Economic split ‘still keeps UK dependent on South’

Jonathan Portes, director of the National Institute of Economic and Social Research.

Jonathan Portes, director of the National Institute of Economic and Social Research.

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THE recovery has done nothing to rebalance the UK economy away from London and the South East and may have even increased the nation’s dependence on the capital, a leading economist has warned.

Jonathan Portes, director of the National Institute of Economic and Social Research, blamed the failure on centralised decision-making and called for local councils to be given more freedom and flexibility to take advantage of growth opportunities.

Mr Portes, a former chief economist at the Cabinet Office, said the recovery to date has been driven by consumer spending and rising house prices in and around the capital. Employment figures reflect the same concentration with strong jobs growth in London and the South East, he added.

Mr Portes made the comments as NIESR published its forecast for the UK economy in 2014. The organisation said the economic recovery has become retrenched.

It expects GDP to increase by 2.5 per cent this year and 2.1 per cent in 2015.

“We expect consumer spending to remain the key driver of recovery in 2014 and 2015, supported by continued buoyancy in the housing market,” said NIESR.

“House prices have seen a dramatic surge throughout the year, concentrated in London and the South-East.”

The organisation expects growth in wages and business investment this year and next.

But it warned that net trade will remain weak reflecting continued weakness in Europe, the UK’s most important trading partner.

NIESR said the performance of the labour market continues to be a welcome surprise, but it flagged concerns over stagnant productivity – output per person – which it expects to persist in 2014 and could pose a risk to the UK’s economic prospects.

Mr Portes told the Yorkshire Post: “We still see an unbalanced recovery which is not favouring the North. That said, there are bright spots outside of London in manufacturing, particularly the car industry.

“It has been a British success story for the last decade and the last few years in particular.”

He added: “It’s not a uniform picture of gloom and unbalance. But overall it is so far a recovery being driven by London and the South-East and consumer spending and house prices.

“There does not seem to be anything pushing against the medium-term dynamics.

“We do think that business investment will start recovering this year so things will spread out a bit but the overall picture is an economy just as dominated as it ever was, if not more, by the South East. There is no particular evidence of rebalancing in that sense.”

Mr Portes said the failure to rebalance was the fault of successive governments for the last 30 years, perhaps longer.

Britain’s system of political and economic government is more centralised than almost any other country in the world; the system of funding local councils is decided in London with Local Government Secretary Eric Pickles determining if a council can raise its tax by 1 per or 1.5 per cent, he added.

“That’s not a system which encourages dynamic local economic development strategies. That’s a long-standing problem,” said Mr Portes.

“We need to do better with connecting universities with the private sector. We need to make sure that cities which have the potential to grow are able to grow.

“York is a good example. York is a success story. We want to make sure that York can expand, that people can afford to move to York, that houses are built, that it has the right transport links, that the right infrastructure is in place.

“The local council needs to have the freedom and flexibility to be able to expand to take advantage.”

Mr Portes was an advisor to Cabinet Secretary Gus O’Donnell and Number 10 Downing Street on economic and financial issues.

Andrew McPhillips, economist at Yorkshire Building Society, said Yorkshire has not been one of the better performing regions and has the second highest rate of unemployment in England.

“Yorkshire has been lagging but is moving in the right direction,” he said. “Hopefully it is starting to narrow the gap with London and the South-East this year.” He expects house price inflation to ripple out to the regions in 2014.

Mr McPhillips said some firms are feeling more confident about increasing their investment.

“We have our own quite large investment plans,” he said. “We have confidence in the future. We are investing in the local area.”

The building society has announced a £160m investment in new products and customer services.

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