Economic recovery and regional policy

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As we emerge from the present crisis it is clear that we are going to find ourselves in a very different economic environment.

As we set out, the only logical conclusion is that the economy needs to grow significantly and quickly – along with employment so that tax income takes pressure off the amount the Government needs to borrow. To achieve this, the overarching policy must be one of going for ‘growth, growth and more growth’.

But such growth will be within a context of receding international trade, a retreat from globalisation, a reassertion of national interest and a degree of national protectionism.

In our country, London and the South East have dominated economically over the last 30 years. Driving economic growth with innovation, high employment, a skilled labour force – which has come along with much higher wages.

In contrast, the regions have variably struggled, with some areas doing reasonably well whilst others having stagnated or declined. The wealth and success of London and the South East has often been driven by a more productive environment whilst the regions have suffered from lower productivity.

Whilst some differences can be attributed to the composition of industrial activity, ‘horizontal’ issues such as skills, connectivity and innovation appear more significant in general. PWC used cross-sectional regression analysis to find that the places, which are better connected physically and have access to skilled workers, tend to be associated with higher productivity levels. This evidence supports the government’s mission to level up Britain and suggests that policymakers and businesses should focus on spreading opportunity across the whole country. PWC estimate that if areas that are currently performing below the UK average can close 50% of this productivity gap, it could boost GDP by £83bn in this area, equivalent to an increase of nearly 4 per cent total UK GDP.

The challenge as we recover from the Covid-19 crisis is, of course, to ensure London’s continued success – but at the same time to ensure that there is a rejuvenation of the regions, driving economic growth and productivity right across the country, rebalancing our economy, and improving the standard and quality of life for all parts of the United Kingdom. To ‘level up’, to borrow a phrase.

To achieve this the Government needs a clear vision and policy framework to affect real and sustainable change. The levelling up agenda is a positive start. Amending the Treasury’s Green Book, so that funding decisions reflect a greater need for regional investment will help and committing substantial funding to infrastructure outside the South East is welcome and long overdue.

However, long-term success will depend on the private sector. Investment and employment created by the private sector is the only way the regions will truly compete and prosper. Therefore, the Government’s role must be to create and incentivise the environment for such investment. The market economy is still the fundamental key to a successful and prosperous country, but in the new environment it is going to have to have significant and sustained government intervention. State capitalism in the short term.

To achieve this new environment with greater state involvement, it is vital that we do not start to pick ‘winners’, but rather create an environment and a vision for ensuring businesses can succeed. This will demand a far more interventionalist industrial and economic strategy.

Set out below is an 8-point plan to kick-start fundamental change to Government policy, which will be the first step to driving regional economic growth.

1) In every area there needs to be local or regional vehicles to help implement and support growth. Traditionally this role has been led by local authorities with many local bodies, such as chambers of commerce. In 2010 Local Enterprise Partnerships (LEPs) were established to bring the private and public sector together in coherent areas to drive economic growth and employment.

The gap between the best and worst performing LEPs in England has widened over time. In 2017, productivity in the highest-ranking LEP being 2.1x higher than in the least productive LEP, compared with 1.8x in 2002.

Whilst it is not in this paper’s scope to rewrite the economic geography of the United Kingdom, if regional imbalances are to be redressed then what’s required is structures and organisations with clear objectives, remits and accountability.

All LEPs need to be brought to the standard of the best. Economic Development Zones (EDZs) could drive local investment and jobs as they have done previously. The interrelationship between Mayors, Local Authorities, LEPs and EDZs should be clearly established.

2) The infrastructure funding which has already been announced must be pushed into the system as quickly as possible. Schemes and initiatives which will clearly benefit the local economies should be prioritised. Future projects should be based very much around the direct and immediate economic impact that they would have for an area. These investments should go beyond transport and into areas like energy, data communications and housing infrastructure.

3) The concept and idea of freeports must be pursued and set up at the earliest opportunity. Where a freeport might not be appropriate, then economic development zones could be an alternative. These may have a greater benefit in towns and small cities which are inland rather than coastal.

4) A small schemes fund should be created to help fund and drive small businesses that need a capital injection. This could be something along the original idea of the 3i investment bank, but its goal would be to help small enterprises lacking capital to access it and allow them to expand more quickly.

5) The industrial policy that relates to the various industrial sectors must have real teeth. The present sector deals are extremely limited in their content and ability to effect real change. A much more focused strategy should be created with proper funding to give real support to sector and industries that have the potential to grow significantly.

Whilst we accept that the role of state intervention will inevitably be a longer and larger presence than we would normally believe to be economically sensible, we reject the idea that Government should back winners but we do believe it should create the environment for success. The pillars set out by the Government in their 2017 Green Paper, ‘Building our Industrial Strategy’ could be adapted as the basis of a post-Covid modern industrial strategy.

6) ‘Economic localism’ must be a key feature of government policy. Quite often local areas have a much better appreciation of what can be achieved for their local economy and what will have the greatest impact and benefit for that locality. With government giving the macroeconomic support it is vital that there is a regional and sub-regional approach to driving and improving the local economy.

7) Ultimately, businesses will make their own decisions about where they wish to locate, and this will be driven by several reasons, such as – is there the skill base? Is there the infrastructure? Is there access to markets or the ability to transport goods via ports, airports or motorways? However, businesses are not immune to incentives by Government. It is possible for a business to ultimately make its decision on the back of a suitable grant or tax incentive. Therefore, there needs to be a coherent policy put in place – not to subsidise the investment of businesses that would otherwise happen, but to incentivise businesses that might otherwise have decided to invest in other already established parts of the country.

8) Skills is recognised as probably the overriding ingredient to improve productivity and peoples’ standards of living. Many of the regions already have high quality university institutions, but the emphasis on schools, colleges and apprenticeships is equally important to ensure the regions do level up. It is therefore essential that the skills are relevant to the industries already in those cities, towns and regions as well as the industries, which those areas want to attract.

Recommendations

1) Create local and regional economic bodies to drive and implement economic growth. Establish remits and accountability for Local Authorities, Regional Mayors, LEPs and EDZs.

2) Pursue freeports where appropriate, and where not appropriate, investigate the benefits EDZs could bring.

3) The National Infrastructure Commission should revise the National Infrastructure Strategy to recognise the post-Covid economy and increased regional infrastructure.

4) Revise and adopt a ‘Modern Industrial Strategy’, which recognises the need to invest in science and innovation, as well as recommendations to encourage trade and inward regional investment, cultivating world leading sectors and extending city and sector deals.

5) Focus on building skills in the regions where they are needed, working in partnership with existing educational providers in each area.

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