24 February 2020

Is the money heading North? by Martyn Jenkins

The recent Conservative Party election victory was underpinned by the Tories taking seats in traditional Labour heartlands in the north of England and Midlands, which prior to the election would have been unheard of (think Darlington, Blyth Valley, Dudley North, the list goes on…)

Boris Johnson, on the back of this, and perhaps sensing this as a seminal moment in the UK political landscape has turned his attention to the north of England, with a series of investment pledges to boost spending and in particular transport infrastructure. Alongside this, rumours that the Treasury is set to radically change the way in which public investment is allocated across the country, with economic appraisal assessments (as guided by the Treasury’s “Green Book”) set to be reoriented to focus on the North and Midlands in particular, could mean we are about to see a step change in public policy.

So, ahead of the Budget on 11 March, this blog takes a look at the possible implications of such a shift on the UK’s (and in particular England’s) productivity performance, and associated regional spatial inequalities, two topics we have looked at extensively in the past…

London sees the lion’s share of public expenditure

Treasury data across 2018-19 illustrates that London receives the lion’s share of public money, both nominally and at a per capita level, with public spending per person in the capital equating to £10,425, compared to the national average of £9,296. Despite this, research by the Institute for Fiscal Studies shows that public spending as a percentage of gross value added (GVA) is lowest across London compared to all other regions, indicating that London’s private sector remains its unique asset, above its (albeit important) public sector.

It must be remembered that not everyone in London (nor indeed the south overall) are wealthy, with significant local concentrations of deprived communities in the capital and wider southern regions. That said, the per capita data indicates that a shift in public expenditure from the capital to the northern regions (as well as south west), in order to stimulate economic growth, could help to alleviate some of England’s “economic divide”.

This economic divide is perhaps best illustrated by the large and growing gap between the least and most productive regions in the country. As the long run driver of economic growth and prosperity, improving the respective regions’ productivity performance will be key in addressing the regional economic inequalities symptomatic of today’s society.

The situation is stark, as illustrated by the map below, our previous blogs on the matter, and given this prompted the publication of the UK Industrial Strategy over two years ago.  

So, if we are to see more public money diverted to the north of England, where is it likely to go?

Major transport infrastructure appears to be the best bet at the moment, whether this is further investment in HS2, Northern Powerhouse rail, or upgrades to the Transpennine Express.  Such investment, as well as creating jobs, helps to connect people to growth opportunities, reduce journey time and help link the North’s six main cities of Manchester, Liverpool, Sheffield, Leeds, Hull and Newcastle, thereby improving productivity and the economic prosperity of regions. Other initiatives mooted by the government include the development of an £800 million “advanced research projects agency” in the north of England, outside of the traditional research “golden triangle” of London, Oxford and Cambridge, as well as funding for vocational education and training.

Shifting public money is not, however, a silver bullet solution…

Whilst shifting public investment away from London and the wider South East may (if spent correctly) help to bring about some of the structural shift required, this will need to be part of a wider holistic approach, possibly as part of a Spatial Plan for England. Indeed, this was one of the key recommendations made by the UK2070 Commission, with their initial report in May 2019 describing previous government action to tackle inequalities as “underpowered pea shooter and sticking plaster policies – too little and too short-lived.” We took a closer look at the prospects of a spatial plan for England in our last blog.

The imminent publication of the Devolution White Paper for England will also have a key role to play in helping to “unleash the regional potential in England”, as well as ongoing support and funding for the 10 combined authorities currently in existence in England, all of which are located outside of the capital. It is clear therefore that a suite of intervention and policy measures are needed to tackle the entrenched economic divide.

Paradoxically, there also needs to be recognition of the benefits that a thriving capital brings to the wider country in the form of government revenue. Indeed in 2019, London had by far and away the greatest fiscal surplus (the difference between what it receives and generates) at £38.8 billion, compared to the North West which had the highest net fiscal deficit of £20.3 billion. Moreover, London is a major transport hub that many people from remote locations rely on to get to other UK regions, mainland Europe, Heathrow and beyond… 

London should not therefore become a victim of its own success, and key developments including the Bakerloo Line Extension and Crossrail should not be put on the backburner at the expense of others.

Note: A positive net fiscal balance indicates that revenues raised in the area exceed public sector spending in the region. The region has a net fiscal surplus.

And there are also European implications…

The UK’s departure from the European Union has also resulted in a looming funding gap. Since 2007, EU regional policy had provided significant investment in the form of European Structural and Investment Funds (ESIF) for UK regions. This funding has supported many local projects and the largest amounts have been allocated to places outside of London.

The government has proposed the “UK Shared Prosperity Fund” (SPF) as the ESIF replacement. This fund will be committed to tackling inequalities between communities by raising productivity in areas of the country that are “furthest behind”. Delivery of this will be essential, or else risk worsening the already significant regional divide.

Conclusion

As alluded to in our previous blogs, there is no silver bullet solution to the complex, and multi-faceted issue that is England’s “economic divide”.  However, fiscal policy has a crucial role to play in driving forward productivity improvements and generating genuinely inclusive growth.

The sounds currently coming out of government are the right ones. However, the forthcoming Budget (as ever) will be a balancing act. Whilst there is the potential and need to divert public money to northern regions, this needs to be balanced with supporting further growth in the country’s most successful region, as well as ensuring any funding gaps are addressed as a result of the UK’s departure from the EU.

This of course will have implications for town planning and developers, given this will have knock on effects for where major developments will be taking place in the coming months and years. Watch this space…