The UK Regions: getting past the numbers

05 March 2013

By Esmond Birnie, Chief Economist in Northern Ireland

When we refer to “the economy”, we tend to focus on the UK as the sum of everything that comprises the national economy. So, if we say that growth in 2013 will be around 1.1%, we’re not talking about a specific region, we’re in the world of averages.

The UK economy includes 12 large regions, and the latest ONS data tells us their performance varies enormously.  According to ONS, around 84% of total UK output is concentrated in the nine English regions and unsurprisingly, the largest share of UK output (43.9% in 2011) occurs in the greater South East (i.e. London, South East and East of England).

In the same period, the total output (or Gross Value Added/GVA (the measure of the value of goods and services produced in the economy, less the cost of intermediate production)) in the six other England regions amounted to 39.9% of the UK total.  And the so-called devolved nations of Scotland, Wales and Northern Ireland collectively represented 13.8% of UK output (plus a further ‘Extra-Regio’ 2.3% largely comprising North Sea oil and gas).  If we round these percentages, the UK looks like a 44:40:16 economy in terms of the percentage shares for the greater South East, the rest of England and the three devolved administrations.

So, what have been the relative fortunes of those regions?  Which are pulling ahead, or falling behind, relative to each other and the UK average?  Between 1997-2011, we’ve seen the level of GVA per head in London jump from 156.8% of the UK average to 170.7%, and the South East increase from 104.7% to 107.2%. Conversely, over the same period, Wales declined from 78.1% to 75.2% and Yorkshire and the Humber from 89.6% to 81.6%.

Indeed, according to estimates made by the Centre for Economics and Business Research (CEBR) in February 2012, only two UK regions in 2010/11 were net contributors to the UK exchequer. In London net receipts were equivalent to 10.3% of regional GVA and in the South East they totalled 0.7%. The regions with the largest deficits (proportionally) were Northern Ireland (39.3%), Wales (35.9%), North East (32.2%),the West Midlands and the North West (both at 18.4%).

All this might seem to confirm the popular notion of a growing “North South divide”, but that would be a serious simplification.   Firstly, there are significant exceptions. GVA per head in Scotland actually increased from 96.5% to 98.6% of the UK average during 1997-2011, and there were also significant variations in performance within each of the broad regions of the UK economy. For example, the variation between the highest and lowest parts of the London region (Inner London-West at £111,519 and Outer London East and North East at £14,027) was about 7 to 1. In contrast, the variation between the London regional average (£35,638) and Wales (£15,696) was “only” 2.3 to 1.

The argument is, that the six “rest of England” regions are losing out; they have missed out on the prosperity of the greater South East, and have neither the advantages nor the autonomy or the responsibilities of the devolved administrations. While the greater South East enjoys a relatively high aggregate GVA and the devolved nations have some measure of funding certainty through the Barnett Formula, questions remain as to how the Treasury allocates public spending to England’s North and Midlands.  We’ve reflected upon these points in our Fair Deal for the North inquiry with the Smith Institute and its recent follow up Public Services North.

Given all of this, the recent Heseltine report on growth was highly significant, suggesting that, rather than talking about UK growth policy, there needs to be a greater focus on England’s North and Midlands.  Heseltine suggested that local government should not be a branch office of Whitehall and there could be benefits in brigading Departmental spending funds and making them available (on a competitive basis) in the regions.  All eyes are now on the March Budget and whether any of his ideas are taken forward.  What is clear is that current regional disparities remain a major challenge to overall UK competitiveness and that these may not be solved without new policies – and new funding formulae.  As Heseltine concludes: “...it is not the relative difference between the contributions of the different regions that matters most but the ability of all regions to grow their wealth and prosperity.”

Esmond Birnie
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