Centre for Public Policy

 

Policy brief by Professor Graeme Roy, Professor Sir Anton Muscatelli, and Dr David Waite.

This policy brief was originally published by The Productivity Institute on 13 November 2024.

The new government has set economic growth as its “number one” mission.

Several recent initiatives reflect this focus: a refreshed industrial strategy green paper placed growth at the core of the UK’s economic strategy, whilst new policy vehicles – such as a growth delivery unit and a mission board – aim to drive a “decade of national renewal”.

Unsurprisingly, the Autumn Budget emphasised growth in both its content and presentation, and much of the reaction followed suit. Perhaps the most striking feature of the Chancellor’s speech was an unashamed return to dirigiste economics.

UK Regional Productivity 

A core objective of the Chancellor is to tackle the UK’s uneven economic landscape. This includes a pledge to achieve “the highest sustained growth in the G7 – with good jobs and productivity growth in every part of the country making everyone,  not just a few, better off”.

The sentiment of such an ambition is, of course, not new. Indeed, the last government – emboldened by electoral gains in the north of England in 2019 – placed stock in a widely touted ‘Levelling Up’ agenda. This resulted in a lengthy white paper, a new government department, and some steps toward devolution (including local ‘trailblazer’ deals).

‘Levelling Up’ is now gone, but what will replace it?

What does the Budget do for regional growth and productivity?

The Budget offered some tentative signals of a new approach, with a mix of old and new and some gaps to be filled over the coming months.

The Chancellor’s promise to “invest, invest, invest” – supported by tweaks to the government’s “Fiscal Rules” – has paved the way for significant new monies for public investment. This included confirmation of funding for projects in regions that lag behind, including transport links in the North of England. Support for Clean Energy was emphasised, most notably for carbon capture and storage, hydrogen production, and electric vehicle infrastructure. These initiatives are expected to foster industry in regions positioned to host such projects, such as the North East and the Midlands. Under the Barnett Formula, the devolved nations will see an uptick in their capital funding too, which will more than reverse the planned cuts that had been planned under the previous government.

Efforts to improve public sector productivity will also have important regional impacts, particularly in parts of the country where the state makes up a larger share of the economy. So too will increases in local government funding to help deliver services and infrastructure that promote economic development.

These measures, while positively impacting regions outside of traditional economic centres, are set against broader fiscal constraints with much of any day-to-day spending uplift  frontloaded to the next two years. A challenge of front-loading both public investment and day-to-day spending is whether the money can be spent in a way which most effectively enhances productivity and growth. Critics might also argue that these investments may be partly offset by the regional impacts of new business tax increases, which could impact local firms’ growth potential.

What next?

Whilst welcome steps, more policy change will be needed to solve the UK’s regional productivity inequalities.

Admittedly, a first Budget of a new government isn’t the time or place to cover the full spectrum of policy interventions. But from the broad ambitions contained in last week’s statement, where does the focus now need to turn?

Firstly, public investment alone will be insufficient to turn around the UK’s regional productivity problem. Private investment will be crucial too. Indeed, if the objective is growth, many economists would argue that crowding-in private investment is even more important. How successful the government is at leveraging private capital – not just in structures and equipment but in new technologies, skills, and innovation – will shape the pace and scale of regional productivity growth for years to come. The new National Wealth Fund remains a work in progress but has clear potential. The Budget also hinted, but provided limited detail, on an apparent willingness to stick with some of the tools and approaches taken by the last government. This includes continued support for innovation accelerators and investment zones.

Secondly, if the government is to be successful on a regional level, a focus of attention will need to be upon second-tier cities (like Glasgow, Manchester and Birmingham). The evidence from The Productivity Institute is clear: if the UK wishes to address its stubborn productivity problem, it needs to focus upon the city regions which currently lag behind but have the scale, economic influence, and specialisation of industry to re-balance national economic development. This will be a complex task, not least because it requires close co-ordination of national and regional economic strategies and tackling decades of under-investment. The role of research-intensive universities in these cities will be crucial. Universities are not only anchor institutions in their regions, but vital generators of high-growth businesses through spin-outs and spin-ins. They also act to catalyse activity through inward investment and clustering innovation and skills activity around research strengths.  But as also emphasised by The Productivity Institute, when it comes to policy is in this area, the detail of how these investments are made and the instruments for delivery i.e. if they genuinely provide additionality, is key. Here in Glasgow, the University of Glasgow generated £1.8bn economic impact in 2018-19 through its research, largely through spillover effects of innovation activity, whilst the Glasgow Riverside Innovation District – through its focus on critical technologies and sectors – aims to support regeneration within the city.

Thirdly, sustainable productivity growth requires stable long-term policies that speak to both the economic strengths and challenges facing the different parts of the UK.  As a key pillar of the ‘growth mission’, the forthcoming industrial strategy promises to be an important policy milestone. We have seen industrial strategies announced before, so the funding and delivery of this version at a regional level will be crucial. When fashionable under Theresa May in 2017, local industrial strategies were encouraged but then abandoned with shifting national approaches. Perhaps this is the role that local growth plans will adopt this time, but they must be authentically regionally focused and draw upon the contribution of key stakeholders within regions, including local businesses, universities, and skills providers. As we have argued, there is much to learn (good and bad) from recent attempts at boosting local productivity, including the value of local knowledge and partnership in securing investment and high-value jobs.

All three of these areas point to a greater focus upon devolution. The Budget reiterated the promise of an English Devolution White Paper that will widen devolution settlements and deepen the powers of mayors and combined authorities. But devolution on its own does not guarantee greater regional productivity, or even better policy outcomes. There can be risks too from a lack of coordination, loss of economies of scale and duplication, not to mention fiscal shocks.

Alongside greater delegation of responsibility, decision-making and funding, a regional productivity agenda must be backed up by much-improved regional governance and coordination.  Efforts by the previous government – from city and regional growth deals through Freeports, Investment Zones and Innovation Accelerators – felt increasingly like a potpourri of measures rather than a coherent agenda. There is now an opportunity to bring a greater strategic coherence to such efforts. The aforementioned ‘local growth plans’ are one such opportunity but further clarification is needed on how each plan will be viewed, supported and coordinated at a national level. Questions too remain over the principles of ‘deal-making’. Deputy Prime Minister Rayner in July pointed, in a letter to local leaders, to a “move away from a deal-based” approach. Despite this, deals have recently been agreed for Argyll and Bute and Hull & East Yorkshire.

Finally, there remains a lack of clarity on what comes next for local growth policy in the devolved nations. In particular, Scottish City Regions – most notably Glasgow and Aberdeen – appear somewhat stuck in the administrative interstices of UK Government and Scottish Government approaches. Unlike in England, where Mayors provide a focal point for further devolved moves, the absence of such roles in Scotland is increasingly noticeable. Indeed, there is a risk that Scottish cities become the “devolution deserts” that were previously a concern for parts of England.

There is likely to be no quick fix to what some have described as “Stagnation Nation” in the UK. The Budget marked an important step, but follow-up actions on local growth plans, industrial strategy, devolution and multi-level governance will ultimately be the key vehicles for solving the UK’s regional productivity malaise.

Authors

Professor Graeme Roy is Professor in Economics, Deputy Head of College and Assistant Vice Principal at the University of Glasgow, and Senior Fellow of the Centre for Public Policy.

Professor Sir Anton Muscatelli is Principal and Vice-Chancellor of the University of Glasgow. An economist, his research interests are monetary economics, central bank independence, fiscal policy, international finance and macroeconomics.

Dr David Waite is Senior Lecturer in Urban Studies and Social Policy at the University of Glasgow, and Fellow of the Centre for Public Policy.

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^{Image source: University of Glasgow, Photo Unit}

First published: 18 November 2024