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29 September 2016updated 09 Sep 2021 8:40am

Economic growth is worth having only if it’s inclusive

Research by the Joseph Rowntree Foundation shows social divisions could be deepened if city centres grow independently of struggling towns. The foundation’s policy and research manager, Dave Innes, explains

By Dave Innes

The Northern Powerhouse provides a powerful vision. Greater Manchester produces half the economic output per head of population of London; the logic of creating an agglomeration of cities to kick-start the north’s economy and counterbalance London is therefore attractive. Leaders in Manchester, in particular, are taking the challenge seriously, setting the ambitious target for Greater Manchester to be a net contributor to the UK economy by 2020.

Some of the headline statistics seem to be moving in the right direction. Greater Manchester’s economy grew 2.3 per cent a year between 2011 and 2014, faster than the national average of 2.0 per cent. The employment rate in the north-west and north-east has grown faster than in any part of the UK other than London since 2008. However, this hasn’t been matched across the whole of the north; economic growth was just 0.8 per cent a year in West Yorkshire.

Economic growth alone won’t necessarily reduce poverty – we need growth that creates more and better quality jobs to do that. Earlier this year, the Joseph Rowntree Foundation looked at how areas of the country have performed on inclusive growth. We found that, over the past five years, Manchester, Leeds and Sheffield have performed better than average on growth– gross value added (GVA), employment and skills – but worse than average on boosting low incomes, addressing labour market exclusion and the cost of living.

A key issue is which places see the benefits of a policy focus on the Northern Powerhouse. The headlines following the vote to leave the EU talked of a divided country. But this divide exists within the north as much as it does between north and south. Most big cities in the north –Manchester, Leeds, Liverpool, Newcastle– voted to remain, but the areas of the region voting most strongly for Brexit map closely on to the struggling towns identified in our earlier research.

Ten of the 12 most struggling towns are in the north of England. Among them, in Burnley, Hull, Grimsby and Blackpool, more than two-thirds of voters voted to leave. Yet these towns are excluded from the original vision of the Northern Powerhouse as an agglomeration centred on Manchester and Leeds. If growth stimulated by the Northern Powerhouse reaches only the centres of the biggest cities, it will fall far short of the rebalancing required to heal the economic divides highlighted by the Brexit vote.

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The government needs a more ambitious vision than the Northern Powerhouse in its current form. Our research on the role of poverty in the decision to leave the EU highlights the individual factors behind the vote: a lack of job opportunities, low pay, low skills and poverty. Where people live has a compounding effect: people with all levels of qualifications were more likely to vote Leave in low-skill areas than in high-skill areas.

This suggests a “double whammy” of a lack of qualifications and a lack of job opportunities locally leading to the dissatisfaction to which the referendum outcome has been attributed. It underlines the point that there are deeper inequalities to be addressed than between north and south.

Our new Prime Minister seems less keen on the Northern Powerhouse than her predecessor. She talks instead about a need to “drive growth up and down the country – from rural areas to our great cities” and about “governing for the whole United Kingdom”. The move to look beyond boosting growth in city centres to declining and coastal towns is welcome, as long as it is matched by the more ambitious strategy that is required. So, what should this strategy look like? On 6 September the Joseph Rowntree Foundation launched our comprehensive strategy We Can Solve Poverty in the UK.

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This lays out what national and local governments, business, service providers and citizens can do together to tackle poverty. It offers lessons for where the Northern Powerhouse should go next. First, sustainably reducing welfare spending requires focusing support services on achieving higher employment and earnings to reduce poverty.

The “work first” approach of Jobcentre Plus prioritises moving people into work quickly over improving their long-term employment prospects, resulting in too many people in jobs that don’t last or offer little opportunity to progress. Designing and delivering services locally is important; co-locating services in a single employment and income hub would allow a more personalised approach. The devolution of the full adult skills budget gives local leaders the opportunity to make connections between training, employment support and job creation, to support better long-term employment.

A second important lesson is that city leaders need to make poverty reduction a central part of their economic strategies. Greater Manchester in particular now has an extensive set of spending powers on transport, housing, skills, employment support and business support. All of these policy areas are relevant to tackling poverty, and it is essential that efforts to reduce reliance on welfare aren’t limited to “employment support”. Leadership at the city-region level provides an opportunity to join up these policy areas, and also to develop specific solutions to local challenges.

Recent research shows how barriers to the labour market differ across areas. Many parts of Manchester and Leeds – as with other big cities around the country – remain deprived despite a large number of jobs existing locally. The problem isn’t an inability to get to jobs, but barriers such as a lack of skills, health and disability, preventing people from accessing them. To enable them to make poverty reduction a central part of their economic strategies, local leaders need the right financial incentives. The benefits to the government of getting people into decently paid jobs, in terms of reduced welfare spending, are clear. But only 7p in every £1 of overall government savings are retained by local government for providing services.

Cash-strapped local authorities have little incentive to orient their focus towards labour market participation and progression. The current financial incentives that are being put in place, notably 100 per cent business-rate retention, revolve around boosting growth and tax receipts, which, as we have seen, may do little to address poverty. Allowing local government and cities across the north to keep more of the savings from boosting employment would be an important impetus to encouraging inclusive local growth.

A bolder vision across the north must be backed by funding and finance. An immediate question is what happens to the £8.9bn of European Structural and Investment Funds committed up to 2020 for supporting growth and job creation in areas that lag behind.

While these funds have been insufficient to reverse growing regional inequality, withdrawing them could speed up the relative decline. An immediate priority should be to secure the funding allocated to local programmes through to 2020. Looking beyond then, the government should commit an equivalent level of funding to create its own rebalancing fund.

This is also an opportunity to think about how best to stimulate local growth. The Local Growth Fund, which finances the current set of growth deals, was announced on the back of Lord Heseltine’s report recommending a single funding pot to support investment in transport, education, adult skills and housing. But Heseltine’s proposal was for a pot six times bigger than the £2bn a year eventually committed. A government serious about devolution to the Northern Powerhouse should expand the Local Growth Fund to its original proposed size of £12.5bn, to give cities the clout to make an impact on local growth. But the Local Growth Fund needs to go beyond just stimulating growth. We propose reorienting it to create an Inclusive Growth Fund. This would retain competitive allocation to ensure that funding isn’t committed to wasteful spending, but bids would be assessed according to how they contribute to job creation, pushing up wages and reducing poverty. The onus would therefore be on local leaders to prove that they would use the money to boost inclusive growth.

The next 12 months are crunch time for the Northern Powerhouse. It appears the government’s commitment to the concept is wavering, and it is unclear what will replace it. Next year brings the arrival of metro mayors in Greater Manchester, Liverpool, Sheffield and Tees Valley. Mayoral candidates should be placing genuinely inclusive growth at the heart of their manifestos. The challenge for the government is to come up with a coherent strategy to ensure that devolution to the Northern Powerhouse reduces poverty and reliance on welfare in places missing from the current vision.