How to Improve Regional Productivity Levers in England and Wales
Helen Tilley, Jack Newman and Charlotte Hoole
Regional inequality in the UK has been a pervasive challenge that has been exacerbated by the cost of living crisis. Recent years have seen a focus on the UK’s productivity puzzle as a route to understanding our relative stagnation.
There are two central public policy challenges that need to be addressed to increase productivity and decrease inequality
- How to tackle inequality between regions, especially in terms of the stark regional disparities in productivity
- How to ensure that devolved institutions have the capacity to improve productivity and inclusivity within regions.
The government has sought to unite these two issues in the ‘levelling up’ agenda. The Levelling-up and Regeneration Act 2023 aimed to enhance local growth through the establishment and implementation of levelling-up missions. But to tackle place-based inequalities, government must also look to the current levers and drivers of productivity and inclusivity. These are particularly important at the scale of the city region, an increasingly prominent tier of governance in the UK.
In a paper for the LIPSIT project* we consider whether UK regions have the policy levers they need to drive productivity and inclusivity.
We compare three UK regions with different governance structures, and the approaches they take to four drivers of productivity:
Enterprise M3 LEP in South East England;
The Cardiff Capital Region City Deal; and
The North East Combined Authority.
Investment and innovation
Innovation is crucial to productivity, but it is currently marked by major regional disparities. Some EU and national investments have attempted to counter this imbalance, but regional levers are very limited. While the devolved institutions are well placed to work closely with businesses to attract major investments, this is currently undermined by a lack of effective local–centre communication, and limitations in local institutional capabilities. While there are attempts to interface between central and local government, such as the ‘Cities and Local Growth Unit’, these exist within the context of mistrustful central–local relations. We therefore propose that these should be complemented by new fora through which communication can help leverage inward investment.
One option would be to provide a more formal role and increased funding to ‘interface institutions’ such as local government associations. Another would be to establish well-funded place-based evaluation units, which would conduct economic research and policy evaluation within an area, comprising both local and national representatives as well as a core research team. The new Local Policy Innovation Partnerships may support this as they are embedded in local areas and have the potential to offer the structure to bring evidence to develop solutions to local challenges.
Transport infrastructure
Transport infrastructure is currently the most important sector for place-based policy interventions, and this is reflected in the devolution of transport powers to regions and to devolved nations. Devolving more transport budgets is crucial, so that places can use transport investment as a productivity lever. However, our research finds that there is also a need for more cross-regional and inter-government working, which in turn depends on a move away from complex and competitive governance structures.
The key to both is reforming the funding system. The obvious option is wholesale reform to create a stable and transparent funding formula based on local need. However, immediate changes to the existing system are also important, notably allowing local institutions more freedom to move funds from one project or sector to another and to combine budgets, as has begun to be realised in the trailblazer deals. With budgetary flexibility, the transport sector has major potential to impact productivity, as well as inclusivity and sustainability; to encourage active travel when supported by health budgets; with environmental budgets, tackle air pollution; and with business development budgets, encourage clustering.
Entrepreneurship and employment
In relation to entrepreneurship, we found a focus on larger firms at the expense of SMEs, and especially of start-ups, which are often absent from regional economic policy. Job creation, rather than business creation, is the priority for all three regional institutions and a focus on the quantity rather than the quality of jobs contributes to an emphasis on productivity over inclusivity. The existing balance between high- and low-productivity sectors means that there is considerable variability in the challenges faced, but there is also variability in the powers of regional institutions to intervene. Rebalancing these capabilities through adjusting communication channels, funding streams, devolved policy remits, and the institutional capacity to utilise them would provide the potential to achieve improved outcomes.
Skills
The ability to meet regional skills challenges is undermined by a lack of decision-making powers over education and training at the regional level, and by the difficulties of planning and predicting future skills demand. Devolving education and skills decisions to the regions and coordination amongst stakeholders would enable them to better respond to their local contexts. Because some of these powers have been devolved directly to schools and academy chains, it is also necessary to draw powers up so that they are able to strategically influence the local skills base. More generally, the powers of local governance institutions should not just come from existing processes that can be devolved, but also from local policy innovations where institutions are enabled to draw up or establish new powers to deliver productivity improvements.
A place-based consensus?
In conclusion, we show that the UK’s regional institutions are currently lacking the decision-making powers, budgetary capacity and institutional capabilities to make transformative policy interventions in the drivers of productivity. The impact of the new Levelling-up and Regeneration Act on these remains to be seen. With both the Conservative and Labour parties now recognising the economic importance of place-based policy for growing productivity, there is some prospect of seeing positive developments in UK regions. Though it is unclear what this means for engagement with the devolved nations of the UK, which has been challenging during the development of the Levelling Up Bill.
Of course, outcomes also depend on the interaction of contextual factors, including past economic performance, economic geography and local political economy. And there is also the importance of the creativity and strategy of individual leaders, though this is itself embedded in and influenced by the local governance structure. However, it is the structure of subnational governance that should be the key tool for intervening in regional productivity, and yet, in the UK, it is a major barrier to solving the productivity puzzle.
* This blog is based on the paper published in Regional Studies: A place-based system? Regional policy levers and the UK’s productivity challenge, which explores the link between devolution and productivity. The work was carried out as part of the LIPSIT project that aimed to identify institutional and organisational arrangements at the regional level that tend to lead to the ‘good’ management of policy trade-offs associated with increasing productivity.