Low skills and poor infrastructure blamed for UK productivity gap

Chancellor Philip Hammond has said that boosting productivity in the north of England is “at the very heart” of the UK government’s economic ambitions as it gets ready for Brexit.

“As we prepare to leave the European Union it is even more important that we support the Northern Powerhouse to reach its full potential,” he said on Monday, ahead of a meeting with metropolitan area mayors from Manchester, Liverpool and the Tees Valley.

Mr Hammond is far from the first UK politician to acknowledge a productivity problem in the north. The productivity gap among Britain’s regions is a long-running issue, and policy experts agree there is no simple solution to rebalancing the UK economy.

But there is now a growing consensus among economists about where reform is needed, with low skill levels and inadequate transport infrastructure blamed for poor economic performance and lower household incomes outside of London.

London and the South East are the only two parts of the UK with productivity above the national average. In 2015, the most recent year for which official figures are available, workers in London produced 63 per cent more output per hour than workers in Wales, the least productive part of the UK.

Higher skill levels among London’s workforce explains about two-thirds of the productivity gap between the capital and the rest of the country, according to Henry Overman, director of the What Works Centre for Local Economic Growth, a research centre based at the London School of Economics.

British cities make up 11 of the 50 lowest-skilled cities in Europe when ranked by the share of workers with less than the equivalent of five good GCSEs, according to analysis by the Centre for Cities think-tank.

Dundee is the worst-performing UK city on this measure, with 47 per cent of residents classified as low skilled. By comparison, in London, just under a quarter of residents are low skilled.

A key reason why there are more highly-skilled workers in London is that the capital attracts educated young people from across the country.

Many university graduates, particularly those with good degrees from the best universities, find jobs in London.

According to the Centre for Cities, about 19 per cent of all jobs in the UK are in London, but 38 per cent of recent graduates with a first or upper second-class degree from a Russell Group university are working in the capital within six months of their graduation.

Yet encouraging graduates to settle somewhere other than London is not the only way to boost the number of skilled workers outside of the capital. Experts say that more investment needs to be made in promoting mid-level skills, such as vocational qualifications, in the rest of the UK.

However, funding for further education has come under pressure in recent years. Central government funding has been consistently scaled back in the past three decades, even as funding for schools and universities increased.

There is also a patchwork of government grants targeted at specific courses or abilities, but they often fit awkwardly with local skills gaps.

“Endlessly having to fit your [local] problems into various [central] government ‘challenge funds’ is a bit tedious,” said Kate Barker, a former member of the Bank of England’s Monetary Policy Committee who sits on the National Infrastructure Commission.

Many experts believe that central government is too removed from local issues to identify the most effective interventions to boost productivity in the regions — and as a result, have largely welcomed efforts to devolve more decision making and spending responsibilities to local areas.

But local authorities are seen as too small to effectively attract and implement wider investments, which is why many supported the recent introduction of elected mayors for metropolitan areas, saying that one figurehead can often lobby more effectively than a committee can for the interests of a given region.

“You see the names Steve Rotheram, Andy Street and Andy Burnham in the press much more often than the names of previous regional leaders,” said Tony Travers, a professor of local government at the London School of Economics, referring to the recently elected mayors for Liverpool, the West Midlands and Greater Manchester.

David Cameron’s coalition government introduced the targeted “Northern Powerhouse” project to improve infrastructure and boost investment in the north. Theresa May’s government has widened the focus to other regions, including the “Midlands Engine”.

But devolution has proved difficult. Just last week, UK transport secretary Chris Grayling was accused of treating the north “with particular contempt” after he said that it was “not up to central government to grasp” the opportunities to improve infrastructure in the region.

Improving the connections between cities, such as Manchester and Leeds, is often proposed as a way to create the critical mass of businesses required to rival London.

However, recent major rail investments, such as Crossrail, have been concentrated around London, in part because the Treasury’s methods for assessing the potential benefits of infrastructure projects suggest that benefits are highest in areas that already have high land values and wages.

“High-skilled service-based businesses are increasingly concentrated in city centres, allowing them to exchange information, be close to clients, collaborators and even competitors,” said Paul Swinney, principal economist at the Centre for Cities. “That is why we see so many packed into central London. Cities in the North are not offering that network of businesses.”

Prof Overman from the LSE and others say it would be most effective for the government to focus on promoting investment in a handful of cities, rather than across the board.

“The evidence suggests that what we need is . . . the growth of one or two other large cities so that they provide similar opportunities [to London],” Prof Overman said. “Uneven development across Northern cities may be necessary if we want one of these cities to provide the kind of opportunities available in London.”

Yet such a strategy may prove politically difficult, because focusing on the most promising areas would mean that others, including faded seaside towns and former industrial areas outside city centres, could be left out.

For instance, there are likely to be economic benefits to improving rail links between Manchester and Leeds. But experts say the current proposal to extend the “Northern Powerhouse” rail link from Liverpool to Hull and Newcastle reflects a political desire to spread public spending more evenly, rather than any evidence that such a scheme offers best value for money.

Economists say a different policy approach may be needed for areas that fall behind.

For example, Diane Coyle, professor of economics at Manchester University, has called for universal basic services, or a redistribution of tax revenues from across the UK, to produce a good standard of public services, such as education and healthcare, in all parts of the country.

“There are no mysteries about what is required to boost productivity outside London,” Prof Coyle said. “But there has been no consistent enthusiasm within central government to implement the necessary policies because they are slow to take effect.”

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