Written evidence submitted by the Northern Powerhouse Partnership (RDE0058)

As you are aware, the Northern Powerhouse concept was launched to address exactly those disparities between the economic outcomes of the North of England and the rest of the country. As our evidence below shows, progress has been made with the granting of devolution deals to some city regions in the Northern Powerhouse giving them greater control over key policy levers to transform their economies. However, there is still much to do, such as devolution to those areas currently without deals and the delivery of significant infrastructure projects such as the Manchester to Leeds rail upgrade as recently announced by the Prime Minister.

The prize on offer is great – additional GVA of £97bn by 2050 and 850,000 additional jobs in the Northern Powerhouse than would otherwise have been the case if we reach our transformational goals. To achieve this outcome central government needs to be committed for the long-term. Many of the policy interventions such as in transport infrastructure and education and skills will take a number of years to produce their full benefit. In addressing the challenges that have built up over many years, it has to be recognised that there are very few ‘quick wins’.

We hope that you find our evidence useful, and we would be happy to expand upon it during the course of your inquiry.

Yours sincerely,

Submission to Treasury Committee Inquiry into Regional Imbalances in the UK Economy from the Northern Powerhouse Partnership

1. The Northern Powerhouse Partnership (NPP) exists to increase the impact and contribution of the North of England to the UK economy by bringing the individual cities, regions and counties closer together, so that the whole of the North has a greater economic input than its separate parts.
2. The NPP has a business-led board, including as well as senior leaders from across the economy prominent city leaders in addition to Chair of Transport for the North, John Cridland, and Professor Dame Nancy Rothwell. Our Chair is former Chancellor George Osborne and our Vice Chair is former Commercial Secretary, Lord Jim O’Neill. NPP will engage with businesses and communities right across the North to develop consensus on the issues that will enable the NPP to drive transformational change throughout the Northern economy.
3. We welcome the opportunity to contribute to this important consultation, and thank the Treasury Select Committee for pursuing this critical work. 

The North – South divide

4. The North Powerhouse is home to 15.4m people (nearly one quarter of the UK population), 7.8m jobs, and generated an economic output of around £344bn of Gross Value Added (GVA) in 2017, almost one fifth of the UK’s total. But persistent gaps in GVA per capita and productivity performance exist when compared with the rest of the UK and London and the wider South East in particular. HM Treasury analysis showed that if the North’s economy grew as quickly as the UK average to 2030 instead of at the slower rate experienced in the past two decades, its economic output would be £37bn higher in real terms.

5. The North’s GVA per capita has been around twenty per cent lower than the average for England for the past twenty years and fifty percent below that of London. In 2017, this gap equated to a £5,100 in GVA per head between the Northern Powerhouse and the UK average, and a £26,500 per person difference between the Northern Powerhouse and London.

6. As we referenced in our first report as a Partnership, there is evidence from the past 20 years that global GDP growth has been primarily driven by urban growth. Yet the UK only has one very important global city, London, that registers in the world’s most populous 50 cities. No other British city registers even close to the world’s top 50. On broad definitions, Birmingham and Greater Manchester would only just be in the world’s top 100.

7. Many Northern cities lie in close proximity to one another. In London, each of the Central, District and Piccadilly underground lines is actually longer than the distance between the city centres of Liverpool and Manchester, Manchester and Sheffield, and Manchester and Leeds – an area that connects close to 8 million people in the towns and cities along the M62 belt. As discussed in a 2009 paper by the Spatial Economics Research Centre (SERC)[1], movement between the major Northern cities of Manchester and Leeds was around 40% lower than might be expected given their proximity particularly for low and medium skilled workers. That piece of research suggested that the cost of commuting between the two cities was a primary barrier to further integration between the cities. Investment in transport infrastructure may therefore lead to an improvement of the composition of the accessible labour market increasing economic output and potential the wages of workers. This analysis, undertaken under the auspices of the Northern Way, has informed the body of work over the last ten years which underpins the Northern Powerhouse project.

8. Since the Northern Powerhouse was instigated five years ago by the then Chancellor George Osborne, there have been tentative signs of a change in the regional disparities in economic performance. The NatWest regional PMI for example has shown that in the North West and Yorkshire and the Humber, business activity levels have consistently been above those of London for the vast majority of periods over the past three years (see chart below).

Northern Powerhouse PMI index (as published by Nat West)

9. Similarly, the housing market outside of London has shown much greater resilience in recent years than that of London and the South East. Some of this effect is undoubtedly due to weaker performance in London but may also be in part due to the initial confidence brought by committed infrastructure to city regions like Leeds City region including Bradford and Greater Manchester, and subsequently initiatives such as the Northern Powerhouse with the Northern Powerhouse Rail project and the early stages of devolution, with Metro Mayors now covering half of the North’s population.

Why do these imbalances matter?

10. As the City Growth Commission (CGC) explained, “economic growth is vital if we are to meet the increasing demands on our welfare system and public services. However, a no less important issue is how the proceeds of growth are distributed.”

11. In the UK, we rely on a significant redistribution of government revenues from a (geographically) small proportion of the country to the rest in an attempt to reduce inequality. If city regions as large and seemingly successful as Greater Manchester are in an annual fiscal deficit of £4-5bn, then it is time to stop doing what has failed to work for decades and look for more radical solutions. Through a complete roll out of devolution across the Northern Powerhouse and wider UK regions as alluded to by the Prime Minister in his Manchester speech, we need to give city regions the power and control to radically alter the current patters of economic growth analogously to the powers and resources available to the Scottish Parliament, Welsh Assembly and when re-established, the Northern Ireland Assembly. In our opinion, devolution to those places in England without it, from Cheshire to the Solent, and devolution of ever more powers from Whitehall are the appropriate vehicle to achieve this.

To what extent do these imbalances explain poor UK productivity?

12. The Northern Powerhouse Independent Economic Review (NPIER), led in its production by Sir Richard Leese, the Leader of Manchester City Council, and co-ordinated by Transport for the North, made the case for what the North – South productivity gap was and the scale of the challenge to close it. The NPIER is currently being refreshed, and we would encourage the Treasury Select Committee to look at the value of the document, including taking evidence on what status Parliament should give it.

13. According to the NPIER, productivity, followed by employment, accounts for the largest share of the North’s ‘performance gap’. When London is excluded, the gap with the rest of England is fairly evenly split between productivity and the employment rate. However, when the North is compared to the rest of England including London, productivity stands out as the critical factor accounting for the lion’s share of the ‘performance gap’. This is because of relatively low employment rates and higher productivity in the capital, making productivity more important when London is included in the comparison.

14. Addressing the challenges of regional disparities in economic performance will therefore go some way to addressing the UK’s poor productivity performance when compared with its international competitors.

What is the interaction between regional inequality and income inequality?

15. These differences in productivity translate broadly into differences in earnings: in 2015, mean earnings of full-time workers in the North were about 5% below those in the rest of England excluding London, and 16% below those in the rest of England including London. So, both the employment rate (more people in work) and productivity (people in higher paid jobs) need to be improved[2].

16. Inequality is a significant challenge within the North, and there are undoubtably ‘left behind towns’, many of which are in close proximity to cities such as Rochdale to Manchester or Ashington to Newcastle, but with vastly different investment in transport links in the last decade. These challenges are no less stark within cities, with a community such as Lincoln Green in Leeds, only a stone’s throw from the heart of the city centre, yet residents can feel a million miles from the economic growth the city is experiencing. From their flats they can see the high-end shopping centre Victoria Gate, the cranes on the skyline and the very real transformation of the city since its resurgence following the recession.

17. It is too simplistic to pitch towns against cities as some observers have done, because the only viable strategy is to better connect assets to maximise them, so that manufacturers in East Lancashire can benefit from and be strengthened by innovation assets, such as in graphene the GEIC at Manchester University, or where distances are significant, such as in Scarborough, a new university campus of Coventry University has been opened because the distance to a city such as York is too far for its benefits to be fully felt in the town.

18. In the charts below we will examine three examples, one from each region of the Northern Powerhouse that shows how statements such as those suggesting that towns are being left behind as the only concern, rather than themselves being challenged by the gap between the worst and better off, need to be subject to scrutiny. The measure used to examine these issues is Gross Disposable Household Income per head. The very definition of what makes a town or city is in itself challenging. For example, one could simply use the list of cities that have been granted by royal charter or letters patent. However, this classification covers areas of wildly varying population sizes and does not necessarily reflect the characteristics that many people would consider a ‘city’ to have. For this reason, we use the Centre for Cities definition of a Primary Urban Area, although in cases such as Greater Manchester it is a definition which does not directly overlay to functional economic geography.

19. Beginning with the North East, four out of the twelve local authorities do not form part of a primary urban area; Hartlepool, County Durham, Darlington and Northumberland (with the last council forming part of the North of Tyne combined authority, which includes Newcastle as a core city). Northumberland is actually the area of the North East with the highest disposable income per head at £18,016 overall, while Redcar and Cleveland, which forms part of the Middlesbrough Primary Urban Area within the Tees Valley Combined Authority, is the lowest at £14,529. Similarly, Darlington, a large town, has the third highest disposable income per head in the North East at £15,487, just behind Newcastle upon Tyne. Clearly in the North East there is a mixed picture of non-city geographies being left behind in relative terms, at least in relation to disposable income levels overall.

Source: ONS, Regional Gross Disposable Household Income (GDHI) by Local Authority

20. 17 out of 39 local authority areas in the North West do not form part of a Primary Urban Area. The six areas with the lowest gross disposable income per head in the North West all form part of a primary urban area. Blackburn with Darwen is the lowest of this measure at £12,450 per head. The first non-PUA region in the North West is Hyndburn at £14,818 per head. At the other end of the income spectrum, the four areas with the largest disposable income per head all lay outside of PUA boundaries. Cheshire East records £22,025 per head, 77% or £9,575 above the lowest in Blackburn with Darwen.

Source: ONS, Regional Gross Disposable Household Income (GDHI) by Local Authority

21. In the Yorkshire and Humber region, 11 out of 21 local authority areas do not form part of a Primary Urban Area, the highest proportion (52%) of the three regions that make up the Northern Powerhouse. The area with the lowest disposable income is Kingston upon Hull at £13,380. The eight areas with the highest disposable income per head in this region are all outside of Primary Urban Areas. Harrogate records the highest level at £21,292, a whole £7,912 or 59% above Hull. In functional economic terms, Harrogate forms part of the Leeds City Region, meaning that it is the scale and success of cities and how easy it is to commute to them which influences a town and many neighbouring villages economic prospects.

Source: ONS, Regional Gross Disposable Household Income (GDHI) by Local Authority

22. What this very high-level look at income statistics hopefully shows is that cities (or Primary Urban Areas) are not ‘leaving behind’ overall other areas at least in terms of the income of their residents. In fact, many of our largest cities actually have the lowest levels of disposable income per head, due to the significant wealth they generate being unequally distributed across their wider functional economic geographies. Of course, looking at a local authority level hides many within place variations in income and other measures of welfare and wellbeing. However, that is as true of any geography you choose to analyse where some areas will be more disadvantaged than others. In order to deliver inclusive growth the most meaningful level of analysis is that of functional economic geography, which have largely been the basis for devolution settlements up to this point.

23. In summary, it is clear that a city’s success does not always benefit their own residents, but those in nearby commuter areas as shown by Cheshire East in the North West. Disconnected towns which fall outside highly agglomerated city regions, such as Blackburn, can also be as low in disposable income per head as the residents of cities such as Manchester. This does not mean left behind towns don’t matter, but it is false to not understand their economic destiny in relation to cities, whose economic functions with enablers like financial services and universities cannot be separated from their role far beyond their immediate surroundings. The lessons for the implementation of the government’s stronger towns fund is clear. Most critically the economic challenges of places must be based on further agglomeration within an existing city region or, as Borderlands is attempting, create the impetus for disconnected places but with the basis for an expanded travel to work area to be pro-actively linked together.

To what extent can devolution of funding promote growth and reduce regional disparities?

24. Devolution is one of the six key ingredients required to realise the long-term ambitions of the Northern Powerhouse; once and for all closing the gap between the North and South of England. Together with transport, education, skills, business engagement and ambition, devolving further power and control to regions of the North could have a transformational effect, increasing productivity so the North truly pulls its weight in economic terms. The key test is the extent to which the devolution of powers has gone far enough, with Mayoral Combined Authorities having the greater range of powers and responsibilities, such as over skills and city region transport, to effect real change. This sits alongside the fact that skills policy was initially far too peripheral to the Government’s Industrial Strategy when it was launched.

25. Transport for the North could be extended in its responsibilities to hold the full Northern Powerhouse strategic transport budget, as has also been recommended by the National Infrastructure Commission in their National Infrastructure Assessment. That would ensure transport connectivity is removed as a barrier to growth, which it most certainly is in the case of passengers and freight in West Cumbria by rail, in crossing the Pennines every day whether it be for container traffic from Birmingham or Liverpool or those reaching or travelling from a city like Bradford to commute by rail or road for example.

26. The Government still needs to complete elements of what they have committed to, such as the Adult Education Budget taking much longer to reach Greater Manchester than when first committed to. NPP believes that going further and giving influence over all post-16 spending is the right approach for all the North’s city regions. The fulfilment of Local Industrial Strategies, in order for them to be meaningful, will require significant further devolution of powers and much of the existing funding spent nationally to be fully devolved.

27. The contrast between the Mayoral authorities and those without deals is stark. For example, the Transforming Cities fund announced in the 2017 Budget; funding automatically given to devolved regions with other areas, such as West Yorkshire, left to apply for the smaller pot that remained. Areas with Metro Mayors received an automatic amount based on their population without needing to enter into a competitive bidding process. Whilst far short of the fiscal freedom ultimately needed for Metro Mayors to achieve their full potential, this was a step towards greater trust following a more accountable and better-resourced infrastructure at the level of the functional economic area (rather than the traditional administrative boundary of local government).

28. The Mayoral model must correspond to where powers over transport and skills can be most effectively used, while responding to where consensus can emerge between civic leaders and government. The Treasury must stand willing to back those areas meaningfully with financial settlements where all parties involved can reach consensus on well thought-through proposals. 

29. Last October, the Mayors of the North joined with the Chair of the NP11 group of Northern LEPs and the Northern Powerhouse Partnership to call on government to give local areas the tools to unlock inclusive economic growth. They made the case that the funding must at least match what is currently allocated and that to ensure maximum impact, decisions and control should be at an appropriate level.

What is the current quality of regional economic data?

30. Granular local level data is often limited. For example, while GVA data is available at local authority level, many other economic indicators (e.g. innovation, labour productivity) are only available at sub-regional or regional level. For Mayoral and non-Mayoral combined authorities to identify and understand patterns of service usage, commuter flows, pockets of new enterprise and skills shortages, data needs to be collected and comparable at the relevant geography, as was argued by the Cities Growth Commission. Without robust, granular data, they are limited in their ability to plan and commission effectively; aligned service budgets and an integrated reform agenda hinge on the power of timely, accurate information. 

Which regional data should government focus on?

31. Clearly productivity is a key metric that should be high up the agenda for monitoring. But there are many others that contribute to that overall productivity performance that should be closely monitored such as education performance, skill levels, indicators relating to connectivity (both physical and digital) and health and wellbeing.

Should ONS regional data be given a higher profile?

32. Regional data should be given the same standing as national releases. It is difficult to believe that the ONS is unable to produce regional statistics to the same timescale as it does for national statistics.

How useful is it to produce regional statistics at the various administrative levels?

33. Thought needs to be given to the geographic level at which statistics are published. Administrative level data will always be required on current boundaries as it will be used to hold those in power to account. Regions (such as North West, North East etc) are seemingly less important now given that there are very few (if any) bodies that deliver on a regional footprint. Indeed, regional level data hides a number of inequalities within regions that are only discovered when getting down to functional economic geography, such as the Liverpool City Region or the Humber.

34. Major economic data could be shared transparently at the Northern level, giving better comparisons to London, which cannot be compared sensibly to any other individual region on its own. The Northern Powerhouse figures in official data sets have to be calculated manually if the media or other observers wish to be able to interrogate what is happening at this sub-national level, despite the Northern Powerhouse having been a consistent government policy commitment and area of focus for five years.

What are the main gaps in regional data?

35. Most subnational data are usually unreliable or out of date by the time it is published. The ONS is making efforts to improve the timeliness of its data by publishing quarterly regional GDP estimates 6 months after the time period they refer to, but it should also take the opportunity to learn from those such as ODI who are looking at ways to collate data more efficiently and present it in a far more accessible and engaging way.

36. It should also be noted that not all data is owned and published by the ONS. As inclusive growth becomes an ever greater focus of local economic policy, it is necessary to bring together data from the ONS, DWP, NHS and others. All of these are produced to different standards, timescales and formats. Being open with the raw data (rather than ONS produced tables of analysis for example) would go a long way in helping those such as the combined authorities in the Northern Powerhouse

Should there be official regional economic forecasts and, if so, who should produce them?

37. Economic forecasting with any degree of accuracy and reliability is of course difficult, particularly over long timescales. One only needs to look at the Bank of England’s “fan charts” to see how great the uncertainty can be.

38. However, despite these challenges we believe that the government should commission a collaborative approach of the Mayoral and non-Mayoral Combined Authorities, NP11, Transport for the North and NPP as a supporting partner to expand the remit of the current Northern Powerhouse Independent Economic Review in order to provide long term economic forecasts which model current projected growth and model transformational interventions, contributing to long term policy making at a pan Northern and devolved authority level, as well as the development of business cases.

39. We support those submissions made by colleagues across the Northern Powerhouse, including in Greater Manchester, that standardised sub-national economic forecasts would not only help improve robustness but also produce cost savings. Individual bodies would no longer need buy this data and analysis separately and would gain greater value from the fact that a consistent evidence base was being used at a northern level in support of TFN’s business cases and assessment of schemes. A refresh of the NPIER is about to commence and we would suggest that the Treasury Select Committee should, as an outcome of this inquiry, take evidence when this review is published, and then commit to publish an annual report on the extent to which UK Government is contributing to economic rebalancing by meeting the objectives it sets out.

40. The production of a pan Northern economic projection, with regular updated forecasts, will have the side effect of de-bunking some of the underlying issues with the way the Green Book methodology is applied to individual projects. Currently, regeneration benefits for example are excluded based on a view from some individuals in Whitehall that they only represent displacement. If we can demonstrate the impacts of interventions in one area of the North is not at the expense only of other travel to work areas, and only for instance redistributes activity from other European cities, or in some cases London and the South East, that should be marked as a positive rather than a reason not to invest. The associated costs in housing policy of over centralised growth in a city like London is significant. The point of economic rebalancing is to see London growth continue but some economic activities which do not need to be there be displaced, releasing capacity in the labour market to attract activity which otherwise might be in New York or Paris to take financial services as an example. It is unacceptable that despite re-balancing being the policy of the government, it is specifically discounted as relevant in investment decisions by the Treasury. We call on the current Chief Secretary to undertake an urgent review of this, to ensure his and the Prime Minister’s focus on northern infrastructure is not undermined by the way the Treasury approaches decisions.

August 2019