Written evidence submitted by IPPR North (RDE0080)

1.   INTRODUCTION

1.1.   IPPR North is IPPR’s (Institute for Public Policy Research) dedicated thinktank for the North of England. With bases in Manchester and Newcastle, IPPR North publishes innovative policy ideas to build fair, democratic and sustainable communities across the North of England.

1.2.   For 15 years our research, ideas and advocacy have influenced a variety of economic, political and social issues – from devolution, the Northern Powerhouse and industrial strategy to transport, skills, education, decent work and natural assets. Most recently IPPR North has been a driving force that made the Northern Powerhouse a national priority. Our approach is collaborative and we benefit from extensive sub-national networks, regional associates, and a strong track record of engaging with policy-makers at national, regional, sub-regional and local levels.

1.3.   Our annual State of the North publications have assessed the regional inequalities in the UK from a northern perspective, built an evidence base for northern policy makers, and influenced policy decisions within and about the North. In 2018, we set out five priorities for the next phase of the Northern Powerhouse agenda, which – together with other key publications – inform this response.[1]

1.4.   IPPR North research shows that centralised government has failed all our regions, by driving inequalities between cities, towns and villages across the country, and between the people that live in them. Across the developed world, devolved power and strong governance have enabled more equal and inclusive economies to develop and helped regions’ economies to converge. We recommend that the government devolves power to England’s regions towns and cities – prioritising the North, which has an economy that would particularly benefit, and where many of the required institutions are already taking shape.

2.   TERMS OF SUBMISSION

This submission focuses on two areas of the inquiry: regional inequality; and policy effectiveness

3.   SUMMARY

3.1.   The UK has a severe problem with regional inequalities in productivity, wealth, health and wages. Across a range of measures we are the most regionally unequal country in the developed world.

3.2.   This is not inevitable – centralised economic policy has prioritised generating higher productivity in a small group of low employment sectors concentrated in London and the South East.

3.3.   The North is at competitive disadvantage – but all regional economies suffer as a result of centralised policy, including in London and the South East. Poverty in London and poverty in the North are two sides of the same coin. Centralised policy has generated inequality and poverty in different forms: outside of London and the south east, low productivity, low pay and few job opportunities are a problem; in the capital, housing costs drive up poverty to the highest levels in the country.

3.4.   The North of England’s economy is of significant scale and if it were at full capacity it could help resolve some of these problems. The Northern Powerhouse agenda recognises this potential, although it needed to evolve from an initially narrow premise.

3.5.   To resolve severe regional inequalities, the government should:

3.5.1.      Devolve power to England’s towns and cities. Develop a clear framework, led by principles, that is locally led, includes a clear set of power of powers on offer, and is flexible – allowing all localities to access and benefit from devolution. This would also allow central government and local government to collaborate on the devolution of transport, skills, education, housing and taxation powers and enables fiscal devolution with fair redistribution.

3.5.2.      Enable devolution to the locally led regional tier. Enable whole regions – such as the North of England – to lead regional industrial strategies, and exercise powers where they can add value to the local tier – such as inter-city transport, trade and investment, innovation and supply chains.

3.5.3.      Invest in people and infrastructure outside of London. Deliver on northern infrastructure by investing in the full Northern Powerhouse Rail project; building HS2 Phase 2 in the North first; and investing in smaller ‘quick win’ transport projects. They should go further and create an Inclusive Growth Fund (IGF) of £10 billion over five years and investigate a ‘solidarity surcharge’ that could fund a long-term pipeline worth hundreds of billions in new infrastructure.

4.   REGIONAL INEQUALITY

4.1.   This section considers the following questions from the Terms of References together, as we believe they are strongly interrelated:

1. What are the most significant regional imbalances in the UK i.e. is it the imbalance between London/southeast and other regions; between towns and cities; or between urban and rural areas? 
2. How have these imbalances changed in the past decade (and potentially longer) and how are they likely to change in the future?
3. How do imbalances present themselves in the UK, in terms of growth, wages, employment and other indicators?
4. What are the main drawbacks of having significant regional imbalances?
5. What is the interaction between regional and income inequality? Is there greater inequality within regions or between regions?
6. To what extent can regional imbalances explain the UK’s poor productivity performance?

4.2.   First, we consider the regional inequalities in general, before focusing on the North of England specifically.

The nature of regional inequalities

4.1.   The UK’s severe regional inequality in productivity must be considered alongside other forms of inequality, and in an international context: productivity cannot be considered in isolation from wages, health and wellbeing. Hence, inequalities between people must be assessed alongside inequalities between places. Comparing the UK to other countries is also essential to make meaningful conclusions.

-        Productivity. The UK’s inequality in productivity is the most severe in the developed world.[2] We divided the country into the appropriate sub-regions[3] and analysed inequality as measured by the coefficient of variation. The UK is more unequal, according to this measure, than any country in the EU. This is confirmed by scholarly analysis too (e.g. see McCann[4]).This analysis provides a more accurate picture compared to others that have been undertaken – some analyses, which have purported to show that the UK is less regionally unequal, have been refuted.[5] Other analyses, such as those conducted by the OECD (and reported infamously by the Economist[6]) mistakenly use GVA per capita, rather than GVA per worker, as a measure of regional inequality – thereby not accounting for the crucial effects of commuting.

-        Wealth. Average household wealth is higher in all of the southern regions than the North, and more than twice as high in the South East compared to the North East.[7] Wealth is growing more slowly in the North than it is in other regions: between 2006–08 and 2014–16 the North’s wealth rose by 49.5 per cent (driven by increases in pension wealth) – half the rate of increase in London where wealth doubled, increasing by 101.8 per cent (driven by increases in property wealth) – recent monetary policy has favoured already-wealthy regions, and therefore exacerbated this regional divide.[8]

-        Health. England has some of the most extreme regional health inequalities in Europe – mortality rates in the North have been consistently poorer than in the South.[9] There are areas where life expectancy is a particularly extreme problem. Male life expectancy at birth in the most deprived neighbourhoods is nine years lower than in the least deprived; female life expectancy is seven years lower.[10] Many of the neighbourhoods with the lowest life expectancy are found within the city regions – in parts of Salford, Bradford, Sefton and Sunderland – although the neighbourhood with the lowest male life expectancy in England is in Blackpool: 68.[11]

-        Wages. Real weekly pay has fallen by £21 (3.8 per cent) in the North since 2008 – by £41 for males and £3 for females. 1.6 million jobs in the North are paid less than the living wage (25.9 per cent of jobs).[12]

4.2.   These inequalities are long-standing – but they are not permanent and inevitable. In 1900 the North was one of the most prosperous regions in the EU (as was London).[13] Industrial change affected regions similar to the North across the developed world, but in the UK the response has been centralised. In contrast, other countries have the powers and therefore the ability to modernise and diversify their economies in more inclusive ways.

4.3.   But the UK’s regional inequalities aren’t as simple as a “rich South/poor North” dichotomy. The capital has the highest rates of poverty and inequality in the country – many of the people living in London do not benefit from the capital’s high productivity, or worse suffer its downsides in terms of high house prices and congestion (this is expanded upon below).[14] In fact the UK has the worst of both worlds for the capital and the country – poverty in London, and poverty outside of London are two sides of the same coin[15]:

4.3.1.      Outside of London and the South East, too many places have been held back by a lack of power and investment – they have not adapted well to industrial change and the social cost has been high; there aren’t enough high-quality jobs; and they are less productive compared to the national average and compared to similar regions overseas.

4.3.2.      Meanwhile even in London and the South East, local leaders haven’t had the powers to manage housing demand and build an inclusive economy – the capital has a housing crisis, and the country’s highest rates of poverty and inequality as a result.

Cities and towns

4.4.   City regions are important for regional economic development and agglomeration is a useful concept to try to understand the positive impact that cities can have. But like any theoretical position, agglomeration also has its limitations, and in particular the impact of density and scale is more limited and nuanced than is often presented. Much of the academic literature does in fact note the caveats and complexities of the relationship between cities and growth, but these are sometimes lost in translation with policymakers. It is important therefore to address some of the limitations of agglomeration theory – internationally, across the UK and within the North specifically

4.4.1.      Internationally: scale is not closely associated with growth and productivity increases in many EU or OECD countries. Cities can grow faster and can be more productive in some developed countries but this is far from uniform: across the EU15 countries, larger cities grew only slightly faster than smaller cities between 1996 and 2001 and grew at the same rate between 2001 and 2006; the recession also appears to have hit cities harder than intermediate areas and those close to cities.[16] In OECD countries, predominantly rural regions grew at a higher rate than predominantly urban regions between 1996 and 2007, and national economic growth has often been driven by previously lagging intermediate or rural regions.[17] City growth is also highly dependent on context – variables such as country size, infrastructure, industrial structure and the presence of strong institutions have a major influence.[18] In addition, while positive agglomerative ‘spillovers’ are widely accepted, there is very little account taken as to the negative spillover effects that agglomeration can generate, such as congestion and poor air quality.[19]

4.4.2.      Within the UK: the relationship between agglomeration and productivity is particularly unclear. One comprehensive study of the UK’s regional growth challenges found that only seven of the UK’s 35 largest cities have worker productivity levels that are higher than the UK or EU average.[20] Another analysis has shown that only in the South of England there is a relationship between urbanisation and productivity, and that this is entirely accounted for by the different concentrations of high-productivity finance and low-productivity agriculture for all areas outside of London.[21] Indeed, rural local authorities grew more than urban areas across England over the last 10 years of data.[22] Modelling indicates that a UK city with double the population of another comparable UK city will only be 1.6 per cent more productive – far less than in many similar countries.[23]

4.5.   It is also misleading to analyse cities and towns in isolation from one-another – i.e. without also analysing the flows of people, goods, services and capital that move within and across regions. Internationally, city regions have important relationships with other cities and towns.[24]

4.6.    The scale of economic geography in other countries is also important to consider as we develop our own regional economies: China, India and the US are increasingly developing at the far larger, often polycentric, ‘megaregion’ geographies which dwarf the North’s city regions – with upwards of 50 million people living in them.

The North of England

4.7.    The North of England[25] occupies an important position in the discussion of regional inequalities, and offers many lessons for the regional inequalities picture more generally. Its economy is larger than most EU countries, and its industrial base is adapting for the fourth industrial revolution, with strong growth in knowledge intensive business services; high-tech manufacturing sectors; health innovation; digital and renewable energy. Its geographical diversity is its strength – it includes five major city regions, 265 towns, almost 1,000 villages and smaller communities; it has 29 Universities, eight major ports, and the UK’s largest airport outside of the South East.[26]

4.8.    The North is thriving in many places but is falling a long way short of its significant potential. We recently compared the North of England to North-Rhine Westphalia in Germany. Both regions are of a similar size, have a similar geography, and similar history of mining and heavy industry.[27] But in North-Rhine Westphalia, the regional government has had the power to intervene in the economy, invest in innovation and transport infrastructure, diversify the economic base and transform the perception of the region. North-Rhine Westphalia has retained a far stronger position relative to the North. Its economy is much larger, accounting for €693 billion, compared to €441 billion in the North; and it receives the most foreign direct investment (FDI) of any German region, at 28.5 per cent of the national total, whereas the North tends to be underrepresented in FDI statistics.[28] Transport networks in the Rhine-Ruhr region are dense and effective: Düsseldorf has the highest highway and rail density in Europe and the motorway in and around Cologne is the busiest expressway in Germany.[29]

5.   POLICY EFFECTIVENESS

This section again considers the following interconnected questions:

7. What lessons can be learnt from the success or otherwise of programs designed to promote regional economic growth so far?  What are the future interventions that the UK should consider?
8. How effective have regional bodies, for example combined authorities, cities, Local Enterprise Partnerships, been in promoting strong growth across all areas of the UK?
9. To what extent can devolution of funding to regional bodies promote growth and reduce regional disparities?

International context

5.1.   UK governance is far more centralised than other developed countries:

5.1.1.      Only 1 per cent of GDP is spent on economic affairs by regional or local government, compared to the OECD median of 1.6 per cent, 2.2 per cent in France and 2.5 per cent in Germany.[30]

5.1.2.      Only 5.8 per cent of tax is raised outside of central government, compared to the OECD median of 20.0 per cent, 20.1 per cent in France and 52.2 per cent in Germany.[31]

5.1.3.      All comparable countries – notably France and Germany – hold power at the regional and sub-regional tiers of government, ranging from transport, housing and the environment to health and education.[32]

5.2.   Devolution often benefits these other countries. The evidence shows that countries with greater devolution of tax and spend experience more progressive policies and better outcomes: there tends to be a positive relationship between devolution and more investment in education and infrastructure; public services tend to be more efficient and innovative; there tends to be greater equality, improved wellbeing, better education outcomes and improved social welfare; GDP per capita tends to be higher and regions tend to converge in more devolved countries.[33]

5.3.   The right form of devolution is essential if these positive impacts are to be felt. The positive impact of devolution should not be assumed to follow automatically: there is some evidence that devolution doesn’t have an impact on local economic growth, and where evidence shows a positive impact it is often dependent on particular conditions being met – local governance and institutions must be of high quality, and devolution must be comprehensive – including both revenue-raising and spending powers.[34]

5.4.   England is still the ‘hole in the middle’ of the UK devolution process. Pre-2010, the RDAs were still agencies of central government and never had powers or legitimacy comparable to the devolved nations. The LEPs that have replaced them are even looser and weaker – although their geography is arguably an improvement in some parts of the country.

5.5.   Combined authorities (CAs) are the latest attempt to address issues of over-centralisation in England. On the one hand, they could be seen as a step forward. They are governed by their constituent local authorities and led by directly elected mayors, thus providing a degree of local representation and accountability. They can also enable integration of policy across the constituent local authorities, whilst also offering an institutional framework that could be the basis for public service reform, capital investment and fiscal devolution.

5.6.   On the other hand, however, CAs remain significantly underpowered and underfunded. This hampers their potential to promote growth in a consistent and effective way.

5.7.   The geography of combined authorities is also problematic. While in some areas CAs map onto existing functional economic geographies (e.g. Greater Manchester CA), in others this is not the case (e.g. Sheffield City Region CA; North of Tyne CA). This can produce mixed results, with considerable impact on the way in which CAs can effectively promote growth in all areas.

5.8.   In addition, in some places, CAs and LEPs do not align and their respective roles remain blurred. Again, this can have a negative effect on economic growth strategies.

5.9.    Finally, CAs do not cover all localities across England. This creates a competitive environment that tends to benefit areas (in particular large metropolitan agglomerations) that are already performing better in some ways – whilst excluding others (especially non-metropolitan areas). This is a clear limit to the promotion of strong growth across all areas in England: it risks creating winners and losers of devolution, and generating new economic divides without addressing existing ones.

5.10. To address these issues, there is a need to:

5.10.1.  Develop a principles based ‘framework’ for devolution. This should not be a system of hard and fast rules. Instead it should be flexible and locally led, so that all areas know what is on offer in terms of powers and funding, and what they need to do to get it (see recommendations in the final point below).

5.10.2.  To enable this, it is essential that real power and funding are devolved form the centre – including fiscal powers, within a redistributive model.

The North of England and the Northern Powerhouse agenda

5.11. The North needs investment and devolution to address regional inequality. In 2014 we welcomed the government’s recognition, with the Northern Powerhouse agenda, that the North could be a much more prosperous economy with the right power and investment. Importantly, this agenda moves beyond a conception of the North as on the wrong side of the “North/South divide” and inevitably in decline. Instead of dwelling on the North’s present and historic shortcomings, it presents an optimistic vision of what the region could be in the future.

5.12. However, our research[35] shows that the Northern Powerhouse agenda, as initially conceived in 2014, was far too narrow, and mistakenly focused – almost exclusively – on increasing productivity with better transport connections between the major cities.

5.13. We therefore welcome its evolution over 5 years into a more comprehensive and modern agenda for the North’s economy. In contrast to the initial Northern Powerhouse proposition, policy makers within the North are focused on education and health not just on transport; on towns, and not just cities; and on economic justice and not simply productivity

5.14. However, so far, central government has not delivered on its pledges. The Northern Powerhouse agenda has been undercut by austerity; transport investment hasn’t materialised; and devolution has not gone far enough, and it’s still benefitting for the most part only a few metropolitan areas in the North.

5.15. Austerity is an important backdrop to this agenda, and the North has experienced a disproportionate cut in public spending. Between 2009/10 and 2017/18 the North experienced a £3.6 billion cut in public spending, while the South East and the South West together saw a £4.7 billion rise (in real terms). London also saw a cut in spending, but by far less, at £256 million.[36]

5.16. Since 2014 when the Northern Powerhouse was first introduced:

5.16.1.  200,000 more northern children are living in a poor household, meaning there is a total of 800,000 children living in poverty in the North[37]

5.16.2.  Public sector employment fell by 37,000, or 2.8 per cent, compared to 1.2 per cent in London, 1.6 per cent in the South West, and 1.7 per cent in the South East.[38]

5.16.3.  Transport spending rose by more than twice as much per person in London (£330 per person) as in the North (£149 per person), in real terms.[39]

6.   RECOMMENDATIONS

6.1.   To address the issues outlined in this submission, it is essential to devolve real power and funding to England’s regions towns and cities so that they can manage their own economies in future.

6.2.   To resolve these severe regional inequalities the government should:

6.2.1.      Devolve power to England’s towns and cities. Develop a clear framework, led by principles, that is locally led, includes a clear set of power of powers on offer, and is flexible – allowing all localities to access and benefit from devolution. This would also allow central government and local government to collaborate on the devolution of transport, skills, education, housing and taxation powers and enables fiscal devolution with fair redistribution.

6.2.2.      Enable devolution to the locally led regional tier. Enable whole regions – such as the North of England – to lead regional industrial strategies, and exercise powers where they can add value to the local tier – such as inter-city transport, trade and investment, innovation and supply chains.

6.2.3.      Invest in people and infrastructure outside of London. Deliver on northern infrastructure by investing in the full Northern Powerhouse Rail project; building HS2 Phase 2 in the North first; and investing in smaller ‘quick win’ transport projects. They should go further and create an Inclusive Growth Fund (IGF) of £10 billion over five years and investigate a ‘solidarity surcharge’ that could fund a long-term pipeline worth hundreds of billions in new infrastructure.

September 2019

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