Regional Inequality and Reclaiming the Heartlands

Matthew Oulton discusses why Labour need to make tackling regional inequality a priority in order to reclaim the heartlands.

As a child from the North, I didn’t understand why anyone would live in London. The price difference between London and Northern cities, for everything from a sandwich to a house, is astonishing. The cause is simple – the Gross Value Added of London was £48,857 in 2017, compared to just £19,899 in Wales, £21,172 in Northern Ireland, and £21,426 in Yorkshire and the Humber. If London were a country, it would be similar in GDP per capita to oil rich nations like Qatar. Yorkshire, meanwhile, is more like a Mediterranean country like Spain or Cyprus but without the weather.

This is a significant dilemma. Why is UK GDP so lopsided towards London? In the face of exorbitant prices, people still choose to live within commuting distance of London. What’s so wrong with Liverpool, Leeds, and Manchester that people choose to relocate from a 4-bedroom house to a single bed flat?

This is a phenomenon that is seen all across the world. Globally, cities account for 80% of GDP, despite only including 55% of the population. Accordingly, though, they attract much larger costs. With more people competing for finite housing, transport and other resources, cities tend to attract a large price premium. Nevertheless, for many economists, bigger is better.

People become more productive when they’re surrounded by other workers, the logic goes, so bringing as many people as possible into large cities should increase productivity. Companies are drawn to London and the rest of the South East because there’s an existing large pool of skilled Labour. They cluster there because they know they will easily be able to make new hires, access specialist consultancies, and in the hope that superior networking will lead to better ideas.

This is a huge boon to the UK economy. Firms headquartered in London create ample opportunity for start-ups to service their needs. It helps to foster intense specialisation both by firms and workers, because the addressable market is so large.

However, London can’t grow infinitely. The high rents in London, and to lesser extents other large cities, can discourage people from setting up companies. Many SMEs that would be viable in the North, where rent and labour is much cheaper, would doubtless fail in London. It’s hard to be the only one to move, though. London has an existing thriving ecosystem of companies that sell services to each other and workers who can afford to specialise knowing that there are lots of firms they could work for. As an individual or the owner of a company, it’s a risky decision to be the first person to move from London to a different region.

Regional inequality is, therefore, a chicken and egg scenario. For many companies in many sectors, it would be desirable to relocate. Their costs would be lower, their employees would have a better standard of living, and for many they would be more internationally competitive. Likewise, whilst many employees might want to stay in London, many others would prefer to leave for somewhere cheaper, or never move in the first place. And when there’s a chicken and egg scenario, it’s the government’s job to be the chicken.

By deliberately helping to encourage firms to locate themselves in the regions, the government can lower average costs for British firms, increasing our competitiveness, and bring employment to left-behind areas. Specific training schemes for workers, tax breaks for companies, as well as redirection of public research and development funds can help to increase the size and scope of regional economies.

Does this sound familiar? It’s not a million miles away from George Osborne’s pet project, the Northern Powerhouse. But the Northern Powerhouse was not effective.

Over five years since its founding, regional inequality remains as stark as ever. A report by the IPPR tentatively concludes that it’s a ‘good start,’ noting employment and output growth in the North that outstripped the national average. These gains were very small, however, and may be attributed to a gradual recovery from the Financial Crisis. The report shows that the number of children living in poverty grew by 50% in the North, reflecting slow wage growth. Austerity struck hardest in the most deprived areas, including much of the North. Finally, the Powerhouse’s city-centric focus did little to help the North’s deprived small towns.

Labour need to make tackling regional inequality a core part of their offering.

Politically, it’s absolutely vital. Firstly, Northern voters turned to the Conservatives in record numbers in 2019, helping to hand Boris Johnson a massive majority. Secondly, one of the largest issues for voters in the South is the cost of housing. Whilst Labour certainly need to address the lack of housing supply across the nation, redistributing demand from high price areas in the South to lower price areas in the North will be a win-win. An unbalanced, London-centric economy is not really beneficial for anyone in the UK.

Labour need to encourage both private and public sector investment in ‘left-behind’ regions. Large projects like HS2 might do something to aid the regions in the long-run, but in the short-run the focus should be on transport within the North. If people can travel across the North more quickly and easily, regional cities would be able to access a large pool of workers. Firms would then be more likely to relocate, given the ample and diverse labour supply, and people from outside major Northern cities would also benefit from prosperity in urban centres.

The Conservatives championing regional inequality was always a strange fit. Labour is the natural party of the North and needs to reclaim that mantel. Through a pragmatic Regional Development Fund, with explicit remit to help to create a thriving private sector ecosystem in the north.

London is an enormous economic asset to the UK, and it is important that we don’t lose sight of that. It massively subsidises other regions of the UK and houses many of our most international and competitive industries. However, London’s economy cannot expand forever as an isolated city-state. It is in the interest of Londoners and the rest of the UK that industry is shared around, allowing further specialisation and growth within London and more spreading of prosperity without.

Covid looks set to decimate the Northern economy. So far it has particularly affected employment in the North, and in the past large economic shocks have reduced investment in the regions disproportionately. A delayed response to regional concerns could easily leave Labour politically damaged and Northerners economically ruined. Labour have a lot to do to reclaim the heartlands, but economic development of the North would be a start.


From Merseyside, Matthew is an Economics Student. He writes frequently on economic issues and is on the Executive Committee for the Economy and Finance Network. In his spare time, he worries about the Red Wall and daydreams about a Labour Government. He tweets at @matthewoulton

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