More than three years after the UK government launched its levelling-up agenda, the UK remains the world’s most spatially unbalanced advanced economy, according to research by British think tank IPPR North.
The report, released on January 25, lays bare the country’s stark regional divides in productivity, job creation and incomes. Some economic gaps between the prosperous south-east and the rest of the country are becoming wider, putting it at risk of falling further behind its peers.
“The UK is consistently less equal than comparable countries,” states the report, which uses the Theil Index of regional inequality to map the country’s economic divisions against other OECD and European nations.
In the areas of disposable income and productivity, the UK is the most unequal nation of its size. In job creation the only comparable country with a poorer performance is South Korea, while disparities in unemployment levels are more pronounced only in Spain and Germany.
The UK fares better in education, although the regional distribution of university-level skills is more unequal than in other European peers of the likes of France, Germany, Spain, Sweden and the Netherlands.
The report’s author, IPPR North research fellow Marcus Johns, tells fDi that “within the UK there are regional inequalities that are getting worse”. Disparities in household income and healthy life expectancy have widened since 2019. Gaps in the size of local workforces “have been fairly consistent and there are signs it is widening in recent years,” Mr Johns added.
The findings are a blow to the government’s levelling-up programme, which aims to reduce economic imbalances across the country.
Mr Johns says regional inequalities develop over decades and cannot be fixed overnight, but “we haven't seen the kind of changes we need to see if they’re going to close in the long term”.
Look to Leipzig
The report calls on the British government to follow best practices that other countries have used to reverse the fortunes of declining industrial regions. These include Leipzig, which was plagued by high unemployment and social inequalities in the late 1990s, but is is one of Germany’s fastest growing cities today. fDi Markets data shows foreign direct investment (FDI) has grown in tandem, with the city’s latest five-year average capital expenditure sitting at $297.8m — up from $84.3m between 2004 and 2008.
The report also cites economic improvements in Bilbao, Spain, following its cultural regeneration and in the Swedish city of Luleå after it started exploiting its vast hydropower and wind-power resources. According to the authors, all three cities’ turnaround was possible thanks to empowered regional governments and the use of public investment to crowd-in the private sector.
In a statement, IPPR North director Zoë Billingham says the UK needs to “learn lessons from our international neighbours to achieve regional growth”.
The think tank specifically calls for more fiscal devolution in the UK to better capture investment returns and minimise the time and money local governments spend on bidding for grants from Westminster. It also wants the British Business Bank and UK Infrastructure Bank to be given an explicit remit to support the reduction of regional inequality, and in turn crowd-in private investment.
Figures from fDi Markets suggest that foreign firms are already doing their part to level-up the country. In 2010, regions outside the south-east attracted 70.6% of the UK’s inbound FDI. Since then their share has steadily grown to reach 92% in 2022, although last year’s numbers were boosted by large-scale renewables announcements in Scotland.
More broadly, the report highlights that underinvestment in the UK is a nationwide problem. While the country is consistently one of Europe’s biggest recipients of greenfield FDI, a different picture emerges when looking at gross fixed capital formation (GFCF), which measures total public and private investment as a percentage of gross domestic product.
The report’s ranking of the 38 OECD members’ GFCF ratio puts the UK fourth from bottom, and ahead of only Costa Rica, Luxembourg and Greece.