Here Aadya Bahl and Henry Overman discuss the difficult but essential decisions the UK Government must make to target investment strategically so that we can close the country’s productivity gap and create economic growth. In particular Aadya and Henry highlight the potential advantages of targeted investment in Greater Manchester.
Closing the UK’s productivity gap requires targeted investment
The UK has entered a prolonged period of economic stagnation, marked by weak productivity growth. UK productivity lags behind other OECD countries, with large spatial disparities that have persisted over time.
Figure 1: Gross value added per job, by area: UK, 2019
Note: GVA per job in 2019, calculated as gross value added divided by number of jobs by workplace. Spatial units are a combination of OECD metro areas and NUTS3 for non-metro areas. Source: Economy 2030 inquiry. Analysis of ONS, Subregional Productivity, July 2021.
At the upper end of the productivity distribution, the large London metro area is one of the most productive areas in the country. It accounts for 25 per cent of all jobs in the UK economy and produced £76,000 of gross value added (GVA) per job in 2019. In contrast, other metro areas – which account for roughly 70 per cent of employment outside of London – have significantly lower productivity and exhibit sizable disparities.
Figure 2: Gross value added per worker, by country and area: 2018
Notes: PPP adjusted. Spatial units are a combination of OECD metro regions and NUTS3 for non-metro regions. Metro areas are shown in darker bubbles in the figure. Bubbles are proportional to the number of workers in each region. Gross value added (GVA) is the value of a unit’s outputs less the value of inputs used in the production process to produce the outputs. Source: Economy 2030 inquiry. Analysis of OECD, Regional Economy Database.
For example, while Manchester and Birmingham have a combined population of 5.6 million, they are 31 per cent and 37 per cent less productive than London, respectively. In contrast, as Figure 2 illustrates, France’s big cities are more productive than in the UK and its second cities, Lyon and Toulouse, have a smaller productivity gap with Paris. If Manchester and Birmingham could close their productivity gaps to the level seen in Lyon and Toulouse, UK GVA would increase by nearly £20 billion annually.
Understanding the challenge
The UK is a services “superpower”, second only to the US in the total value of services exported. Tradable services such as law, design, and accountancy, benefit from ‘agglomeration economies’ – a catch all term for the productivity advantages offered by dense locations and a large pool of highly educated workers. So, it’s unsurprising that the UK experiences larger spatial disparities than Germany with its specialisation in manufacturing. But France is also a major exporter of services suggesting that the scale of the current gaps isn’t necessarily inevitable.
Differences in the size of the local economy, human capital, and capital stock drive differences in productivity across areas. Together, they account for 55 per cent of the spatial variation in UK productivity in 2019. As the UK’s economy has become more focused on high-value tradeable services, differences in an area’s human capital and intangible capital, such as research and development (R&D) and information and communication technologies (ICT) equipment, have become increasingly important explanations for productivity disparities.
Narrowing disparities requires a more even distribution of these underlying factors. But continued growth in London and the Southeast also requires more investment. With budgets tight, and overall investment constrained by the ability of business to invest (using either the savings of UK households or borrowing from abroad), policymakers face a difficult balancing act: how to reduce regional disparities at pace, without slowing efforts to catch up with other more productive economies.
Policy implications
It’s up to politicians to make the difficult decision about policy priorities, but they must recognise that the scale of change requires substantial, spatially focused investment. This means making hard choices about where to focus, how quickly to act and what trade-offs are acceptable. Closing Greater Manchester’s productivity gap alone will require 180,000 extra graduates to work in GM, £30 billion in additional business capital, and at least £1.85 billion in additional public investment up to 2040.
Given the size of investment required, the government cannot support globally competitive cities in every region simultaneously (which was the aspiration of the previous government). Instead, policy must focus investment to generate the strongest multiplier effects – and this will mean targeting a limited number of major cities. While there will still be important projects to pursue outside these cities, a strategy that spreads investment too thinly, especially in smaller towns, will struggle to generate large-scale productivity improvements.
One option is to adopt a phased approach, beginning with targeted investment in a small number of cities, to create the self-reinforcing benefits of size, skills and capital that generate productivity growth. The resulting growth will help fund future investment and government spending everywhere.
This approach is consistent with the Industrial Strategy Green Paper which identifies eight high-potential growth sectors that benefit significantly from agglomeration. The government aims to concentrate support in areas where clusters either already exist or could plausibly emerge. Some of our major cities are home to clusters that cut across multiple sectors, further justifying spatially targeted investment.
When assessing options for where to target investment, government should be looking for evidence of relatively strong economic performance and local government that is willing to, and capable of, coordinating a big push for growth. Outside of London and the South-East, Greater Manchester is especially well-placed. It has been one of the fastest growing cities in the UK after London, recording a growth of 2 per cent per year between 2002 and 2019. Its governance model is rooted in decades of cross-authority collaboration and served as the institutional basis to push for devolution. Now, mayoral powers and the ‘Trailblazer’ devolution deal give it the tools to deliver national growth and reform.
If done right, investing in Greater Manchester could create a replicable model for others. The English Devolution White Paper identifies six Combined Authorities for deeper devolution, in places which have the power to convene numerous stakeholders, and make policy decisions on planning, skills and infrastructure. As capacity and governance structures develop elsewhere, additional city-regions can follow. The challenge is large, but so is the opportunity. Getting the timing and sequencing right is the only way to close UK’s long-standing regional and national productivity gaps.
Productivity is the foundation of good growth. But achieving this means targeted and sustained investment in places with the greatest potential to drive national prosperity. Without this strategic focus, the UK risks deepening stagnation rather than overcoming it.
About the authors
Aadya Bahl is a Policy Officer at the Centre for Economic Performance at the London School of Economics. Her work aims to use data-driven and research-backed insights to inform policy decisions. Prior to joining CEP, she worked with Metro Dynamics across multiple projects aimed at driving inclusive growth across places, and the GM Chamber of Commerce on the Local Skills Improvement Plans.
Henry Overman FAcSS is Professor of Economic Geography in the Department of Geography and Environment at the London School of Economics. He is also the Research Director of the Centre for Economic Performance and the Director of the What Works Centre for Local Economic Growth. From April 2008 to September 2013 he directed the Spatial Economics Research Centre.
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