Economics - Divide or conquer

For much of the period between 1945 and 1997, successive governments had a national policy for the UK regions, largely imposing Whitehall’s one-size-fits-all policy. Under New Labour, the regions have been given more autonomy over key microeconomic issues that influence performance through the assemblies in Scotland, Wales and London, and the Regional Development Agencies in the other eight English regions. With each region having a clearer mandate to identify and manage local priorities, attention is being focused on measuring performance.

Chancellor Gordon Brown initiated an investigation by Christopher Allsopp, an Oxford economist and one-time member of the Monetary Policy Committee, of the information requirements for an effective regional policy.

The continuing growth of GDP has masked the fact that there has been a less clear-cut pattern of activity across the regions. It is too soon to claim this is a result of the government’s regional initiatives. Rather, it owes more to the performance of the economy as a whole.

In the early days of New Labour, the UK’s regional economic divide became even more marked following the global slump in spending on information and communications technology. Those parts of Britain (Scotland and Wales, in particular) that had been successful in attracting high-tech foreign investment were especially vulnerable as companies retrenched. The southern territories were sustained by buoyant household spending and strong demand for consumer and business services.

The impact of 9/11 was rather different. Although manufacturing was clearly affected, so too was the financial services sector. Falling equity prices and problems in the insurance industry led to many job cuts. From being the top of the regional growth table in 2001, London plummeted to the bottom by 2003.

Regions outside the greater south east, moreover, have benefited from the generally lower burden of debt carried by households and a sharp acceleration in government spending. Regional unemployment rates have narrowed and the three northern regions of England, along with Wales, are the main drivers of the housing market.

The upshot is that the pattern of regional performance over the past 18 months or so has been distinctly atypical. The north east boasted the country’s fastest rate of job creation and house price growth, and the rise in local GDP here and in Northern Ireland, the north west, Yorkshire and Humberside was faster than the national average. The West Midlands, London and Wales have been struggling.

But without a substantial shift in the direction of policy, the recent growth numbers will not mark the dawn of a more equal regional order. With services still the primary driver of growth, the south is expected to reassert its traditional dominance in the next year or two.

There is still too great a dependence in some parts of the UK on slow-growing manufacturing sectors with poor productivity records. The scope for repeating the inward investment boom of the 1990s to stimulate industrial regeneration is now very limited. Even in services there are problems as the much derided call centre boom tails off and jobs move eastward. The northern regions need to develop a stronger, self-sustaining services sector. The fact that many parts of the country with first-class universities are unable to hold on to the brightest graduates is indicative of structural weaknesses in the local economy.

As a result of manufacturing weakness and an inadequate services base, many parts of the country have had an over-reliance on services and jobs funded by the taxpayer. The Chancellor’s increase in public sector spending has made a significant contribution to the pick-up in employment outside the south east. Now, however, as his borrowing pushes up against the limit of his own fiscal rules, this summer’s spending review is likely to see a more stringent approach to spending adopted.

While John Prescott, the government minister most committed to decentralisation, has ironically been arguing for policies to help the south east (the Sustainable Communities Programme and the need for affordable housing), the Institute for Public Policy Research and a Parliamentary Select Committee have been putting forward the case for ‘affirmative action’ by the government to help other parts of the country. They may find an ally in the Chancellor, who is considering moving civil jobs out of London. Over time, this would help to narrow inequalities and encourage regional rebalancing.

– Dennis Turner is chief economist at HSBC.