UK productivity: Rebalancing the regions
Jenny Roper, April 18, 2017
London is no longer the be all and end all of business in Britain. Have you considered moving some or all of your staff out?
On Thursday 23 June 2016 London’s bankers, marketeers, policymakers, sharp-suited lawyers and bearded media types went to bed as normal, confident in their understanding of the world. On Friday they woke to find it shaken to its very core.
The UK had voted to leave the EU by a margin of 2%. Or rather England had voted to leave and Londoners (by a majority of 60% to 40%) to stay.
In the millions of column inches filed since then the phrase ‘London bubble’ has featured heavily. As while the reasons behind the result were complex and nuanced from voter to voter, the result undeniably highlighted a profound difference in satisfaction levels with the status quo – and people’s lived experiences – between the UK’s capital city and its regions. And a profound frustration with ‘London’s’, or the ‘liberal elites’’, failure to recognise this.
For when pronouncements are made regarding the UK’s recovering GDP or high employment levels London appears to nods happily in agreement while the rest of the nation shakes its head in despair. In the words of author of Capital and How to Speak Money John Lancaster: “Around the country people look at London and they don’t really recognise themselves.”
This isn’t just a case of a cultural or mindset disconnect, or different interpretations of the same economic reality. Pronouncements around the health of the UK post-recession describe a picture skewed by London’s genuinely better outlook. The UK as a whole has a historic productivity problem, still lagging well behind other G7 countries. But London, reports David Lutton, director of competitiveness and financial services policy at membership organisation London First, does not.
“London is the most productive region in the whole of Europe,” he says. But looking at his organisation’s charts showing gross value added (GVA) and employment growth 2007 to 2014 (see below) you see other British cities have moved down the scale. “That shows you immediately that there’s a big difference, and a big problem,” he says.
What London First’s data also shows is that other countries don’t suffer this issue – which begs the question of where the UK’s historic geographic imbalance comes from. And, most importantly, how it should be redressed.
The matter is far from straightforward, reports David Green, professor of historical geography at King’s College London. It’s not as easy, he explains, as comparing the UK with Germany or the US and working out where we’ve gone wrong. Much is down to complex historical and geographical legacy. “Germany’s a much newer country, and it’s a federal state so each federal capital has its own set of functions and has always had them because they were separate principalities,” he explains. “Britain’s been unified for much longer so that hasn’t had to be negotiated. London’s really been the capital for well over 1,000 years.”
London’s historic port status also makes it different from many other European capitals, he adds, with this legacy directly leading to its success as a financial and service sector economy today. “[Port status is] important because you need lawyers to draw up contracts and insurance to insure cargos,” he says. “All that requires finance, banking, commerce…”
Such a strong initial presence of these professions has enacted something of a self-fulfilling prophecy, he adds: “A lot of that business is face to face: the network is very important when you’re dealing with services. And where you’re looking for something like legal advice it’s all about critical mass. You need enough lawyers to talk to so you get a range of opinions.”
“London is a really good example of agglomeration,” agrees Lizzie Crowley, skills policy adviser at the CIPD. “Around the financial hub of London you have really strong business services – all those things you need to make a success of a global business.”
So the slightly contrary and unhelpful answer to ‘why is London so successful?’ is: because London is successful. London’s buoyant finance and service sectors, not to mention handy time zone, international language of business, and stable politics has long made it the destination of choice for businesses and people from across the globe, escalating its success.
And the fact it has, through agglomeration, always boasted a thriving arts and entertainment scene is not to be underestimated. “If you look at the important factors that make up economic performance in a place, the general quality of life offering will have a huge effect on where people, including international workers, want to locate,” says Paul Sissons, senior research fellow at the Centre for Business in Society at Coventry University. “It’s hard to separate that from functional job opportunities.”
Perceptions of job opportunities also play an important part, particularly in attracting graduates from their home or university towns. Again this represents a self-reinforcing cycle. “There is some sense of a self-fulfilling prophecy with London: people go there because the jobs are there but the jobs are there because the people go there,” confirms Andy Durham, managing director at economic modelling organisation Emsi UK. It’s all too easy, he explains, for businesses to assume they won’t find the skills they need if they’re not in the capital.
A tale of two cities
But London as a runaway success story doesn’t just create regional imbalance. It has also caused problems for the city itself, particularly around housing. The global and high margin sector nature of London’s success is in serious danger of making something of a hollowed-out economy, warn experts. In a FT article Shelter head of policy Toby Lloyd is quoted as saying: “If a city can’t provide the homes its nurses, teachers, shop workers and cleaners can afford eventually it will choke on its own success.”
The ‘London problem’ is two-fold, and so arguably doubly in need of redress. But with a multitude of complex, coincidental and historic factors at play it’s difficult to determine how responsible policymakers have been. There are many who’d argue policymaking has been damagingly London-centric, siphoning investment, wealth and opportunity to an increasingly bloated capital. But a more subtle and pressing danger has been governments attempting the exact opposite, warns Crowley.
“Any kind of government policy that has attempted to shift economic activity is like trying to push water uphill and has in many cases failed and been very expensive,” she says. Lutton agrees. “You’ve got to be careful because you could see it as a zero-sum game, that London benefitting takes away from the rest of the country,” he says. “That’s dangerous because London is a third of the UK economy, it drives growth. Our fates are bound together.”
Supporting the UK as a whole means a focus on fixing London-specific issues, a devolutionary approach that should be replicated regionally, feels Lutton. “Central government taking a one-size-fits-all approach is not working,” he says. “We need to work out ways that cities and elected mayors can capture more of the tax income they’re responsible for in their area and use that to leverage private money.”
Lutton is encouraged that “the government is moving slightly in that direction, with the retention of business rates for example” and the confirmation in the recent Spring Budget of six ‘powerful mayors’. Experts including the Local Government Association have sounded a significant note of caution, however, around the government’s consultation in February on the proposal that local councils retain 100% of business rates raised. “Proposals around business rates could risk widening the gap between successful and poorer places because they only keep what they raise,” agrees Crowley.
What’s needed isn’t necessarily greater fiscal powers and the ability to decide on infrastructure projects at a local level, she says, rather a regionally based, cross-organisation partnership approach.
John Greatrex, group HR director at Unipart, an organisation vocal around collectively combatting the UK’s productivity problem, agrees. “We’ve found that the most effective regional development is where we’ve got together with local businesses and education and customers,” he says. “That’s a model that has been used well in other countries, notably Germany.”
Education education education
The crucial element is education. For too long infrastructure projects have been lauded as a fix-all for stalling regional development, says Crowley, when what’s really needed is more emphasis on skills. Unfortunately recent national government announcements continue in this vein, she laments.
“Although investment in the flagship Midland Skills Challenge is welcome it’s still a drop in the ocean when it comes to spending on skills. It also needs to be considered alongside the large cuts in the adult skills budget over the last five years, declining employer investment in training, and the challenges facing businesses post-Brexit,” she continues. “There’s also a marked disconnect between spending on skills versus infrastructure, with government once again turning its attention to how people get to and from work rather than focusing on what actually goes on inside those organisations.”
Her concerns echo those of the CBI, which recently demanded the government place greater focus on boosting regional growth and productivity through education and skills. They join those disappointed that the regions, Wales in particular, didn’t receive enough mention or clarity over funding in the Spring Budget, and criticisms that the Autumn Statement also committed little fresh money to the ‘Northern powerhouse’.
Crowley’s infrastructure concerns reflect the many voiced around the High Speed Two (HS2) rail line. “Running a high-speed line to Birmingham means Birmingham becomes a suburb of London,” says Green. “Same with Leeds.” “We’re frustrated with how long it’s going to take to properly join up the Northern cities,” adds Rob Painter, brand and HR director at Sheffield and Leeds-based Sky Betting and Gaming, echoing the view from many that projects that connect and promote growth across a specific self-contained region, such as Crossrail, are actually far more valuable.
Crowley is encouraged, however, that skills do seem to be rising up the government’s agenda – albeit not fast enough, and not to the extent they should be. A notable example was the Spring Budget’s announcement of T-Levels, which will replace thousands of vocational courses to allow 16- to 19-year-olds keen on a vocational route to choose between 15 sectors, including hair and beauty and construction. “It was encouraging for skills to be mentioned so often,” Crowley says regarding the government’s Industrial Strategy specifically.
Greater emphasis on skills shouldn’t just be about developing vocational skills regionally though, she adds. It’s also important regional businesses hone their approach to skills and talent. In short: focus on HR. “We need a big fund where regions can trial projects like our people skills project, so people can get their HR skills up to scratch and start to think about talent development and attraction,” she says. “Those kinds of things could begin to make a difference.”
Gareth Way, chief HR officer at Creditsafe Group, agrees. His business started in 2000 in London but moved to Caerphilly in Wales two years later to take advantage of “an incredibly eager workforce with limited access to career-driven work”, who would be “high-performing and loyal” as a result. He points to the CIPD Wales’ policy programme as “a fantastic starting point” in government supporting Welsh economic development. It includes recommendations such as government creating a Welsh Workplace Commission with the aim of helping employers raise standards of people management, and government providing low-cost and no-cost HR support for small businesses.
Public service moves
Perhaps the most game-changing move on the government’s part in recent years, points out Green, has been relocating public sector organisations, such as the DVLA to Swansea, HMRC to Nottingham and the BBC to Manchester. “That’s a form of regional economic policy; so you create growth around particular activities, which spins off demand for schools, housing and so on,” he says.
“The move to Salford has brought a huge benefit, not just creatively for us but economically for the local area,” says BBC HR director Valerie Hughes D’Aeth. “The BBC was the catalyst for Salford’s MediaCityUK development, which now employs 7,000 people and is home to commercial companies. There are also more than 150 SMEs operating from and around the site. Between 2011 and 2014 there was a 75% increase in employment within the creative industry sector in Salford.” The BBC has also moved substantial numbers of people to Pacific Quay in Glasgow and The Mailbox in Birmingham.
There are some encouraging sounds and developments at a macro policy level. But it’s still too early to say whether the government’s Industrial Strategy and Spring Budget announcements will finally make good on ‘Northern Powerhouse’ rhetoric. Certainly there are plenty who would advocate going further on devolution. Government should, say some, seize the moment of costly repairs at Westminster to finally shift the seat of government and break up London’s stronghold once and for all.
Things are shifting, however. It’s been hard to miss the buzz around Manchester and Birmingham becoming ever more popular with the types of firms previously synonymous with London. And while there is a big role for policy in supporting this rebalance, many organisations are taking it upon themselves to explore the benefits of thinking more creatively around where to locate, taking ownership themselves around making this work, as we explore in part two.