘quick profits’ and instead focus on encouraging innovation and long-term growth.

Why focus on closing regional gaps?

As made clear during the festival discussion, economic problems can engender social problems over time. Significant differences in money spent per capita at the local level, as well as in income levels or productivity, can lead to tensions with healthcare provision, civic engagement and a range of opportunities that contribute to overall living standards. Inter-regional imbalances can also lead to social ruptures and a breakdown in community cohesion with a number of economic and social consequences for wellbeing (Ballas et al, 2016Iammarino et al, 2018).

On this basis, a more integrated approach to individual economic and social wellbeing, based on a more inclusive concept of prosperity requires economists and policy-makers to turn their attention to regional inequalities, and address what brings these imbalances about. This makes levelling up the left behind a challenge to be faced, but not an impossible feat.

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Author: Julia Wdowin
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