Tag: regional multiplier

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Manchesterism: will greater devolution boost economic growth and help tackle inequality?


Andy Burnham is set to become UK Prime Minister on 20 July if no-one else stands to replace Keir Starmer. In a speech on 29 June, he outlined his economic vision. Central to this is devolution, where a greater number of economic decisions would be taken locally rather than by central government. This approach has been dubbed ‘Manchesterism’, in reference to his time as Mayor of Greater Manchester from 2017 to earlier this year. Under his mayoralty, Greater Manchester (GM) achieved faster economic growth than other regions or cities in the UK. From 2017 to 2023, GM’s gross value added grew by an average of 6.6% per annum and the city of Manchester’s by 8.4% – the highest of any city in the UK. The UK average was 4.9% and London’s was 4.6%.

The UK, especially England, is one of the least devolved of the OECD countries. One aspect of this is taxation. The chart shows local taxes and, in the case of federal countries, state/regional/provincial taxes too. (Click here for a PowerPoint.)

Only 4.9% of UK tax revenue is in the form of local taxes (council tax and 50% of business rates) and the amount that can be raised in council tax is capped by the central government. The remainder of UK tax revenue goes to central government in the form of income taxes, social security taxes (national insurance), VAT, excise duties, etc. This compares with an average of 7.1% local taxes and 24.5% local plus regional taxes across the 17 OECD countries shown in the chart.

Andy Burnham plans to shift some of the spending and tax-raising powers from Whitehall to metro mayors and local councils. The aim is to stimulate productivity and economic growth at a regional and local level by tailoring support and incentives to local needs and strengths. Local leaders will be best positioned to understand these needs and strengths and will be able to customise spending and support appropriately.

Examples of the types of greater autonomy over decision making would include:

  • Control over adult education budgets to allow them to be tailored to provide training and apprenticeships to meet the skills requirements of existing and emerging industries in the area;
  • Forming partnerships with local universities to support research and development that complements regional economic growth;
  • Providing greater funding for and control over local transport infrastructure, including roads, buses, trams, trains, etc., with local consultation to make them fit for the local population and businesses;
  • Tailoring business incentives to local needs and to the needs of the businesses themselves so as to attract an increase in investment;
  • Greatly expanding council house building, which has virtually dried up in recent years, with mayors and/or local authorities empowered to develop local housing strategies, including affordable housing programmes, and to direct housing investment funding to particular housing developments in areas of greatest need.

Andy Burnham has pledged to stick to the government’s two existing fiscal rules:
a) The Stability Rule (Fiscal Mandate): the current (day-to-day) budget must be in balance or surplus. In other words the provision of salaries, public services, state pensions, welfare, etc. must be covered by government revenues (largely taxation). The government should borrow only to fund long-term investment.
b) The Debt Rule (Stock Mandate): each year, public-sector net financial liabilities (PSNFL) must be forecast by the OBR to be falling as a share of GDP compared to the previous year in three years’ time. This acts as a break on the amount of borrowing for long-term investment.

It is likely, therefore, that there will be little extra government money for investment. Rather, the policy involves a redistribution of public-sector investment from central government to mayoral/local authorities.

In theory, such a policy of devolution need not see a redistribution from richer to poorer regions, but that might be part of the policy when the details are published. The UK has a bigger gap in productivity (GDP per worker) between its capital city and other large cities than in do other countries. Birmingham, Sheffield, Leeds, Newcastle, etc., as well as Cardiff, Glasgow, Edinburgh and Belfast, lag further behind London in output per head and economic growth than do other European countries lag behind their capital city. Thus the gap between Paris and Lyon, Toulouse and Marseille is narrower; as is that between Belin and Munich, Hamburg and Frankfurt. It is a similar picture in Spain and Italy. In the USA, some cities, such as San Francisco, outperform Washington DC and New York. A redistribution of government funding from London to the regions could see their incomes rise faster without having too much impact on London, which would still continue to attract large amounts of private investment.

Overall, there would be little increase in government funding. ‘Manchesterism’ is not, therefore, a demand-side policy. It is a supply-side policy – directing funds to areas where, combined with local incentives and local knowledge, the funding could yield greater returns and thereby increase potential GDP.

But this is not to say that there is no effect on aggregate demand. The hope is that devolution along the lines outlined by Andy Burnham will attract increased private investment, thereby increasing actual GDP as well as further increasing potential GDP.

We wait to see the details over the coming weeks.

Articles

Videos

Data

Questions

  1. Use an aggregate demand and supply diagram (simple or dynamic) to illustrate the effects on real GDP of a successful devolution strategy.
  2. Find out the details of the last Conservative government’s ‘levelling up’ policy. Was it similar in aims to that of ‘Manchesterism’?
  3. How could a policy of devolution as outlined by Andy Burnham affect income distribution within regions?
  4. Find out about the approach to regional policy in the EU. Is it similar to that being advocated by Andy Burnham?
  5. What is meant by ‘regional multipliers’? Why might they differ from the national multiplier?
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The geographical immobility of labour in England – a social problem

Where you live in Great Britain can have a profound effect on your earning potential. According to a report published by the Social Mobility Commission, there is a growing geographical divide, with more affluent areas getting relatively richer, while ‘many other parts of the country are being left behind economically and hollowed out socially’.

The Commission uses a Social Mobility Index to rank the 324 local authorities in England. The index is a measure of the social mobility prospects for people from disadvantaged backgrounds. It is ‘made up of 16 key performance indicators spanning each major life stage’.

The index shows that children from disadvantaged backgrounds have lower educational attainment, poorer initial jobs and poorer prospects for advancement in the labour market. Often they are stuck in low paid jobs with little chance of getting on the housing ladder and fewer chances of moving away from the area.

The problem is not simply one of a North-South divide or one of inner cities versus the suburbs. Many inner-city areas have been regenerated, with high incomes and high social and geographical mobility. Other inner-city areas remain deprived.

The worst performing areas are remote rural or coastal areas and former industrial areas, where industries have closed. As the author of the report states in the Guardian article linked below:

These areas have fewer specialist teachers, fewer good schools, fewer good jobs and worse transport links. … Many of these areas have suffered from a lack of regeneration: few high-paying industries are located there, and they often exhibit relatively limited job opportunities and clusters of low pay.

The problem often exists within areas, with some streets exhibiting growing affluence, where the residents have high levels of social mobility, while other streets have poor housing and considerable levels of poverty and deprivation. Average incomes for such areas thus mask this type of growing divide within areas. Indeed, some of the richest areas have worse outcomes for disadvantaged children than generally poorer areas.

There are various regional and local multiplier effects that worsen the situation. Where people from disadvantaged backgrounds are successful, they tend to move away from the deprived areas to more affluent ones, thereby boosting the local economy in such areas and providing no stimulus to the deprived areas. And so the divide grows.

Policies, according to the report, need to focus public investment, and incentives for private investment, in deprived areas. They should not focus simply on whole regions. You can read the specific policy recommendations in the articles below.

Articles

Social mobility is a stark postcode lottery. Too many in Britain are being left behind The Guardian, Alan Milburn (28/11/17)
State of the Nation – Sector Response FE News (28/11/17)
Social mobility: the worst places to grow up poor BBC News, Judith Burns and Adina Campbell (28/11/17)
How Britain’s richest regions offer worst prospects for poor young people Independent, May Bulman (28/11/17)
Small Towns Worst Places In Britain For Social Mobility, New ‘State Of The Nation’ Report Reveals Huffington Post, Paul Waugh (28/11/17)

Report

Social mobility in Great Britain: fifth state of the nation report Social Mobility Commission, News (28/11/17)
Fifth State of the Nation Report Social Mobility Commission, News (28/11/17)

Questions

  1. Explain how local multipliers operate.
  2. What is the relationship between social immobility as identified in the report and the elasticity of supply of labour in specific jobs?
  3. What is the link between geographical, occupational and social mobility?
  4. Explain why, apart from London, English cities are ‘punching below their weight on social mobility outcomes’.
  5. Go through each of the key policy recommendations of the report and consider the feasibility of introducing them.
  6. What policies could be adopted to retain good teachers in schools in deprived areas?
  7. To what extent might an increased provision of training ease the problem of social mobility?
  8. Investigate policies adopted in other European countries to tackle local deprivation. Are there lessons that can be learned by the UK government, devolved governments, local authorities or other agencies?
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The London magnet

While much of the UK is struggling to recover from recession, the London economy is growing strongly. This is reflected in strong investment, a growth in jobs and rapidly rising house prices.

There are considerable external economies of scale for businesses locating in London. There is a pool of trained labour and complementary companies providing inputs and services are located in close proximity. Firms create positive externalities to the benefit of other firms in the same industry or allied industries.

London is a magnet for entrepreneurs and highly qualified people. Innovative ideas and business opportunities flow from both business dealings and social interactions. As Boris Johnson says in the podcast, “It’s like a cyclotron on bright people… People who meet each other and spark off each other, and that’s when you get the explosion of innovation.”

Then there is a regional multiplier effect. As the London economy grows, so people move to London, thereby increasing consumption and stimulating further production and further employment. Firms may choose to relocate to London to take advantage of its buoyant economy. There is also an accelerator effect as a booming London encourages increased investment in the capital, further stimulating economic growth.

But the movement of labour and capital to London can dampen recovery in other parts of the economy and create a growing divide between London and other parts of the UK, such as the north of England.

The podcast examines ‘agglomeration‘ in London and how company success breeds success of other companies. It also looks at some of the downsides.

Podcast

Boris Johnson: London is cyclotron on bright people BBC Today Programme, Evan Davis (3/3/14)

Articles

London will always win over the rest of the UK The Telegraph, Alwyn Turner (2/3/14)
Evan Davis’s Mind The Gap – the view from Manchester The Guardian, Helen Pidd (4/3/14)
London incubating a new economy London Evening Standard, Phil Cooper (Founder of Kippsy.com) (10/2/14)

Reports and data

London Analysis, Small and Large Firms in London, 2001 to 2012 ONS (8/8/13)
Regional Labour Market Statistics, February 2014 ONS (19/2/14)
London Indicators from Labour Market Statistics (11 Excel worksheets) ONS (19/2/14)
Annual Business Survey, 2011 Regional Results ONS (25/7/13)
Economies of agglomeration Wikipedia

Questions

  1. Distinguish between internal and external economies of scale.
  2. Why is London such an attractive location for companies?
  3. Are there any external diseconomies of scale from locating in London?
  4. In what ways does the expansion of London (a) help and (b) hinder growth in the rest of the UK?
  5. Examine the labour statistics (in the links above) for London and the rest of the UK and describe and explain the differences.