Huge investment in cities needed to 'level up' says report

A new report from the Resolution Foundation has called on policy makers to focus on major cities outside London to raise national growth.

Boosting cities in order to 'level up' will require change on a previously unimagined scale, according to the Incomes Outcomes report, part of the Economy 2030 Enquiry series by the RF and the Centre for Economic Performance (CEP) at the London School of Economics (LSE).

The report examines the scale of income gaps across the country and how these have changed over time. It found that four-fifths of income variations across local authorities today match the pattern of 1997, with the only exceptions being traditionally poor inner London areas like Hackney and Newham.

However, the report also claims that despite what many people think, income inequalities have not grown. Gaps in earnings and employment have shrunk; the average gap between the highest and lowest employment areas of the UK have fallen by almost a fifth since the beginning of the century.

Whilst there are large income gaps across the country, the report also found large productivity gaps. In London, productivity is £76,000 per job in London, which is double that of Powys and Torbay. The report claims that this is caused by the transition from an industrial to a services-based economy, where highly productive economic activity is more geographically concentrated. This is exacerbated by the failure of major cities outside of London to successfully make that transition. This means that the productivity gap of 30 per cent between London and Manchester is higher than those in other countries, such as Paris and Lyon (20 per cent).

The authors say it is possible to raise the productivity of major cities in the UK and this would bring wide-ranging benefits. Currently 69 per cent of people in the UK live in cities or the surrounding areas, which compares to 56 per cent in France and 40 per cent in Italy. The authors state that raising productivity would require a focus on the drivers of growth in a service economy which have become more important in recent decades - this includes increasing the capital stock, the graduate share, and the size of the local economy.

However, according to the research, in order for Manchester to raise its productivity to halve its gap with London, tens of billions of pounds of investment is needed. This is a seven percentage point increase in its graduate share. The size of Greater Manchester also needs to increase by almost 300,000 workers.

The authors call on policy makers to focus on major cities outside London to raise national growth and close regional gaps, but stresses that the scale of change needed is much larger than anything currently being anticipated.

Co-author Lindsay Judge, research director at the Resolution Foundation, said:

“Britain is beset by huge economic gaps between different parts of the country, and has been for many decades. While progress has been made in reducing employment gaps, this been offset by a surge in investment income among better-off families in London and the South East.”

“People care about these gaps and want them closed, as does the Government via its ‘levelling up’ strategy. The key to closing these gaps is to boost the productivity of our major cities outside London, which will also lead to stronger growth overall.”

Henry Overman, professor of economic geography at the LSE, said:

“Those looking for Britain’s productivity problems can find them in our under-performing major cities. Addressing this challenge will require Britain to completely turn around its poor record on investment, to take hard-headed decisions on where this investment should be prioritised, and for cities to embrace growth.”

Alex Beer, welfare programme head at the Nuffield Foundation said:

“Reducing large and persistent geographical inequalities in income requires investment in making more places attractive to high skilled jobs and workers, although that won’t necessarily improve outcomes for lower skilled workers.

“Addressing geographical inequalities is important, but even wealthy areas of the country can still have some of the highest poverty rates. Alongside efforts to reduce geographical disparities we need action to address other persistent inequalities, for example in relation to age, gender and ethnicity. People everywhere should have a fair opportunity for a healthy life and good access to education, public services and employment opportunities.”