Andrew Sentance: The myths and the methods for regional growth

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THE UK economy has picked up over the past 18 months and is set to be the strongest growing economy in the G7 this year. Unemployment has come down sharply and low inflation is easing the squeeze on workers who are seeing very modest pay growth.

This improvement is being seen across the UK, not just in London and the South-East. In Yorkshire and the Humber, employment has risen in line with the national average over the past year, even though unemployment – at 7.2 per cent – remains above the six per cent rate across the nation as a whole

Business surveys continue to paint a positive picture for the Yorkshire economy – in both manufacturing and services.

Yorkshire is one of the more industrialised regions of the UK economy. But gone are the days when manufacturing dominated the economies of northern England. In Yorkshire and Humberside, manufacturing now accounts for around 10 per cent of total employment and just over 14 per cent of GDP.

Across the country, all the regional economies rely on service industries for around 70 per cent or more of GDP and at least 75 per cent 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. They account for around a quarter of economic output in Yorkshire and the Humber, with Leeds one of the more important UK regional financial centres.

There are two other main clusters of services which are important to the economy in all the UK regions. One is a group of services led by the Government – including public administration, education and health. The other cluster is services aimed at serving local needs and supporting the local economy – transport, distribution, hotels and restaurants.

Clearly, the economy of Yorkshire and other regions will benefit from more manufacturing jobs and investment. But the reality is that it is the success of the services sector which will be the most important factor driving the economy in all the major regions of the UK, including Yorkshire.

How should the Government support more balanced growth across the regions of the UK economy? The policy debate tends to be couched in terms of narrowing the North-South divide, and this is an important issue. But there are also very large disparities within regions.

In this region, the travel to work area with the lowest employment rate is Bridlington and Driffield, with just over 60 per cent per cent of 16-64 year-olds in work, whereas Richmond and Catterick has an rate of over 80 per cent.

There is a North-North divide and a South-South divide which are as significant, if not more so, than the well-known North-South divide. Policies to promote balanced regional growth also need to address the issues facing towns and cities which struggle to attract business and jobs.

There are a number of other myths surrounding the debate on regional policy in the UK. One is that holding back London is the way to help other UK cities and regions. The beneficiaries of an attempt to stifle London’s economy would be New York, Paris, Frankfurt, Hong Kong and Shanghai – not Sheffield, Leeds and York. Other UK cities could well suffer if London is held back.

Another 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. HS2 may deliver some economic benefits in 15 to 20 years time, but it is not a magic bullet.

So what should be done to promote stronger UK regions and more balanced growth? First, we need to create more powerful regional clusters of knowledge-based service industries, around major cities and their universities. 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 improving 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 provide better links from the northern cities to Manchester Airport and the northern ports. Third, the skills base of all regions in the UK is vital to attracting high value-added economic activity.

Finally, local government and business leaders need to be empowered to take charge of the economic development agenda, with devolution of decision-making in areas like transport, housing, skills and education.

Local leaders know best how to support development. They should be given the powers to do so.

A fuller analysis of the UK’s regional rebalancing challenge is published in the latest edition of PwC UK Economic Outlook, available via www.pwc.co.uk

Andrew Sentance is a senior economic adviser to PwC. He is a former member of the Bank of England’s Monetary Policy Committee.