Levelling up is central to the Government’s policy agenda. But it has become an umbrella term for everything and anything – which while part of its success electorally, raises challenges in terms of tangible policy.
To address this, last week the Government announced that Michael Gove is to be appointed as Secretary of State for Levelling Up and that former Bank of England Chief Economist Andy Haldane will head up a task force for the next six months to look at this area. The good news is that much analysis has already been carried out. In a presentation at Policy Exchange in June, for example, Haldane outlined how to make levelling up a success.
Building on work from the Government’s previous Industrial Strategy Council, Haldane’s message was that spatial differences between regions in terms of income and productivity are large and getting larger. Thus, there was the need for 'a new regional eco-system' covering infrastructure, innovation, skills, finance, social – in terms of places being attractive to live – and governance, citing a need to devolve more power locally. Above all, a levelling-up strategy needed longevity, scale and interdependence.
What should we make of this? Levelling up could cover a plethora of areas, including incomes and wages, health and life expectancy, educational qualifications and skills. Haldane even mentioned happiness, noting this was not always correlated positively with economic measures of success. He cited lengthy commutes. One might also add the high cost of housing.
A high priority for Gove and Haldane is thus defining what they want to achieve and establishing criteria for what success looks like. There is a need to focus on policies that will move the dial and make a tangible difference, transforming lives. Definition brings with it policy direction. There is also a strong political incentive to demonstrate progress in time for the next election.
It requires sequencing of policy, with a twin pillar strategy that provides direction and reflects the need for immediate action in some areas that could bring quick success, while also building the foundations for future progress in areas that will take longer, such as improving basic numeracy and literacy, as well as building skills and boosting innovation.
In terms of policy, all too often the issue is framed in terms of north versus south. This dated understanding not only tallies with the way we have tended to view regional policy, but also fits with the Conservative party’s focus on the red wall seats. However, the factors giving rise to the need to level up are much more nuanced.
Previously, economists have focused on this issue in terms of the UK’s low rate of productivity. Productivity helps determine a country's long-term performance. It measures output per person or per hour worked. Over time, high productive economies have higher output and living standards. Low productive economies find it hard to keep up with high productive ones. If productivity is higher, we can work less, or pay ourselves more, or both. This requires more investment and innovation.
Let me outline the four key economic issues that need immediate attention to deliver upon levelling up.
First, crucially, an issue not aired sufficiently enough, is that the UK’s experience shows that there is as much need to level up within regions and cities as there is to level up between them.
Diffusion has to thus form part of the solution. For levelling up to be achieved there is a need for greater diffusion of innovation and technology between the best and worst performers. Currently, there is a 'long tail' between the best and worst firms within the same city or region.
Second, the role of the private sector needs to be encouraged greatly as part of the solution. Thus, getting the incentives right, through low taxes and smarter regulation needs to figure more in this debate.
It also requires the Government continuing to focus on its current agenda of improving connectivity, both digital and transport.
Housing is an issue too, in order to attract and keep the best talent. When I was a Commissioner on the London Stansted Cambridge Corridor Growth Commission, the biggest hurdles to firms investing were housing and transport links. Transport, too, was the catalyst for Canary Wharf’s rise to success in a previously run-down part of London. Only now, much more of that infrastructure spend needs to be across the country, including the second-tier cities.
Third, finance is critical, and Haldane is right to stress its importance. This is not just about the government spending more. It’s about entrepreneurs and business having excess to working capital.
In my view, the funding gap faced by small and medium sized firms needs to be filled. Incredibly this, ‘the Macmillan Gap’, was first identified 90 years ago in a government report and still exists today. Indeed in 2019, according to the Bank of England, this funding gap was a mammoth £22 billion. The fact that such a huge figure could be stated then without senior figures at the Bank, or in the City, taking ownership of how to address is worrying. It is remarkable that closing it has not been a policy priority that has been delivered upon before, but it should become one now to help make inroads into levelling up.
Fourth, empowering local areas so they are best placed to deliver levelling up still needs to be worked upon. For some this is about more finance at the local level, but it is also about leadership too, which is harder to plan for. Moreover, one size will not fit all as the idiosyncratic features and starting conditions vary considerably. For some places it will be about building clusters linked to frontier areas tied to university research. For others, it is about catch-up potential based on retail, health and social care and distributional services.
We need to learn from success. While we should look at successful case stories from overseas, there is also the need to be mindful of how success is being rolled out in the UK. I have been researching into the issue of levelling-up with economist Paul Ormerod, who is also Chairman of Rochdale Development Agency. It is remarkable how much success is being achieved on the ground in Rochdale, although there is still a long way to go. There is a complex interaction at the local level, working across Greater Manchester, where they are creating the right incentives to create a mega-cluster of manufacturing innovation focused on materials and machinery.
Politically, the Government need to control the terms of the debate and that becomes harder the more one tries to cram into a phrase, or slogan. Politically the quicker they define it, and set the goals of success, then they keep the debate on their own terms. The danger is if they don’t. While voters may similarly not be able to define it, they’ll know it when they see it. Good economics is good politics and delivering upon levelling-up requires a sound economic foundation.