An end to neglect – levelling up through innovation and reinvention

15 July 2021

By Will Hutton FAcSS, President, Academy of Social Sciences

Spatial inequality, both relative and absolute, has sullied Britain for decades. Six of the ten poorest regions in Europe are in Britain, in particular in England, and only Poland and Romania have wider regional gaps.[1]  Living standards in parts of England’s South West, the Midlands and North now approach those seen in the less developed world. Life expectancy in some very deprived areas is plummeting.  An important, perhaps decisive reason, for the Brexit vote, well understood by the Conservative leadership who subsequently picked up parliamentary seats in Labour’s former “Red Wall”, was that it was a vote against a colossally unfair status quo. Redress was wanted, and the call heeded. Thus “building back better” and “levelling up”.

The reconversion of the Conservative party to the cause of a more spatially equal Britain is welcome, especially after the repeated failures of governments of all hues who have attempted it since the war– with the abolition of Labour’s Regional Development Agencies by the Coalition government, a particularly wanton destructive policy act. For levelling up is the task of a generation, building on the efforts of others with differing political convictions. Initiatives and institutions need to be given the chance to bed down, grow and inevitable mistakes corrected rather than made the victim of ideological biases. Cross party support is crucial, in particular from the Tory party which historically is in power many more years than Labour. There is now a chance that, providing the policies are well-designed, Britain may start to find that cross party consensus and begin to close the spatial gap.

It will not be cheap. In a recent lecture[2] to the centre right think tank, the Policy Exchange, outgoing chief Economist of the Bank of England Andy Haldane identified £171.5 billion of funds already earmarked for levelling up of which £98 billion was for HS2 and another £25 billion on roads and motorways. Given the backlog of underinvestment this is only a beginning. At least another £500 billion will have to be found over the next decade to equalise the cumulative disadvantage that has been built up over the last century.

Equally the disbursement of these many billions must be equitable; as Andy Haldane argued, it should not be distributed through a politicised process of cities and regions bidding for funds competitively with allocations left to the discretion of ministers to favour particular parliamentary constituencies.  Growth in the Midlands and North will necessarily be interdependent, with innovation, agglomeration, and spillover effects feeding off each other which do not respect artificial political boundaries. The principles and rules need to be rational, transparent, and well-understood, and there needs to be plenty of autonomy offered to mayors and civic leaderships of all political hues to operate within those guidelines.

So what are my three areas for focus? The UK is an “old world economy”, particularly in its disadvantaged regions. In Europe the old coal mining, iron and steel Ruhr Valley has been entirely reinvented around green and renewable technologies[3], while Estonia with its legacy of Soviet heavy industry has reinvented itself around a commitment to digital technologies and intense investment in education[4]. The UK can do the same, placing innovation at the heart of its regeneration efforts – the first of three policy priorities. Tees Valley mayor Ben Houchen has made a determined effort to reproduce the Ruhr effect in Teesside, with commitments to green technologies and hydrogen energy – collaborating with Teesside University.[5]

This should be a model. There may be savage regional inequality in England and Wales, but one institution has bucked the trend: universities. The great universities in the North of England, the Midlands and Southwest are amongst the best in the world and can be the centre of new knowledge intensive growth poles. Northumbria University has the highest number of start-ups of any UK university[6]. Oxford, which I know well, has in a decade become committed to encouraging start-ups and spin-outs from its academics to have a record now challenging Northumbria’s. The government is committed to raising R and D spend to 2.4 per cent of GDP: it should invest disproportionately in our great regional universities.  The energy and ideas are there: they need to be systematically fostered, and the resulting business propositions harnessed with local scale-up systems established to allow the start-ups to scale. Here the Catapult network[7], with its mission to support business growth in selected high-tech growth sectors, could be boosted with branches in appropriate growth poles.

This leads to a second area of focus – finance. Bank of England statistics show that while loans from the KfW, Germany’s Business Bank, represent 16 per cent of Germany’s GDP,  the British Business Bank’s lending represents  less than 0.1 per cent of UK GDP.[8] Business lending constitutes 18 per cent of all German bank lending: it runs at only a third of that in the UK. [9]Worse, what little there is disproportionately goes to London and the Southeast. The British Business Bank needs to be turbo-boosted, with branches in every new university centred growth pole – a key component of the scale-up system. Debt must of course be matched and supported by equity. Britain needs a twenty first century variant of the Industrial and Commercial Finance Corporation (ICFC), set up after the war and which morphed into 3i, but which crucially is organised with an office network in all our key growth poles.

Lastly education. Vocational education, encompassing lifelong learning, also needs to be turbo-boosted, though not at the expense of higher education. This is a long-standing national problem, but as Estonia and the Ruhr both showed, no programme of economic regeneration ultimately pulls through without massive and sustained investment in fit for purpose skills. Progress must be made across a broad front – fit for purpose curricula whose certificates have recognised currency in the labour market, skills that match enterprises’ needs in particular travel to work areas, the opportunity constantly to update skills across any individuals’ career, getting FE colleges and other skill providers to work with business and with each other collaboratively, and raising the professional standing and pay of FE professionals.

If I could sneak in a fourth policy wish it would be to promote fast, cheap public transport connectivity. Too many towns and cities outside London are too small to secure economies of scale in every facet of economic life: greater connectivity would allow more areas to capture agglomeration effects.

It is an ambitious agenda, but it is feasible. Moreover now is an unique economic and political conjuncture – a cross-party recognition that the votes for Brexit and then for Tories in former Labour “Red Wall” seats sent a message that there had to be change. Britain can and must level up.

Read more commentary pieces on the Levelling up hub.

End notes
[8] Sources: British Business Bank, KfWGroup, ONS, Eurostat and Bank calculations
[9] Sources: Bank of England, Deutsche Bundesbank, ONS, Thomson Reuters Datastreamand Bank calculations.

Note: UK data refer to lending to non-financial corporates by UK resident monetary financial institutions (MFIs) for 2018Q1. German data refer to lending to enterprises and the self-employed by Germany resident Banks in 2018Q1.

Will Hutton is the President of the Academy of Social Sciences. He is a political economistauthor and journalist.