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Levelling up was never going to happen

The government’s mini-Budget confirmed what we already knew.

By Richard Holt

Liz Truss has said that her government’s over-arching economic priority is to promote national economic growth, and that too much attention has been paid in the past to reducing inequalities. The implication is that levelling up is no longer the flagship policy that Boris Johnson once claimed it to be.

Our forecasts at Oxford Economics match that. We project that London’s economy will grow faster than that of any other region or nation in 2023; most others will see no growth or even fractional declines in output. And over the period 2021-2030, London and the South East look likely to be the only two parts of the UK that experience growth above the UK national average. The North East, Northern Ireland, and Yorkshire and the Humber are predicted to have the slowest growth. That is the reverse of levelling up. And the national growth figure is itself less than 2 per cent, compared with the new target of 2.5 per cent – implying disappointment in that respect as well.

Of course, the Prime Minister and Kwasi Kwarteng, the Chancellor, did not create the present sluggishness in the UK economy or regional imbalances. These problems, especially the second, are long-standing. Their policies, however, have reinforced regional challenges without doing much if anything to improve performance overall.

From a levelling up perspective, the U-turn on abolishing the 45 per cent tax rate is a welcome adjustment. But if the plan is still to remove the cap on bankers’ bonuses, as announced by Kwarteng in his mini-Budget on 23 September, that will clearly most favour the more prosperous parts of London and the home counties.

Probably more important in terms of regional dynamics, however, is the overall balance of macroeconomic forces and policies. The cost-of-living crisis means that, nationally, real household incomes have fallen more than 4 per cent from their peak in the first quarter of 2021. Even if the decline is the same for all income groups this will have a disproportionate effect on low-income households, since they lack a cushion of savings to protect themselves. The same is true of the impact of higher interest rates. This means that those regions and local areas where incomes are lower on average and that need the most levelling up will be worst affected. And if the government announces spending cuts in November the impacts will only be magnified.

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It is true that Truss and Kwarteng have promised policies that they suggest will support levelling up, including the revival of Northern Powerhouse Rail. That, however, may face a similar threat from the squeeze on public finances, and there is a danger that the project will proceed only very slowly, or be cut back, or both. Some other ambitions, such as the removal of planning restrictions on infrastructure, will face strong political opposition, as well as having only questionable benefits in terms of economic impact.

That last point applies to the proposed investment zones. These will offer lower taxes to businesses, reduced planning and environmental restrictions, and fewer industry regulations. But are they addressing the real issue? In places that underperform economically, the main challenge is rarely that business costs are too high or planning regulations too tight. These difficulties are more significant in successful places, where land is expensive, business costs higher, and where competing demands for land are used as justifications for tight planning regulation and scrutiny.

International comparisons and the experience of the UK in the past show that although schemes like investment zones can sometimes have positive impacts on local employment, this is often at the expense of other areas, including those nearby, with little or no overall gain at the broader regional level. The implication is that investment zones may offer most opportunities in places that are currently not the worst performing. Of the 38 locations within England where local governments have already expressed an interest in hosting them, 16 are in southern England, seven in the midlands and 15 in the north. Others are expected to bid, including ones in the three devolved nations. So widespread will the zones be that it seems unlikely they will have a major impact on reducing overall regional inequalities, although they may bring boosts to specific local areas.

Even before the change of Prime Minister and the appointment of the new Chancellor we were sceptical that the levelling up agenda would have more than a marginal impact on regional economies. Following the mini-Budget, we see no reason to change that assessment.

[See also: Kwasi Kwarteng’s speech only revealed his contradictions]

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