Separating myth from reality in the UK regions

10 November 2014

By Andrew Sentance, Senior Economic Adviser, PwC

The major political parties have the regional rebalancing of the UK economy high on their agenda - and rightly so. However, improving the prospects of cities and regions outside London and the South East must be based on a realistic view of our regional economies and the drivers of economic growth in the 21st century.

Unfortunately, too much of the debate on regional rebalancing harks back to myths from Britain’s past rather than a sober analysis of present realities.  Four common and misleading myths frequently surface in the policy and media debate on the UK regions.

The first is the view of Britain divided into an industrial north and midlands, and a commercial and financial south. According to this view, manufacturing industry is the key to regenerating the less well-off regions of the UK. This may have been an accurate description of the UK economy in the nineteenth century and much of the 20th century. But Britain is now a post-industrial economy. In the 1960s, around 35% of the total workforce was employed in manufacturing; that figure is now down to 8% nationally. In the 1960s, nearly two-thirds of employees in the West Midlands worked in manufacturing; the current figure is just over 11%.

UK manufacturing contains some very successful and highly productive sectors – aerospace, specialist engineering, cars and pharmaceuticals. But the bulk of economic activity and employment in all the UK regions is service-based. Across the country, the regional economies rely on services industries for around 70% or more of GDP and at least 75% of employment. Business and financial services are particularly important in supporting high-value added jobs and services exports, not just in London and the South East but across the country. For example, they account for nearly a third of economic output in the North West.

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A second myth is that regional disparities between London and the South East and the rest of the UK mainly reflect differences in employment and unemployment. That was true in the 1980s, where many of the former industrial regions suffered persistent and chronically high unemployment. But differences in unemployment rates between the major UK regions are now much reduced. With the exception of the North East and the West Midlands, the unemployment rates across the UK regions lie in the range 4.5% to 7%, with an average of 6%. London’s unemployment rate – at 6.6% - is above the national average.

Much more significant variations in employment rates exist within regions – between towns and cities which are well-connected hubs of economic activity, and those which struggle to attract business and jobs. This has created a North-North divide and a South-South divide which is as significant, if not more so, than the well-known North-South divide. Clacton in Essex has the lowest employment rate for 16-64 year olds of any UK travel to work region, while Bury St Edmunds less than 50 miles away has one of the highest. In the midlands and the north, employment blackspots include towns and cities like Wolverhampton, Hartlepool and Blackburn.

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A third myth is that holding back London is the way to help other cities and regions. This would be a major mistake. London features alongside New York at the top of most surveys of global cities. The beneficiaries of an attempt to stifle London’s economy would be New York, Paris, Frankfurt, Hong Kong and Shanghai – not Manchester, Birmingham, Leeds, Belfast and Glasgow. Indeed, other UK cities could well suffer if London is held back, because it is such an important international hub for the British economy.

A final myth is that the High-Speed 2 rail link (HS2) is the main remedy for UK regional differences. HS2 will not reach Birmingham until the mid-2020s and it won’t improve connections with the major northern cities until the 2030s. Meanwhile, it is subject to potential planning and political delays, and is likely to be heavily reliant on public money.  HS2 may ultimately deliver some economic benefits in 15-20 years’ time, but it is not a magic bullet.

So what should be done to promote stronger UK regions and more balanced economic growth? First, we need to create more powerful regional clusters of knowledge-based services industries, around major cities and their universities. Manchester, Leeds, Edinburgh and Bristol provide good examples of success in doing this. Second, cities and regions outside London and the South East need better transport infrastructure. Improving connections to the global economy via ports and airports and improved links within regions should be the priority. This points to intra-regional projects like HS3, which aims to link up the north of England, and upgrading the A14 which connects the midlands to the east coast ports. Third, the skills base of all regions in the UK is vital to attracting high value-added economic activity. And finally, local government and business leaders need to be empowered to take charge of the economic development agenda, with devolution of decision-making to cities and regions in areas like transport, housing, skills and education. Local leaders, rather than Whitehall and Westminster, know best how to support development in the north of England, Scotland, Wales and Northern Ireland.

The coalition government is right to focus on the need for regional rebalancing. But a productive policy agenda must be based on realities, not myths rooted in Britain’s industrial past.

A fuller analysis of the UK’s regional rebalancing challenge is published in the PwC UK Economic Outlook out later this week.

Andrew Sentance:
Read profile | Contact by email | Tel: 020 7213 2068

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