Dorset Economy blog 49: Unproductive regions & the Autumn Statement

BU's emeritus Professor Nigel Jump writes the next in his series of blogs on the Dorset economy.

The Chancellor of the Exchequer delivered his Autumn Statement on 22^nd November.  He emphasised the avoidance of recession and the fall of inflation over the last 6 months, but the Office of Budget Responsibility’s (OBR) latest forecasts show a stagflation economy persisting over the next 3 years.

The Statement dwelt on important economy issues: the need to raise productivity through supply side reforms.  The Statement announced measures to help all the productivity drivers: skills, investment, innovation, entrepreneurship, and competitiveness.  These plans included various directed expenditure packages, tax and benefit changes, and regulatory reforms aimed at incentivising business investment and worker engagement.  No doubt, in the days to come, the media and others will scour the details, assessing the potential impact, individually and collectively.  Some industries, employers, places and public bodies will welcome the changes on incentives for R&D, planning, foreign direct investment and free trade zones.  Here, however, I want to focus on the broader regional questions.

Low productivity is often highlighted, not least in the Statement, as the key driver of the UK economy’s weakness, nationally and regionally.  It explains aspects of how output, wealth and well-being are ill-distributed across our various geographies.   

“The UK has some of the highest regional inequalities of any advanced country. Today, these are larger than those between east and west Germany and north and south Italy. New technologies, global competition, the loss of old industries — and the failure to support new ones — have all driven that divide.”  This quote comes from a recent report by the Harvard Kennedy School of Business and Government (HKBG), “Why hasn’t UK regional policy worked?”  It analyses the failures and lessons of UK regional policy. 

Basic evidence, in the shape of the GVA per head measure of productivity, reveals wide disparities across Great Britain and Northern Ireland (see snapshot in table below).  The data demonstrates a clear north-west/south-east divide.  SW England (including Dorset) ranks midway amongst the twelve UK regions and devolved administrations.  On this measure, SW England is below (-13.2%) the UK average whereas SE England is above (+7.4%).  Crucially, the regions in this league have barely moved in terms of relative performance or ranking for at least three decades.  Regional disparities are wide and persistent.  Strong economic activity is concentrated amongst larger, well-connected, urban centres in the Greater South East.

Within SW England, the equivalent indices for Dorset County and Bournemouth, Christchurch and Poole in 2021 (latest available) are 71.4 and 90.3 respectively: -28.6% and -9.7% below the UK average.  Of course, the UK average is pulled up significantly by London, reflecting how centralised and concentrated our economy is in a ‘hub and spokes’ pattern.  (It is important to note that GVA/head is a measure of output in a place divided by the number of residents.  Hence, the extent of commuting in or out of an area can boost the numerator but not the denominator.  It is not a measure of regional income/head, for which the regional differentials are similar, but narrower.  Most urban areas, including within Dorset, have their relative GVA/head moved positively by the way the statistics are compiled.)

UK Regional GVA per head 2021 (UK average = 100)

Source ONS

The HKBG report offers six explanations for UK regional weaknesses:

1. wide regional divisions are broad and fairly stable, … narrowing them is hard;
2. past regional policies have been spatially biased … and insufficiently ambitious;
3. centralised approaches have encouraged imbalances in regional growth;
4. policy instability has led to unsustainable outcomes because of short-termism;
5. consistent political leadership, empowering local government, is needed to overcome regional differentials; and
6. cross-party support for local governments working together within city-regions, might improve things.

It suggests regional policy needs to consider:

1. the best levers for growth in the English regions?
2. the right place for decision-making on local productivity?
3. the way to fund a regional revival in infrastructure and performance?
4. reconciliation of local fiscal autonomy and accountability, with a redistribution of resources from wealthy regions to the outliers?

Regional divergences in productivity and wealth reflect several historical economic forces, particularly de-industrialisation, the rise of London as a global financial hub, and failure to persist with long-term, sub-national policies.  Lack of regional progress shows a mix of over-centralisation, policy inconsistency and globalisation.  There has often been an optimistic belief that market forces would rectify things without the need for state interference.

Fundamental and pervasive weaknesses in the UK’s economy, governance and politics remain.  After Brexit, policy makers have been less radical than might have been expected in pursuing sub-national improvements.  As a result, for example, foreign direct investment (FDI) into the UK (historically a key source of productivity growth) has struggled.  Uncertainties about EU market access, lower economies of scale, and comparatively large policy initiatives in Europe and America have pushed the UK below France in the FDI league and seen FDI fall from about 10% of GDP in 2016 to under 3% in 2021.  The latter was a ‘funny’ year and some of the drop may be recovered as the economy gets over recent shocks, but some growth potential has been lost, possibly forever.

Sub-national increases in productivity are key political, institutional, and economic challenges for the 2020s and beyond.  Regional policy should be part of any UK growth strategy.  Spreading prosperity by attracting wider and deeper local investment would improve the entire country’s performance.

According to the HKBG report, our local and regional businesses are often confident but not competent.  They can be slow to take and act on good advice.  Structural inadequacies are enhanced by skills and innovation weaknesses.  Many of our international rivals show better regional patterns, reflecting social compression of the workday, more homogeneous workforces, consensus-driven leadership, flat organisations, and good communications.  Any UK relative improvement is likely to mean more technology and investment, and higher wages and respect, along the lines of several northern Europe countries where work is shorter and smarter, with better outcomes.  We are a long way from such a model.  “Levelling up” has entered the regional policy lexicon and the Autumn Statement dresses some of its actions under this label.  But, to date, the vision, design and progress of “levelling up” has been patchy, at best.

The UK’s diverse, yet unproductive regions need real improvements in productivity that do not restrict the successful regions but spread best practice to underperforming ones.  Learning lessons from across the world - countries and industries, technologies and skills, and infrastructure and investment - may drive forward entrepreneurial competitiveness.  To this end, co-operating to compete amongst local businesses, workforces, and educational and other bodies is vital.   The Autumn Statement says some things on these matters, but a radical, positive and comprehensive change to regional policy remains elusive.