North East Devolution and Levelling Up
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Tough choices needed to reduce productivity gap – report

Reductions in the productivity gap between London and Britain’s other big cities will not be achieved easily, will not necessarily include Newcastle and will not on their own benefit poorer households.

Those are some of the stark conclusions to be drawn from a new report* today from the Resolution Foundation, the think tank which published a report on the regional incomes gap discussed here on Monday.

Spatial disparities in productivity, says today’s report, are large and persistent, and slightly larger than they were at the start of the 2000s, though these changes are small relative to the level of disparities that persist throughout the period. This is in line with this website’s findings reported here on June 17.

Closing the productivity gap, says the Resolution Foundation, requires bigger high value-added services sectors, and a wider range of cities succeeding with them, with major investment needed, as well as increases in skills and even city sizes.

This in turn will require two important trade-offs: first, whether and how quickly national productivity should improve relative to spatial disparities narrowing; and second, which places to invest in most aggressively, since not all places can be prioritised simultaneously.

The Resolution Foundation does not pick and choose the regional cities that should be prioritised, but the statistics it uses suggest that Newcastle is one of those where the challenge is greatest.

On three important factors for productivity – capital per job (human, physical and intangible, such as intellectual property), graduate share of the workforce and population size – Newcastle is currently among the worst placed of eight cities outside the capital discussed in the report.

As well as being the second smallest in population of the eight, ahead of only Cardiff, Newcastle also has the second smallest graduate share of the workforce ahead of the West Midlands and the second lowest capital per job ahead of Leicester.

Substantially narrowing the disparities between London and even one of the second cities requires significant increases in the size of the less productive city as well as significant investment in capital and skills, says the report.

Even where, and if, this can be done, it adds, it is not a simple fix for improving outcomes for poorer households; complementary investments must take place to ensure that poorer households can access the opportunities generated.

‘The coming decade of change – driven by Covid-19, Brexit and net zero – might change the balance of the economic forces driving productivity disparities’ concludes the report. ‘However, it would be dangerous to assume that these changes will do policy makers’ job for them by reducing – rather than increasing – spatial disparities.

‘Instead, policy makers need to be realistic about the forces which shape the economic geography of the UK and about the size of the interventions that will be required in the coming decade to make a difference.’

At least one of the authors of today’s report has held the view for at least a decade that there is a trade-off between national growth and regional equality. Professor Henry Overman, in an academic paper in 2012**, suggested building on success by prioritising investment in London and a few other cities – on that occasion he named Birmingham, Manchester and Leeds – even if this meant uneven spatial development.

Overman is an influential figure in his field. As well as his academic work he has provided policy advice to the European Commission, the Department for Levelling Up, Housing and Communities, the Treasury and the North East Independent Economic Review

*Bridging the Gap: What would it take to narrow the UK’s productivity disparities? by Paul Brandily, Mimosa Distefano, Hélène Donnat, Immanuel Feld, Henry Overman and Krishan Shah.

**Investing in the UK’s most successful cities is the surest recipe for national growth. LSE Research Online.