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Post-Brexit UK will need all its growth engines firing

The hinterland is in revolt. This has been a theme of much of the political commentary on the election of Donald Trump and the vote for Brexit in 2016. In the UK, the idea has been further cemented by the success of the Tories in winning seats long loyal to Labour in the 2019 general election — turning the “red wall” blue. Quite suddenly, what economic geographer Andrés Rodríguez-Pose calls the “places that don’t matter” do: they have been at the forefront of these populist rebellions.

The UK government has promised a “levelling up” of these places, as a way to entrench the shift in political loyalties. The question, however, is whether the country has a well-defined problem, with clear solutions. The answer, alas, is no. It has neither. It might prove far easier to level the economy down, by destroying London. The indifference to the fate of London’s service industries in the Brexit deal suggests the government might even like to do so, though the deal’s impact on EU-destined exports of manufactures is likely to offset this.

The starting point has to be with an attempt to understand the problem. This turns out to be complex, on at least two dimensions: place versus people; and productivity versus consumption. On the former dyad, the question is whether one should care more about places or the people who currently live there? On the latter, the question is whether we should care more about what people do or how they live?

The distinction between productivity and income is critical. A paper published by the National Institute of Economic and Social Research last year argued that the “UK today is one of the most geographically unbalanced countries in the industrialised world”. Regional inequality in output per head is exceptionally large in the UK, with London far above the rest. This reflects the benefits of agglomeration and the costs of deindustrialisation, reinforced by over-centralised governance.

Per capita, indexed to UK = 100

Yet, perhaps surprisingly, as the Resolution Foundation and others have pointed out, the distribution of real household disposable incomes, earnings and employment is far less regionally unequal than that of output per head. Moreover, while regional inequality in output per head and per worker has tended to rise since 2000, that in earnings and employment fell, at least pre-Covid-19.

This is due, in part, to the combination of higher minimum wages with higher employment — a real success. Moreover, housing costs are very regionally unequal. Thus, according to the Resolution Foundation, the regional variation in real median household disposable incomes, after housing costs, was at its lowest since the 1970s, pre-pandemic. The UK also has fairly average regional inequality in household incomes among OECD members.

Suppose, quite reasonably, we care more about people than places and consumption than output. We would conclude there is no big problem of regional inequality as such. The problem is poverty, which is an important issue everywhere, including London, with its high cost of housing and low real incomes for those dependent on minimum wages or state benefits.

The solution to poverty is for the government to provide resources needed for good education, health services, local government services and welfare support, everywhere. It was a mistake to slash money for local authorities, especially in poorer areas, and to cut spending on investment and welfare, in the austerity programmes imposed by the government after the financial crisis.

Public capital spending (£ per person), annual average between 2014−15 and 2018−19 (in 2020/21 prices

Yet this does not mean regional inequality in productivity should be ignored, for three reasons. First, redistributing money from wealthy regions to poorer ones, in order to equalise consumption, is a burden on the former and one that the post-Brexit UK may be less able to afford. Second, the concentration of highly educated people in a relatively small part of the country divides it culturally, in a very unfortunate way.

Finally, and most importantly, as the Niesr paper persuasively argues, a large economy cannot fly fast on just one regional engine. The paper’s most important finding is that the UK has just one big high-productivity city and many low-productivity ones. Despite their size, these cities are no more productive than the regions around them.

Policy must therefore focus on developing what the late urbanist Jane Jacobs called “city-regions”. These must be granted the autonomy and resources needed to create their own development paths. The aim must be to help the UK’s city-regions develop themselves, but London must be allowed to develop, too. The country will need all its growth engines in the years ahead.

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