Dorset Economy blog 55: Levelling up election?

BU's emeritus Professor Nigel Jump writes the latest in his Dorset economic blogs

Key:

RGDP = real gross domestic product
CPIH = consumer prices including housing
PMI = purchasing managers’ index- survey of regional activity.
Sources ONS & SPGlobal

Modest and mixed activity trends persisted through the first quarter of 2024, with services and production doing better and construction worse.  Activity surveys pointed to a small climb out of recession in the first 3 months of the year.  Labour markets loosened a little and inflation rates eased further towards target (headline CPI 2.3% year to April).  ‘Core’ rates remain higher (see table for CPIH).

Levelling Up Election?

In recent years, one of the main economic development issues has been the relatively wide gaps in economic performance across the UK nations and regions (compared with history and with overseas comparators).  There have been various projects and funding pots to encourage “levelling up” across and between the regions, cities, and towns.  Now, approaching a General Election, regional observers are looking for measured impacts from the freeport initiatives, and the various regeneration funds: the Towns Fund, the Levelling up Fund, the Shared Prosperity Fund et al.  

The government published its white paper on “levelling up” in February 2022.  It envisaged more development powers for local governments and help through freeports, low-tax investment zones and a multitude of funding pots dishing out grants largely through local authorities.  More than £10bn was allocated for “levelling-up funds” in the five years to 2025-26.

The results to date are small and inconsistent: “Left-behind towns are still left behind” (FT 28/4/24).  Any positive results are said to be counter-balanced by the imposed effects of

• local government austerity and other cuts (including the northern parts of HS2 rail infrastructure),
• broader investment short-termism,
• the war/energy driven inflation surge, and
• the wider impacts of post-Brexit barriers (tariffs and bureaucracy). 

Sadly, some analysts claim that adversarial and under-bidding has occurred in these “levelling” programmes.  The current approach has been blamed for “delays, moving goalposts, unachievable spending deadlines, costly bidding processes, and opacity and unfairness in the way the cash was allocated (FT 28/4/24).”  Despite the evidence of previous development cycles, politicians, businesses, and others seem, again, to have been surprised by how long it takes to

• get development going,
• promote competition,
• yield results, and
• evaluate progress.

They should not be so surprised.  Such investments always take time to be decided and implemented, to come to fruition and then to prove to be positively sustainable.

Essential shifts in productivity have yet to materialise.  Transport, culture and other projects were rushed: focussing on work that was “ready to go” rather than aimed at “best” outcomes.  It has been argued that bidders and assessors have not been given enough time or scrutiny to judge optimal plans and measure outputs against desired outcomes.  On this view, policy has been “spreading out” rather than “levelling up”, with questions arising about political rather than economic prioritisation. 

Indeed, the metrics of output per hour, living standards/real pay and health have yet to catch up and show any “catch up” in the weaker areas.  According to the key productivity statistics on GDP per hour worked or GVA per head, the Greater South-East (GSE), including London, retains a large lead over other areas.

There are positive signs:

• Freeports have attracted some investment and created jobs,
• (although it is not clear whether these have been merely displaced from somewhere else i.e. would have happened anyway). 
• Cultural spending had risen outside the Capital,
• (although the losers shout louder than the winners).
• R&D, transport, and civil service movement to non-GSE locations are a bit higher, (although there are counter trends, and the net position is unclear). 
• Devolution has progressed with deals covering most of the urban North spreading powers over investment, transport, and adult education,
• (although competition for funding has not made good what has been cut since 2010). 

Local government, for example, is a much smaller share of total government expenditure than it used to be.  Arguably, some of these cuts have outweighed direct spending on “levelling up”.  Consistency and compatibility across departments and areas remains weak.

How can the system be improved?  Long run continuity is key, perhaps over as much as 20 years, especially in creating Area Investment Plans assessed against potential and need.  In allotting funds, targeted and transformational schemes should be supported, far beyond near-term expediency.  Capturing long-term value driven by competitive strategies for high ‘multiplier’ spending and fast ‘accelerator’ investments is a basic requirement for any mixture of revenue and capital schemes.

The history of regional development in the UK has been one of “stop-start” programmes based on political preferences and myths rather than underlying productivity needs.  Just as returns are beginning to be generated, a new political administration tends to pull the plug on current development structures and replaces them with some other untried and untested format.  Hence, a dozen years ago, the Tories shut the Regional Development Agencies and set up the very different Local Enterprise Partnerships.  Last month, in turn, central government support (core funding) was withdrawn from Local Enterprise Partnerships and functions were transferred to local and combined authorities.  

Compare this with Germany and many US sub-regions, for example, where development structures evolve rather than rise and fall from decade to decade.  If “levelling up” is to mean anything, it should be sustained (non-politically) across government departments, administrations, and political parties.

(In this election, Labour proposes a National Infrastructure and Service Transformation Authority, merging the Conservative’s Infrastructure and Projects Authority and the National Infrastructure Commission.  Meanwhile the Conservatives are offering £20mn each for 30 towns over 10 years – none in Dorset.)

With the right incentives, sectors that offer hope of “levelling up” would probably include transport and communications, defence and energy, and a range of AI-driven consumer services.  These are sectors in which

• technology and labour are changing,
• demand and supply patterns are shifting, and
• some globalisation impacts are reversing. 

Secure, safe and resilient domestic sourcing (onshoring) is expected to be more of a feature.  Hopefully, the Dorset economy and businesses can eke out some positive niches for growth and development in this new AI-driven economy.

For lasting “levelling up”, the usual productivity mantra remains the backdrop: investment in infrastructure, capital and skills encourages local entrepreneurship and competitiveness.  Much of this can be done by private business, and other agencies and institutions but the various governments in the national departments, devolved administrations and regions/mayors still have important roles in setting the legal and fiscal framework, providing direction and incentives, offering kickstart funding, and evaluating results.

“Levelling up” requires the creation of conditions over a generation to which business and other investors can respond positively, taking advantage of the incentives to yield high comparative expected returns.  This means less direct government intervention in the innovation process but more in terms of strategic direction, facilitation, and infrastructure.

The economy is less like a growth “engine” subject to policy “fine tuning” and more like a “natural ecosystem” in which State meddling happens only at great risk to the diversity and sustainability of the system and its results.  Reckless experimenting is dangerous, especially when it means not allowing the “bad” to fail and not leaving room for the “good” to thrive. 

As of late May, we await the politicians’ detailed proposals in their election manifestos.  It will be interesting to judge any detailed “levelling up” commitments for investment realism and impact potential.