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3 February 2016

Enough talk about a “high-wage, low-welfare economy“. Here’s how you get one

Cities are the key. 

By Alexandra Jones

The era of the “long-term economic plan” is over. Since its victory in last May’s general election, the government has largely replaced its former mantra with a new economic watchword – the promise to build a “higher-wage, low-welfare” economy in Britain.

This theme was first introduced in George Osborne’s budget speech last summer, in which he vowed to give Britain “a pay-rise”, while also announcing £12 billion cuts to welfare spending. The Chancellor has since returned to the idea in his conference speech last October, and again in his first major address of 2016.

This is clearly a long-term vision, but a new report published this week by the Centre for Cities, Cities Outlook 2016, examines how the Chancellor’s vision is currently playing out across UK cities – and highlights how much more needs to be done to achieve his ambition. It shows that the number of UK jobs rose dramatically between 2010-14 (with nearly a million new jobs created in UK cities). However, in the same period, urban wages fell by 5 percent – equivalent to a drop in average annual salary of £1,300 per city resident in real terms.

And while the Chancellor will be encouraged by the fact that nearly a quarter of UK cities are already delivering “high-wage, low-welfare” economy, less heartening will be the report’s findings that nearly half of UK cities have lower than average wages, and higher than average welfare spending.

Another issue is the continuing geographical divide across the country. While individual cities in the North, such as Manchester and Leeds, are continuing to grow their wages and economies, the report highlights that almost all the “high-wage, low-welfare” cities are located in the South East of England, while most of the top ten places with low wages and high welfare spending are in the North and the Midlands.

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The North/South divide is longstanding, and the government has taken welcome steps to address this issue – stealing a march on the Labour Party by introducing initiatives like the Northern Powerhouse (focusing on improving trade, innovation and infrastructure in Northern cities), and by devolving more powers to places like Manchester, Liverpool and Sheffield – efforts which will help to boost wages and jobs in these cities in the long-term.

However, the report also highlights the complexity of the picture on welfare spending. While overall benefit spending levels are highest in Northern and Welsh cities, what’s more surprising is that welfare payments have risen fastest in high-wage cities in the South East. For example, while welfare spending decreased in low-wage places like Liverpool and Glasgow between 2010-14, it grew by 4 percent in cities like Reading, Cambridge and Milton Keynes in the same period, all of which are among the UK’s top ten cities for average wages.

This rise in welfare spending in high-wage cities is largely down to increases in housing benefits. These places are feeling the pressure of their own success, which has pushed up demand to live there, with no increase in the availability of homes at affordable prices – causing housing benefit payments to increase dramatically.

Cutting welfare may reduce overall benefits spending, but it won’t reduce the need for welfare – either in low-wage cities where welfare is highest overall, or in high-wage places where housing benefit demands means welfare spending is growing fastest. If the government is to succeed in boosting wages and reducing welfare, it needs to go beyond either welfare cuts or the Living Wage – and set out a comprehensive approach to addressing the obstacles that different cities face in strengthening their local economies.

In places with weak economies, addressing skills-gaps and educational attainment is critical. Cities in the North generally have low numbers of residents with five GCSEs, and high proportions of residents with no formal qualifications. Addressing this problem will be vital in helping these places to attract more high-skilled, high-paying jobs, and move more people in to work – and should be a key part of the Northern Powerhouse initiative.

For cities with high-wages and rising welfare, the priority should be more homes. Housing has moved to the top of the government’s agenda in recent times but still more needs to be done to build more homes where they are most needed, and to make better use of existing stock.

Addressing these challenges, by empowering and supporting UK cities to grow, will be crucial if the government is to achieve its vision of a high-wage, low-welfare economy over the next four years – and if cities and their residents are to make the most of their economic potential.

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