Neil O’Brien: How to rebalance Britain’s unbalanced economy – by levelling up, not levelling down
Neil O’Brien is MP for Harborough.
Even Brexit, it turns out, is about location, location, location. Ben Ansell, an Oxford professor, has found that in wealthier areas, where the price of a house averages £500,000, 70 per cent voted to remain. Poorer areas, where the average house price was £100,000, were an exact mirror image, with 70 per cent voting to leave.
Like a disclosing tablet, the EU referendum highlighted the different economic experiences of different places over recent decades: booming London and the most prosperous home counties voted to Remain, as did Scotland, the next richest part of the country. The reviving cores of our large cities did likewise. But smaller towns and cities, the countryside and coastal places voted overwhelmingly to Leave, as did Wales.
In response, Boris Johnson recently set out his ambition to “level up” poorer areas in a fantastic speech in Manchester. It’s the right thing to do – and it makes political sense too. The 2017 election saw us losing ground in wealthier-but-Remainy areas, and gaining former Labour seats in the midlands (and north) which we’d never gained before. We have huge potential to win in seats where people have felt taken for granted and left behind for many decades.
The economic case for levelling up is clear too. There are no G20 countries which have a more regionally imbalanced economy than the UK and are also richer than the UK. Conversely, all large countries that are richer per head than the UK have a more balanced economy.
In other words, a more balanced economy is a stronger one. In a highly unbalanced economy, resources like land and infrastructure end up overloaded in some parts of the country, and under-used in others, which is costly and wasteful. Given that workers (particularly lower skilled people) don’t simply move away from their families in the face of local economic problems, having greater distances between unemployed workers and job opportunities may well compound problems matching people to job opportunities. There might even be compounding mechanisms: if some areas have high unemployment that can lock in patterns of worklessness.
But to bring about a more balanced economy, there are two big lessons that the Prime Minister must draw from previous successes and failures.
First, the crucial thing is to attract private sector employment – particularly jobs that are knowledge and investment-intensive. The work of academics like Enrico Moretti and think tanks like the Centre for Cities shows how gaining “brain jobs” in the private sector has a much bigger multiplier effect than just moving public sector jobs to an area.
Tax breaks for inward investment can be very effective in attracting in new investment, which is why most other countries offer them. Within the UK, probably our most successful ever regional intervention was Margaret Thatcher luring Nissan to Sunderland with a mix of investment tax breaks, lobbying and the offer of cheap land (an old airfield). It’s now one of the most successful plants in the world.
When people think about regeneration, they often start with plans for a new tram or shiny cultural facility, which tend to be popular, and can indeed help growth in areas that are already motoring along. But such investments aren’t going to do much for areas where the economic engine has rusted up and needs restarting. Detroit famously built a fancy monorail intended to fight its economic decline: but in a city where every factory was gone it remained largely unused, drifting through a city that looked like it had been bombed flat. Without private sector investment, there’s no demand for it or anything much else.
Second, different things work in different places and a different set of policies are needed for our towns than our city centres. During the 1970s and 1980s the “inner cities” were a byword for decline. But in recent decades capital cities and the centres of other larger cities have outperformed other areas, right across the world. The shift from a manufacturing to a professional services economy (plus the growth of universities) revived the centres of our cities.
There are still many problems to solve in our cities, but the places that have struggled the most in recent decades have been rural areas, smaller towns and cities, and the outer parts of large cities (even outer London). Places on the coast and places without a university have suffered particularly badly from a brain drain. Labour have tried to capitalise on their discontent with glossy ads like their film “our town”.
What to do for towns is even trickier than helping big cities grow. Though there are trendy small towns from Hebden Bridge to Hay-on-Wye, simply copying ideas from big cities, like “culture-led regeneration”, is often a recipe for failure in small towns.
Improving connections between city centres and towns might help – Tom Forth has highlighted just how bad we are at this in Britain. The Prime Minister’s new fund to help regenerate town centres is a good move and will make them more attractive. We should do things like re-examine funding historic funding formulas for government spending on science, transport and housing, which are still heavily geared towards supporting London and other areas that are already growing fast. And we should offer devolved economic powers to counties, not just big cities.
The more we can use free market mechanisms to help poorer towns, the more likely we are to succeed.
Looking at Britain as a whole, chronically low investment rates are a big part of our long-term productivity problem. We should cut taxes on business investment across the whole country, and make the UK’s capital allowances among the most generous in the world (at present they’re among the least).
But to level up poorer areas we should go further, and have even more generous tax breaks for investment there, where the problem of low investment and low productivity is most severe. We should also empower the Department for International Trade to take part in the same aggressive tax competition for inward investment that countries in Asia, the US, and our neighbours in Ireland do so successfully. And we should use those tools to encourage inward investment into poorer places.
More generous capital allowances would help lagging regions anyway, even if introduced across the board. While manufacturing accounted for around a quarter of productivity growth nationally since 1997, it provided 40–50 per cent of productivity growth in poorer regions like Wales, the West Midlands and North West. Manufacturing requires roughly twice as much capital investment as the rest of the economy, so an investment-hostile tax system hits poorer places harder.
Ever since the referendum, there’s rightly been renewed focus on how to help poorer places. Helpfully there is decades of evidence about what does and doesn’t work. If we can join up an energetic new Prime Minister with the bit between his teeth, plus a new agenda for left-behind places, then we can really get things moving.
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