- Far from being a Western European economy, much of the UK more closely resembles poorer Southern and Eastern European neighbours.
- Tackling regional inequalities has to be at the heart of economic policymaking after the election.
- This means rewriting one of the sacred texts of government – the Green Book.
Many politicians like to think of the UK as a wealthy Western European country, celebrating our status as the fifth biggest economy in the world in terms of GDP. MPs constantly highlight our world-leading financial services sector, top-tier universities and increasingly-important tech industries.
This is all true at an aggregate level. But the problem with the UK is that so much of our economic prowess is concentrated in London and the surrounding Home Counties
Within Europe, the UK is in a league of its own in terms of how much wealthier its richest regions are than the rest of the country. GDP per capita in the richest part of the UK, Inner West London, is close to ten times that seen in its poorest region – Southern Scotland. GDP per capita in Inner West London is six times greater than the UK average – again a far higher multiple than seen in other European countries.
Source: SMF analysis of Eurostat data. Regions are NUTS 2 areas, which contain populations of between 800,000 and 3 million inhabitants.
Inner West London is, in fact, the richest region in the whole of Europe – by a large margin. Southern Scotland, by contrast, has a GDP per capita similar to that of Turkey.
This got us thinking more broadly: how much of the UK is really “Western European” in terms of its economic performance? Which country is each region of the UK most closely comparable to, in terms of GDP per capita? The answers to these questions are displayed in the interactive map below.
Map: GDP per capita by region, 2017, UK and Germany. Click regions to see information on GDP levels and the countries these are most comparable to. Red regions are “Central & Eastern European”. Yellow regions are “Southern European”. Green regions are “Northern and Western European”
Source: SMF analysis of Eurostat data. Regions are NUTS 2 areas, which contain populations of between 800,000 and 3 million inhabitants. GDP per capita data are expressed in Purchasing Power Standard (PPS) terms. PPS is an artificial common currency, which adjusts for differences in price levels between countries.
The key insight is that much of the UK is closer, economically, to Southern and Eastern European countries, than to Northern and Western European nations. GDP per capita in Lincolnshire is closest to Poland, for example. while Essex is similar to Spain – though you are still probably better off going to the Costa del Sol rather than the Costa del Clacton for a sunny vacation.
Very wealthy regions in Southern Britain sit alongside considerably poorer ones. While Inner West London is extremely wealthy, Outer North and East London’s economy is similar to that of Poland in terms of GDP per capita. Surrey’s economic strength (similar to that of Finland), is not matched in neighbouring Kent which has GDP per capita similar to Slovenia. Despite being a popular holiday destination for wealthy Londoners, many of which have second homes there, Cornwall’s GDP per capita is comparable to Hungary.
As the interactive map shows, this situation contrasts sharply with Germany where “Northern & Western European” levels of economic performance are much more pervasive, although the East of the country still lags behind the prosperous West. Germany’s richest region, Hamburg, is only 2.4 times wealthier in terms of GDP per capita than its poorest region – Mecklenburg-Vorpommern.
A focus on the “economics of geography” and regional inequalities needs to be at the heart of economic policymaking in the next UK parliament – especially if politicians are serious about healing the divisions that exist in this country. It will also be a key area of focus for the SMF in 2020, where we hope to build on some of our recent research in this space – for example our reports this year on coastal communities and lack of pay progression in much of the country.
What does putting regional economics at the heart of decision-making look like? A good place to start would be to revisit the way that government decides where to invest its money.
At present, London receives a substantial proportion of government infrastructure investment; a recent study by IPPR North found that, over the last 10 years, Londoners enjoyed an annual average of £708 of transport spending per person, while just £289 was spent for each person in the north of England[1].
This spending gap is driven significantly by the fact that that the returns of investing in London & the South East are at face value often much greater and more immediate. Improving transport infrastructure in deprived parts of the North, by contrast, might take years to pay for itself in terms of a stronger economy. Further, the long-term benefits of transformational investment in deprived areas are often difficult to quantify – making it hard to build up an economic case that will stand up to scrutiny under the Treasury’s stringent project appraisal guidelines. In short, policymakers have created an economic framework that, focused on straightforward returns, entrenches existing regional inequalities.
We need a new approach to appraising investment decisions that reduces the skew towards already-wealthy areas and focuses on raising the wealth of “left behind Britain”. As Diane Coyle and Marianne Sensier from the Universities of Cambridge and Manchester have noted, “although evidence-based appraisal is important, infrastructure investments also need to be based on a strategic view about economic development for the whole of the UK”[2]. We need to become much more willing to undertake large-scale, transformational investment in our poorer regions – even though these are inherently more speculative than the “safe bets” of investing in stronger economies such as London.
In practice, this means editing one of the sacred texts of government – HM Treasury’s Green Book – which sets out the rules for project appraisal and evaluation. Rewriting this tome might sound dull and is far from headline-grabbing manifesto material. But this book holds the key to resolving so much of what has gone wrong with our regional economic planning – putting an end to a system that contributes to our league-topping economic inequalities.
We also need to do more to devolve decision making on public spending. As Coyle and Sensiser have noted, it is often local level infrastructure spending – for example, secondary roads rather than motorways – that is most correlated with economic growth in a region. By devolving spending we can ensure that infrastructure is focused on meeting local needs and driving local-level economic growth.
A few things for policymakers to consider after the silly season of the election is over…
[1] https://www.theguardian.com/politics/2018/aug/01/transport-spending-gap-london-north-of-england-ippr
[2] Coyle and Sensier (2018), “The Imperial Treasury: appraisal methodology and regional economic performance in the UK”.