A ‘Northern Powerhouse of Cards’? Regional Development After Brexit

(NB: This is slightly longer than any usual blog post, as it was actually a short summary of research carried out for the IEA in August, 2016)

The ‘Northern Powerhouse’ has reached a hiatus. George Osborne’s flagship regional development policy, aimed at tackling regional inequalities within the UK, was seemingly rejected by the very people it was supposed to help when post-industrial regions emphatically voted ‘leave’ in the recent EU referendum. The narrow 52%-48% winning margin showed the extent of current divisions within British society, opened up by the economic transformation of the last 40 years between those who have been successful in the economic readjustment and those who feel powerless against capitalism’s ‘creative destruction’. As of yet, the new government have not made any formal commitment to the continuing of the ‘Northern Powerhouse’ initiative. This provokes the question: what next for UK regional development? The Brexit vote, and Theresa May’s first speech as Prime Minister, suggest regional development will be on the political agenda for the foreseeable future. However, the Northern Powerhouse needs a drastic re-think if regional development is going to be successful.

Despite George Osborne’s claimed ownership of the concept of a ‘Northern Powerhouse’, it is certainly not something new. In fact, every Prime Minister since Mrs. Thatcher have pledged to tackle regional differences and discord within British society, so it should have come as no surprise to anyone. It bears a striking resemblance of John Prescott’s ‘Northern Way’, a similar top-down development initiative under New Labour in the not too distant past[1]. In principle, it is difficult for anyone to argue against the benefits of a Norther regeneration project, and it now seems to be a requirement that the government portray itself as concerned with regional inequalities.

It is increasingly accepted on all sides of the political divide that Britain is one of the most centralised societies in Europe, largely contributing to a disillusionment with Westminster politics[2]. Therefore, any attempt to encourage a spatial change of the UK economy towards decentralisation of power and the greater enabling of regions should be welcomed. Currently, those in more deprived areas of the UK are in effect trapped by barriers to movement; in the forms of wide regional variations in wages and house prices, and also by a yawning skills gap vis-à-vis London and the South-East, which makes it particularly unlikely for those living in deprived regions to secure jobs in Britain’s most productive economic activities or for businesses to find the human capital in these regions to employ and create wealth[3]. This is the political economy behind the North’s vote for Brexit, and for anyone concerned with economic freedom it is an intolerable situation.

At the heart of the Northern Powerhouse strategy is transport, in particular the HS2 and HS3 programmes aiming to improve the transport links between the UK’s major cities. This is emphasised by the sub-title of the government’s Northern Powerhouse proposal, ‘A Report on the Northern Transport Strategy’[4]. The justification behind these projects is the notion that the North can work as a single economic entity to counterbalance London through much improved transport infrastructure, which will improve trade and in effect create a single market of the North. Again, theoretically this is intuitively sound, and leads one to be optimistic regarding the prospects of economic growth in the North. PwC’s UK Economic Outlook report for July 2016 argues that the Northern Powerhouse, as defined by the government, would on its own be the 10^th largest economy in the EU[5], which suggests there is clearly economic potential to be tapped into.

 It is therefore counterintuitive that the government are prioritising the extortionately expensive HS2 project, which will connect London to Birmingham by high-speed rail, rather than encouraging investment in the pan-Northern ideal which the Northern Powerhouse projects claims is the overarching goal. Whilst HS2 may provide faster transport to the capital and perhaps improve overall economic performance for the UK, it is also likely to exacerbate regional differences, whose people may be unable to access the benefits of this[6]. Richard Wellings gives the example of Doncaster – a Northern town with great transport links to the capital, yet remains one of the poorest towns in the UK[7]. This supports an increasingly common view that HS2 fails a basic cost-benefit analysis, prompting the House of Lords to describe the project as ‘deeply unsatisfactory’ and an enormous waste of public money. This breakdown in internal logic on behalf of the government shows the Northern Powerhouse to be a political brand, rather than fundamentally concerned with promoting economic growth in the North, something which failed to fool those Northern regions who voted for Brexit to feel a sense of self-determination[8]. After a generation of poor performance on these promises, why should they have taken Osborne seriously?

The Northern Powerhouse initiative seems to be part of what is a wider London-centric attitude to regional development. Evident in the writings of journalists such as Allister Heath[9], the London-model of economic development is clearly behind support the Northern Powerhouse. But the romantic idea that one could work in Sheffield whilst living in Manchester but be able to go out to dinner at the Albert Dock in Liverpool in the evening, as if each city can integrate to become London-style boroughs, completely ignores economic and geographical reality[10]. Not to mention the preferences of those who actually live in these cities to avoid other features of London-style integration. Given the geographical distances of different Northern cities and hubs, as well as distinct traditions and identities, London-style social integration is impossible, whilst increasing door-to-door travel between cities extremely difficult and costly, with uncertain economic benefits. Owen Hatherley rightly labels this idealistic, London-centric top-down approach to regional development as ‘feeble’[11].

Any future regional development policy must focus on facilitating wealth creation through decentralisation of power from Westminster to Northern regions, and by enabling individuals in those regions to make themselves more attractive to employers and businesses starting up. As Ed Cox of the IPPR has repeatedly argued, business interests must be at the heart of regional development strategy[12]. Although job creation is above the national average in the North, the reality is that most of these jobs are in low-skilled and low-pay sectors, and it is estimated that this creation will slow down by 2022[13]. There is no point in investing heavily and with high costs in transport infrastructure if people cannot secure the type of skilled work that will increase the North’s participation in the services economy, as well as other highly skilled jobs. As Naomi Clayton of the Centre for Cities think-tank has argued, you have to train people before you transport them around the country. It is therefore the skills gap which is the greater driver of economic disparities between regions, rather than transport links, which should now take priority. By making local authorities more responsible and accountable, they would be able to adapt policies on skills training and education to suit the economic demands of that particular region.

 Sir Richard Leese states the case clearly when he argues that the government should only provide the conditions for growth, and leave the private sector to provide the wealth-creating activities[14]. Yet it does not follow that all post-industrial regions will be able to be economically successful. As an earlier report by Policy Exchange has shown, it is a simple economic fact that not all towns and cities will be able to regenerate[15]. To some extent, it is about being in the right place at the right time, and some places will inevitably have more prospects of development than others. The most vulnerable towns are those on the coast, originally developed on the basis of ship-building industries which have long since passed to other countries, and distanced from many of the modern metropolitan hubs of economic development further inland. However, the recent vote for Brexit has shown that it is simply not politically viable to disregard the wants and preferences of the people who live in these deprived areas in a modern representative democracy. Brexit has shown that people who live in these places need to feel a sense of control. The challenge for any future government is breaking down the barriers to economic freedom that have alienated those in deprived regions, devolving abilities to local government to shape policy more appropriately to cater for differences in time and place, and providing resources to close the skills gap which will create the conditions for further economic growth and allow the North to share in the comparative advantages and wider benefits of the UK economy. This is even more important in the aftermath of Brexit, which is expected to further transform the economic landscape of the UK.  The Northern Powerhouse not only failed to convince the North that economic redevelopment was around the corner, it ultimately failed to convince people that enablement and devolution was its true aim. The current government would do well to listen and take note.

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[1] ‘The Northern Powerhouse: Smoke and Mirrors?’ (2016), Dr. J. Pugh MP and Southport Liberal Democrats

[2] Autumn Statement: splashing central government money around is not 'devolution' (2015), K. Niemietz, IEA

[3] ‘The city-region chimera: the political economy of metagovernance failure in Britain’, D. Etherington and M. Jones, Cambridge Journal of Regions, Economy and Society, 2016

[4] ‘The Northern Powerhouse: One Agenda, One Economy, One North’, March 2015, HM Government

[5] UK Economic Outlook, July 2016, PwC

[6] ‘Evidence, policy, and the politics of regional development: the case of high-speed rail in the United Kingdom’, J. Tomaney and P. Marques, Environment and Planning: Government and Policy, 2013, volume 31, pages 414 – 427

[7] ‘Re-heating Regional Policy: flaws in the Northern Powerhouse’ (2015), R. Wellings

[8] ‘Powerhouse of Cards? Understanding the “Northern Powerhouse”’, N. Lee, 2016, SERC Policy Paper 14

[9] Only the private sector can deliver an economic revolution in the North’, A. Heath, The Daily Telegraph, 14^th May 2015

[10] ‘HS3 is a political gimmick and will do little to reduce travel times’, M. Littlewood, 15^th March 2016, IEA Press Release

[11] ‘The Feebleness of the Northern Powerhouse’, O. Hatherley, Vol. 34, No. 2, Summer 2016, World Policy Institute

[12] ‘Full Steam Ahead: Business Attitudes Towards the Northern Powerhouse’, E. Cox and J. Hunter, IPPR North, 2015

[13] ‘Rhetoric to Reality’, E. Cox and L. Raikes, IPPR North, 2015

[14] ‘Why We Can’t Afford to Leave the North Behind’, Szu Ping Chang, The Daily Telegraph, 23^rd May 2015

[15] ‘Cities Unlimited: Making Urban Regeneration Work’, T. Leunig and J. Swaffield, Policy Exchange, 2007