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  1. Spotlight on Policy
30 April 2021

How Brexit will impact the levelling up agenda

Leaving the EU will only deepen imbalances in the UK economy.     

By Philip McCann and Raquel Ortega-Argilés

The fortunes of the UK’s regions have been a central topic of political debate and policy discussion since the December 2019 elections. And with its so-called “levelling-up” agenda, the government has sparked reflection on issues that this country has largely ignored for decades.

The background to these debates is twofold. First, in recent years, the emerging evidence has shown that the UK is one of the most regionally unbalanced and unequal nations in the OECD, if not the most. Among the UK’s peer group of countries there are no major economies that are more unbalanced, and all major countries that are richer than the UK are also more regionally equal. These inequalities are not unique to the UK, but the scale of them is largely unprecedented.

Second, this growing awareness has cut through in politics, largely in the aftermath of the 2016 European Union referendum. The plight of so-called “left-behind places” has created a “geography of discontent”, which challenges the political status quo and the institutional set-up of many countries. The UK is no exception. The political ramifications associated with Brexit and the fall of the “red wall” of parliamentary seats has put regional issues centre stage.

“Levelling up” might sound good, but there are real challenges to making it a reality. Half of the UK population today live in places that are no more prosperous than the poorer parts of the former East Germany or the US states of Mississippi and West Virginia, whose quality of  and access to healthcare is equivalent to eastern Europe. The UK has large geographical variations in income, wealth, social mobility, educational attainment and life expectancy. These inequalities started to emerge in the 1980s and accelerated from the 1990s onwards.

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Prior to the 2008 global financial crisis, all UK regions displayed steady productivity growth, but since then, productivity – the best measure of overall prosperity – has flatlined. In particular, the economies of whole swathes of the Midlands and the north of England, along with Wales and Northern Ireland, have stalled for around a dozen years. At the same time, the London economy and much of the south of England, along with Scotland, largely recovered quickly from the shocks of 2008, and have steadily continued to prosper.

This is not to say that all parts of the south have blossomed, with some southern coastal towns struggling to keep pace. Similarly, parts of the north, and the north-west in particular, have recently experienced local growth, but the general story still holds. The country is decoupling internally.

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As the UK2070 Commission – chaired by Bob Kerslake, the former head of the civil service – has argued, these inequalities also adversely affect people in the more prosperous regions. They hit lower-income groups, which are unable to afford housing and face ongoing shortages in public service personnel.

UK regional inequalities in prosperity are enormous by international standards. And as they have arisen, they have largely been ignored by the government. This is important because the UK’s governance set-up is itself partly to blame. Among large countries, the UK has the most centralised, top-down governance system in the industrialised world. This limits the state’s ability to respond to and alleviate emerging inequalities.

Countries with more devolved and decentralised governance systems not only grow more evenly, but they do so with no loss of national output growth relative to centralised societies. More devolved societies are also less dominated by a single city.

Read more: Exclusive poll: Majority of councillors give Tory government bad marks on levelling up 

Germany is a case in point. Interregional transfers of some €2trn  aimed at building institutions, research and educational infrastructure, and regional governance capacity mean that even after the cost of German re-unification in 1990, the country is more devolved today, more regionally balanced, and more prosperous than the UK. In the UK, the combination of a highly centralised governance system alongside frequent changes in ministers and civil servants means that the centre learns little or nothing about the local.

Meanwhile, the local is entirely disincentivised from engaging with the centre. Four decades of growing regional inequalities and London’s economic dominance have left the UK in a very difficult position economically. The UK productivity puzzle is, to a large extent, a regional problem. Yet our existing over-centralised governance provides few levers for boosting productivity.

Brexit and the Covid-19 pandemic add to the difficulties. A large body of evidence already suggests that leaving the EU will make regional inequalities greater than they already were. The main reason for this is that the economically weaker regions of the UK are more dependent on EU markets than the more prosperous ones. As such, they will need to restructure their economies to a greater extent than wealthier parts of the UK in order to cope with Brexit.

There is a certain irony to this, given the fact that the sense of being “left behind” was a feature of the geography of the Brexit vote and a catalyst of the levelling-up narrative. These challenges are magnified by the public debt. The deficit arising from the pandemic response means that the long-term possibilities for public expenditure to facilitate the government’s agenda are likely to be limited. The pandemic is also likely to engender major financial shocks, which rarely favour weaker places.

Politics is now also dominated by a cities-versus-towns narrative, but the UK’s regional inequalities are not primarily between cities and towns. Rather, they are between different parts of the country.

At the same time, some view the challenges of levelling up as being primarily local in nature and requiring very localised policy responses. In reality, however, they are large-scale. While hyper-local responses may help address pockets of deprivation in prosperous regions, localised responses will do little to address nationwide regional inequalities. As the UK2070 Commission stated, for levelling up to work, it is necessary to “make no little plans”.

Philip McCann is professor of Urban and Regional Economics at the University of Sheffield. Raquel Ortega-Argilés is the chair in Regional Economic Development at the University of Birmingham.

This article originally appeared in the Spotlight supplement on regional development.

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