Levelling Up UK regions: scale-related challenges of Brexit, investment and land use

Introduction

Levelling Up is viewed in many quarters as primarily a political project, forged largely out of the Brexit experience and process (McCann & Ortega-Argilés, Citation2021), and therefore also subject to the ebbs, flows and vagaries of political discourses. The ensuing debates have given rise to numerous different perspectives regarding what Levelling Up is, or should be, and to some extent, the central messages have become shrouded in a cloud of differing narratives. Yet, the issues which give rise to the Levelling Up debates are fundamentally economic in nature, profound in their scale, and longstanding in their existence, and as such addressing these issues is a challenge which goes well beyond individual electoral cycles or the waxing and waning of specific political narratives.

The aim of this paper is provide some much-needed clarity regarding the economic underpinnings of the Levelling Up challenges, and the associated institutional and governance challenges which arise. Many of the UK’s national economic challenges are fundamentally a series of regional economic challenges to an extent that is not the case in most other OECD countries (McCann, Citation2016, Citation2020). Therefore, reconsidering how the regional and the national economic challenges reflect each other is a useful way of reframing the Levelling Up narratives.

In a recent concise and excoriating article, the chief economics editor of the Financial Times, Chris Giles, argued that the UK economy is gravely hampered by three key features, namely Brexit, public and private investment, and land-use planning, the adverse impacts of which politicians of all colours are neither entirely honest nor transparent about (Giles, Citation2023). Giles’ argument is that while voters want high standards of living with high quality public services, they voted for Brexit which fundamentally weakens the UK economy, they often prioritise tax cuts when services are under-funded, and the economic growth and development which is dependent on building and infrastructure is stymied by the land-use planning system which makes development very difficult. These are national growth problems. The key problem Giles articulates is that the UK public and media want largely contradictory things, while being unaware of, or uninterested in, the realities of the inherent trade-offs, and how these trade-offs shape or hinder the UK economy. The acknowledgement of trade-offs and the search for complementarities is generally central to economists’ thinking about good policy design, but this becomes extremely difficult in situations where public perceptions and preferences are themselves self-contradictory. Chris Giles’ point is that it is the public’s perceptions and preferences, allied with politicians’ and the media’s lack of clarity on these matters, which fundamentally hampers our ability to choose the right policies necessary to move the UK forward.

Each of these issues also has a specific and direct corollary or feature relating to the Levelling Up agenda. The reason is that so much of the UK economy’s weaknesses and challenges are related to place, with the UK displaying amongst the largest inter-regional and inter-urban productivity inequalities in the industrialised world (McCann, Citation2020, Citation2023a, Citation2024; Carrascal-Incera et al., Citation2020). The sluggish national performance of the UK economy cannot be separated from its regional problems (McCann, Citation2016), so any attempt to address national productivity growth challenges almost certainly runs up against regional challenges. This was explicitly understood and articulated by the 2022 Levelling Up White Paper (HM Government, Citation2022), which argued for a multi-institutional, multi-faceted and multi-dimensional response to regional rebalancing the UK economy. This paper adopts the broad tripartite schema of Giles (Citation2023) in order to examine the nature and scale of the UK’s regional productivity challenges, and uses this schema to reframe the governance and institutional challenges to be overcome in order for Levelling Up to be a reality.

In order to do this, the rest of the paper is organised as follows. In the following three sections we deal respectively with each of the three national issue raised by Giles, namely Brexit, public and private investment, and land-use planning, but in this case setting them explicitly in the UK regional context. This allows us to understand the institutional and governance challenges associated with each feature, and to better identify the likely trade-offs associated with public-policy decisions aimed at driving forward Levelling Up. The final section discusses two key emerging questions from the tripartite schema, regarding both the institutional and fiscal scales at which Levelling Up should be implemented. The evidence presented here suggests that on both counts, the current scales on which Levelling Up is being driven are far too small to be effective in the long-run.

Brexit and UK regions

On the first of Chris Giles’ threefold list of features hampering the UK economy, namely Brexit, the Levelling Up agenda is a case in point. Levelling Up as a political project was forged almost entirely out of the Brexit vote and process (McCann & Ortega-Argilés, Citation2021), as a result of a ballot-box mutiny (Collier, Citation2018) arising from a profound ‘geography of discontent (McCann, Citation2020) in places which felt increasingly ‘left behind’. However, in economics terms, this is largely a self-contradictory aspiration, given that Brexit will most severely and adversely affect the UK’s economically weaker regions, as a dozen or so different pieces of empirical work have subsequently found (Los et al., Citation2017; Chen et al., Citation2018; Borchert & Tamberi, Citation2018a, Citation2018b; Gasiorek et al., Citation2018; Cambridge Econometrics, Citation2018; Clarke et al., Citation2017; Davenport & Levell, Citation2022; Fetzer & Wang, Citation2020; Thissen et al., Citation2020; Wyman, Citation2018; Fingleton et al., Citation2023). Widespread narratives regarding so-called ‘Brexit opportunities’ not only ignored all of the national evidence on the adverse effects of Brexit (Springford, Citation2022; OBR, Citation2020a, Citation2023a, Citation2023b, Citation2023c; Romei, Citation2023a), but also ignored the regional implications, which are to make the UK’s already high regional productivity and prosperity imbalances almost certainly worse than they were prior to Brexit. Many of the UK’s economically weaker regions were more dependent on EU consumer and investment markets for their trade than were the UK’s more prosperous regions, but it was these same regions which primarily voted for Brexit (Los et al., Citation2017; Chen et al., Citation2018). As such, while Brexit has spurred Levelling Up as a political project, the UK regional productivity imbalances are exacerbated by Brexit, such that the resources which Levelling Up requires to succeed needs to be even greater than would be the case without Brexit. Whether the political economy of the UK can rise to these challenges is another matter, given that, as we will see below, both the UK’s national and regional investment landscape and also the UK’s land use planning landscape inherently push in the opposite direction of Levelling Up.

Investment in regions

It is well known that the UK economy invests annually as a share of GDP less than many of our comparator and competitor countries, consistently ranking in the bottom quarter of OECD countries (OBR, Citation2020b; Johns & Hutt, Citation2023), and that this has been a longstanding problem since the 1980s. More recently, business investment has flattened out since the Brexit vote of 2016, costing the UK an estimated £29bn in lost business investment, or some of 1.3% of GDP, and expected to rise to some 2.8% by 2026 (Romei, Citation2023). The fact that over the last four decades the UK has shifted towards being a relatively more services-oriented economy than some other OECD economies has in the past been used to try to explain this performance, on the argument that service industries require less physical capital investment than other types of economic activity. Yet, when using conventional measures, other economies with similar industrial structures to the UK, such as The Netherlands, consistently display higher shares of investment than the UK. However, knowledge-intensive service industries invest primarily in intangible assets (Haskell & Westlake, Citation2018), the value of which is argued to not be fully reflected in standard measures of investment (Goodridge & Haskel, Citation2022). Allowing for these adjustments, the UK is seen to perform relatively better with respect to its competitors than conventional measures imply (Corrado et al., Citation2022), although these relative improvements still are not large enough to remove the overall investment gaps between the UK and other comparator OECD economies. The UK still underinvests in R&D in comparison to our competitor countries (Forth & Jones, Citation2020).

At the regional level, the overall patterns of investments in intangible assets appear to be strikingly similar to the regional distribution of GDP (Goodridge & Haskel, Citation2022), with sectoral structures playing almost no role in the patterns, a result which also echoes other findings (Martin et al., Citation2018; Harris & Moffat, Citation2012, Citation2022), whereby sectoral structures nowadays play no real role in shaping UK city or regional productivity. Meanwhile, the UK-wide under-investments in R&D are especially marked in terms of the UK’s economically weaker regions, whose levels of publicly-funded R&D investments are far lower than what might be expected on the basis of OECD-wide patterns (Forth & Jones, Citation2020). Another key area where the UK investment levels are very low by international standards in comparison to the UK’s population and GDP concerns infrastructure, ranging from all forms of infrastructure (TUC, Citation2016) through to high-speed road infrastructure (EURF, Citation2016), high-speed rail infrastructure (New Statesman, Citation2021), and even to overall road investments (Crescenzi et al., Citation2016; OECD, Citation2020). Low overall levels of both private and public investment appear to be endemic to the UK economy as a whole, and these heavily reflect, and are reflected by, large UK regional disparities. Indeed, the geographical patterns of publicly-funded productivity-enhancing investments across R&D, transport infrastructure, heritage and culture (McCann, Citation2016; O’Brien & Miscampbell, Citation2020) appear, if anything, to exacerbate the UK’s regional inequalities (Forth & Jones, Citation2020: O’Brien & Miscampbell, Citation2020), and nor can these geographically skewed public investment patterns be defended on the basis of value-for-money or cost–benefit calculations (Coyle & Sensier, Citation2020). The UK is in many ways therefore a ‘hub no spokes’ (Haldane, Citation2018) economy in which the regional inequalities are central to this problem, and the causes of these regional inequalities are a result of both private sector market failures and also public sector decision-making failures, in both cases due primarily to central government errors (McCann, Citation2016, Citation2022).

One area where the UK is a high investment economy is that of inward foreign direct investment. For four decades the UK was Europe’s major recipient of inward FDI, and even recently during the post-Brexit period there is evidence that the UK continues to be an attractive place for foreign investors (HM Government, Citation2019). Yet, whether this is a sign of economic strength or weakness is open to debate. During the UK’s participation in the EU Single Market, the UK was seen by many international firms as an excellent place for locating establishments aimed at exporting to the rest of the EU. A deregulated market landscape, a strong legal enforcement regime and an English-language working environment together provided an ideal base for those firms seeking an export platform (Iammarino & McCann, Citation2013) for accessing the EU single market. Longstanding flows of inward investment entered the UK on the basis of this logic, and these capital inflows focussed on building new production facilities helping to bolster the UK’s export position (McCann, Citation2016). Brexit means that most of these advantages have now been lost. At the same time, deregulation of almost all parts of the UK economy since the early 1980s also led to large inflows of capital aimed primarily at mergers and acquisitions of existing UK businesses. The ongoing UK balance of payment deficit required such capital inflows to help underpin UK consumption levels, and these inflows were dominant in a wide range of areas including infrastructure, energy and utilities, banking and finance, media, sports, as well as manufacturing. Large inflows of this type can be interpreted as being a double-edged sword; on the one hand a positive phenomenon if investment levels increase, but on the other hand a negative phenomenon, if proprietary knowledge, control and coordination abilities are lost from the UK. The ability to coordinate is central for good public policy-making, and any reduced coordination abilities due to fragmented and overseas ownership pose real challenges for policy-making, as we will discuss shortly in more further below.

A related question regarding investment levels is that of the ability of the private sector to provide the scale of investments necessary to drive Levelling Up. Observations of patterns of credit applications and provisions show no major geographical trends (Stansbury et al., Citation2023), although self-selection processes may be at work due to the potential distortionary effects of finance on the UK economic structure (Martin & Sunley, Citation2023). The UK banking and financial system is highly centralised and militates against local financial provision in comparison to more decentralised banking systems (Mayer et al., Citation2021). In particular, the long-term tailored financial relations with local SMEs are greatly hampered by this system. Similarly, the geography of venture capital is highly skewed, with 50% accounted for by London alone, and 72% by the wider South and East of England as a whole (Beauhurst, Citation2022), and these regions are unsurprisingly home to 68% of high-growth firms (Haque, Citation2023). Indeed, the geographical skewness of venture capital towards the more prosperous regions has actually been increasing in recent years.

Apart from the highly centralised structure of the banking and financial services industries, another important explanation for these highly skewed patterns of regional financial provision relates to the behaviour of investment markets. The 2008 global financial crisis led to profound capital shocks across OECD countries, and in turn spurred the deployment of quantitative easing (QE) policies by central banks. However, the 2008 global financial crisis also led to an asymmetrical partitioning of capital flows into UK regions which heavily favoured London in the post-crisis era, at the expense of the rest of the UK’s regions, due to a ‘flight to safety’ (Daams, McCann, Veneri, & Barkham, Citation2023a). This pro-London ‘flight to safety’ was a direct result of the profound shift from an investment market regime characterised by risk to one characterised by ‘radical uncertainty’ (Kay & King, Citation2020). This regime change engendered a surge of capital into London at cheap prices in the post-crisis era, whereas the rest of the UK experienced capital shortages at inflated capital prices (Daams, McCann, Veneri, & Barkham, Citation2023a). This is different to the case of the USA, where the capital shocks provided for inflows into many large cities scattered across the country (Daams, McCann, Veneri, Barkham, & Shoenmaker, Citation2023b), rather than to just one region, as is the case in the UK. Today, the regional risk indices demonstrate that London continues to be priced in terms of blue-chip investment territory, whereas the UK’s economically weaker regions still remain stuck in junk bond territory, some fifteen years after the crisis (Daams, McCann, Veneri, & Barkham, Citation2023a). QE only positively the affected London economy, with no traction in other UK regions being observable whatsoever in the data (Daams, McCann, Veneri, & Barkham, Citation2023a). The gap in risk premia and yields between London and the UK’s economically weaker regional economies is of the order of 250–300 basis points (Daams, McCann, Veneri, & Barkham, Citation2023a), a gap which is identical to the current long-term risk premia differences between the sovereign bonds offered by the UK and Romania on the global financial markets. Indeed, the post-crisis real estate asset price inflation in London and the South East has actually accentuated UK interregional wealth inequalities (Advani et al., Citation2020; D’Arcy, Citation2018), while doing little or nothing for weaker regional economies in terms of reducing the risk spreads on the part of the private sector investors (Daams, McCann, Veneri, & Barkham, Citation2023a). Unless national policy can help to bring about an interregional narrowing of these risk and yield spreads, it is almost impossible to see how Levelling Up can take place. This is because the risk-pricing data tells us that investors perceive the economic core and periphery of the UK as being, in effect, very different countries, as is consistent with the four decade-long decoupling of the UK regional economic system (McCann, Citation2016). Levelling Up can only work if the private sector is willing to undertake long-term investments in weaker regions on an enormous scale and across a wide range of fronts, thereby driving processes of regional convergence. However, the current 250–300 basis point ‘external finance premium’ (Bernanke, Citation2022; Daams, McCann, Veneri, & Barkham, Citation2023a) associated with non-core UK regions does not permit this, and therefore public investments in strategic arenas are need to help de-risk these regions.

This raises an important issue regarding the efficacy of governance and institutional systems to help regions recover from adverse economic shocks. Many of the investments needed to help regions develop, and especially those weaker regions which require help in order to turn around their fortunes (Frick et al., Citation2023), need to be both large and long-term as well as being well-tailored to the local development challenges. In order to realise a more levelled up playing field, the publicly-funded investments in economically weaker regions need to de-risk the local financial landscape for potential private investors to levels which are similar to the more prosperous lower risk regions. In terms of building public-private partnerships, devolved decision-making and local agency often allows for easier cross-sectoral coordination across stakeholders and interested parties (McCann, Citation2023b), something which should be reflected in more favourable local investment risk pricing. However, in the case of the UK, the hyper-centralised nature, logic and architecture of the central-sub-central fiscal system works against such principles. The UK fiscal system is unlike any other such system in the industrialised world (McCann, Citation2022), and militates against local policy tailoring, local policy innovation and local policy risk-taking, with the lion’s share of policy funding and prioritising shaped and constrained by the short-term whims of government ministers, facilitated by the extreme centralisation of decision-making in Whitehall and Westminster (McCann, Citation2022). These local agency problems are exacerbated by the fact that UK policy settings are changed so frequently (IFG, Citation2017; Cook et al., Citation2020) while industrial and place-based policies often bear no relationship to one-another (Coyle & Muhtar, Citation2023). These weaknesses are further magnified by the fact that devolution in England, is to such small governance units by the standards of other OECD countries (McCann, Citation2016, Citation2022; Pope et al., Citation2022), thereby inhibiting any policy-induced economies of scale. The context in which investment in economically weaker UK regions takes place is therefore currently unfavourable both in terms of private investment markets and also public investment frameworks, issues which the last fifteen years of government policy, including the post-2010 localism agenda (McCann et al., Citation2023) and the more recent Levelling Up agenda, have until now, largely failed to address.

Housing, land use planning and regions

The issues around housing and land use planning concern our ability to build assets and infrastructure in the ‘right’ places at the right time for economic development. Whatever the original progressive thinking underpinning the post-war land use and planning reforms (McCann, Citation2016; CPRE/Natural England, Citation2010), over many decades the UK land use planning system has morphed into something which is fundamentally conservative, or even reactionary, in terms of its interregional and intergenerational wealth distortion and distributional impacts (McCann, Citation2016), in complete opposition to its original logic. Nowadays, in reality the UK town and country planning system it is not in any way a land use planning system in the sense understood in continental Europe (OECD, Citation2017a), in that only London and Scotland have what might be described as proto-plans, while the rest of the UK have nothing resembling a land use plan which is able to interact constructively can other economic and social policy agendas (UK2070, Citation2020; OPC, Citation2020). Indeed, as of 2020, only 30% of local councils in England had local land use plans which were up-to-date in terms of their plan being both less than five years old and also incorporating a five year housing land supply details included (CPRE, Citation2020; Blackman, Citation2020). In order to meet the government's proposed 2023 deadline that all local councils have an up-to-date plan operational by 2023, CPRE (Citation2020) estimate that 80% of English local planning authorities will need to have revised an existing plan or adopt an entirely new plan. However, covid-19 lockdown stymied many of these efforts, making such an aspiration unrealistic. Yet, the problem is not simply the updating of local plans. More fundamentally, over the last four or five decades, the UK town and country planning system has morphed largely into an ad hoc development control or development-mitigating system (OECD, Citation2017b), the economic effects of which are particularly pernicious on lower incomes groups. These issues were most clearly articulated in the two landmark Barker (Citation2004, Citation2006) reports which proposed a series of fundamental reforms to the operation of the UK land use planning and housing market systems, However, the influence of the Barker reports’ proposals was largely sidelined due to the impacts of the 2008 global financial crisis and the subsequent 2010 change of government which focused government attention away from these possible reforms to other priorities. In particular, the 2010 shift to localism (McCann et al., Citation2023) moved the focus of public policy attention away from larger coordinated reforms to smaller locally-specific agendas.

Given the major institutional and system-reform challenges which need to be addressed, there are various different analytical approaches which are relevant for the reforming and improving of the land use planning system in order to allow for a better working of the UK’s housing markets and commercial development markets in general.

One argument is that coordinated expansion of development into the greenbelt in various places (Cheshire et al., Citation2014), via for example, the establishment of strategically sited new towns along existing transport corridors (Cheshire & Buyuklieva, Citation2019), would be cost-effective and also environmentally sustainable. However, the UK experience in this regard is not a positive one (Francis, Citation2023). The development of new towns require fundamental and long-term institutional and governance changes in order to be effective, and the history and experience of these in the UK, as with the recent case of the Manchester HS2-link cancellation, is one of poor long-term support and strategy (TCPA, Citation2021). The premature end in the 1980s of the three-decade long New Towns programme, allied with a fire-sale of the assets of the Development Corporations in which no consideration was given regarding the long-term stewardship of the ambitions of the places that were created (TCPA, Citation2021), is eerily reminiscent of what has just taken place in the case of HS2 (Pidd, Citation2023). New town communities were left bereft of support, and those that prospered such as Milton Keynes or Hemel Hempstead, prospered because they were within the economic orbit of a successful city, namely London, whereas those that were not, such as Skelmersdale, suffered primarily as they were within the orbit of declining cities (Whipple, Citation2023). Indeed, the pattern of UK new town success or failure largely resembles the more general UK economic geography of poverty or prosperity, and that whether a settlement is long-established or a new town per se, appears to be of limited relevance.

As Barker (Citation2008, Citation2014, Citation2019) argues, simply building more houses will not of itself solve many of these problems, which are distributional in nature, and require a fundamental overhaul of the whole system, including re-thinking aspects of the relationship between green belts, greenfield land and brownfield land, including tilting the tax system in favour of brownfield development by taxing greenfield-related development. While these arguments are consistent with a Coasian logic, excess hedonic rental effects on housing wealth associated with locations within, or in very close proximity to, the greenbelt environment, imply that such taxes might also be levied on home owners as well as house builders in green areas, along the lines of the classic land value capture arguments of Henry George. Of course, such suggestions immediately run up against both local and nationwide political opposition, but this point highlights the fact that promoting brownfield development is itself costly, and typically more costly than either greenfield development (Barker, Citation2004) or prevailing market returns, and this is precisely why such brownfield land remains either vacant or derelict. Who pays the burden of these development costs in order to allow private investment markets to operate effectively is central to the problem of reforming the land use system, but as it is, there is little real discussion of these issues. The planning system is riddled with blockages and overcoming local opposition to reform is very difficult (Thomas, Citation2023). However, the current land use planning system is not neutral, in that the interregional and intergenerational wealth distortions associated with the house price effects of the current system, already impose enormous societal costs. On economics grounds, these arguments all tend to push in the direction of the expansion of housing and commercial developments into some parts of the greenbelt in places where demand is especially high, such as many parts of London and the wider South East, or alternatively, a reforming of the local property tax systems in favour of brownfield development, with major implications for greenbelt residents.

There are also additional powerful economic arguments in favour of brownfield developments. The UK’s second and third tier cities outside of the wider South and South East significantly underperform relative to what might be expected from their size (McCann, Citation2016; Swinney, Citation2021) and to their equivalent OECD peers (RF, Citation2023a,b), and turning around these cities is essential for galvanising their wider hinterlands (CFC, Citation2023). Except for the case of London, or possibly also Edinburgh, the UK’s city centres are very small relative to their overall populations in comparison to OECD and European peers (Rodrigues & Breach, Citation2021; NIC, Citation2023), and this is especially true for the UK’s second and third tier cities (Rodrigues & Breach, Citation2021). Greater urban population density allied with greatly improved intra-city public transport infrastructure has the potential to begin to address and redress these productivity weaknesses (Arbabi et al., Citation2020; Rodrigues & Breach, Citation2021; NIC, Citation2022, Citation2023). Indeed, insufficient local density and economic scale is almost certainly the key reason why the UK’s cities outside of London and the South display no scale-related productivity effects of any form which are detectable (McCann & Yuan, Citation2022), nor any favourable financial risk premia associated with clustering in these cities (Daams, McCann, Veneri, & Barkham, Citation2023a). Indeed, excluding London, almost none of the various types of UK regions display agglomeration effects (McCann & Yuan, Citation2022), with many parts of the UK outside of the south of England containing cities displaying lower productivity than smaller hinterland towns, and lower than all large or small places in the south of England (ONS, Citation2017).

Amongst OECD countries, the lack of any scale-related productivity effects in geography is a feature which is unique to the UK. Yet, the fact that the UK’s interregional variations in the stocks of high skills workers, low skills workers, and also unemployment rates are all relatively low by OECD standards, and in particular are all very small in comparison with the UK’s regional productivity variations (Johns & Hutt, Citation2023), allied with the fact that with similar UK-US graduate cohort profiles, outside of London the regional stocks of UK graduate skills display diminishing returns (Stansbury et al., Citation2023) rather than the increasing returns displayed by US cities (Burn-Murdoch, Citation2023), means that the scale and quality of the local labour supply is unlikely to be a key determining factor in shaping UK regional productivity differences (Burn-Murdoch, Citation2023). In contrast, the UK’s vastly different regional and city risk premia suggest that the distortionary effects of the UK’s ad hoc development control system allied with a highly centralised governance system which is largely unable to adapt to local context, are the most likely candidates for accounting for the UK’s unique lack of any urban scale-productivity relationships. Taken together, these insights would imply that the UK needs a combination of greater urban densification allied with greatly improved intra-urban, intra-regional and interregional transportation infrastructure, all of which are essential for realising both greater local and national productivity benefits in a manner which is also environmentally sustainable (Arbabi et al., Citation2019, Citation2020).

In many countries where variations in spatial productivity are primarily local in nature, these debates are typically framed in terms of addressing purely local transport and accessibility issues, but in the UK some 60% of regional productivity variations are intra-regional with 40% being intraregional (Arbabi et al., Citation2019; Zymek & Jones, Citation2020). This implies that primarily local intraregional policy responses, of a type articulated in the national planning guidance (DLUHC, Citation2023), cannot of themselves address these issues, and local responses must necessarily also involve additional interregional policy responses from central government, something which sets the UK apart in terms of governance challenges from many other more interregionally equal countries (UK2070, Citation2020).

Unfortunately, the UK’s ultra top-down and centralised governance system (McCann, Citation2022) means that carefully constructed attempts at overcoming the lack of meaningfully-planned approaches to the nationwide development and provision of infrastructure towards a more long-term and strategic approach can be readily and rapidly undermined in the minds of international investors by political decisions taken by a small number of people. The responses across the political spectrum to the recent Manchester HS2 curtailment decision demonstrates exactly the gravity of these concerns (Financial Times, Citation2023: Pratley, Citation2023; The Guardian, Citation2023; Thompson, Citation2023: Haldane, Citation2023). In all likelihood, the scattered, uncoordinated and largely unplanned local infrastructure schemes proposed (Williams, Citation2023), will suffer exactly the same fate for the same reasons as HS2 itself, unless fundamental institutional reforms are made. There is currently no evidence that such institutional reforms are underway. The results of this extreme short-termist thinking and decision-making, which appears to have been taken without recourse to detailed consultation with the government’s own high-level advisory body the National Infrastructure Commission (Walker, Citation2023; Sparrow, Citation2023), are that risk premia in the UK’s northern regions will rise even further above their currently alarming junk bond levels (Daams, McCann, Veneri, & Barkham, Citation2023a). This is especially risky given the fact that in the big picture, the costs involved in HS2 are tiny. Although the costs of infrastructure construction in the UK dwarf those of continental Europe, largely because of differences between how the Common Law and Napoleonic Law systems work (Dimitriu & Hopkinson, Citation2023; Lawford, Citation2023), it is still the case that the overall costs are tiny. The total construction costs of HS2 across two decades annually amounted to no more than around 0.3% of UK public expenditure, or 0.15% of UK GDP, and in the context of global investors’ perceptions of the UK and the overall functioning of the economy, these numbers are tiny. In particular, whatever the political significance of these numbers, the resulting additional risk premia associated with long-term investments in the UK’s economically weaker regions are likely to dwarf any purported savings from curtailment of HS2. When it comes major reorientations of the economy associated with Levelling Up and sustainable transitions, it is the long-term opportunity costs which are paramount, not the short-term pecuniary cost savings, and the UK’s institutional set-up appears to be uniquely ill-equipped to deal with these issues (McCann, Citation2022).

Discussion

In terms of policies relating to Levelling Up, the central problem which all of the three issues raise, is how best to provide the right types of investments, resources and powers and also the right scale of these investments, resources and powers in the right places, both geographically and institutionally, in order to foster both regional and national growth and development.

In this context, one of the first questions that any future discussion about Levelling Up must address is whether the investments being made locally are in reality being made in primarily the local, regional or national interest. Moreover, this question is equally applicable to investments made in London as well as those in other regions, as there is currently an almost total lack of clarity on this matter in UK policy or institutional circles (McCann, Citation2016; Coyle & Sensier, Citation2020).

The UK interregional economic system was the first amongst all OECD countries to systematically switch from a convergence model to a divergence model, beginning in the late 1980s, and then accelerating from the 1990s onwards (Carrascal-Incera et al., Citation2020). Many other OECD economies have subsequently also made this transition from convergence to divergence, and especially after the 2008 global financial crisis (McCann, Citation2023b) such that only 30% of the OECD population currently live in regions enjoying convergence, and just 4% live in convergence regions where growth is driven by city-led agglomeration effects (McCann, Citation2023b). Importantly, when the underlying nature of the interregional economic system is one of convergence, then additional housing and infrastructure provision in already-prosperous and crowded regions, unambiguously boosts both the national economy as well as the local regional economy in which the investments are made. However, when the underlying nature of the interregional economic system is one of divergence, this is no longer the case (McCann, Citation2023b). Indeed, under a divergence regime, the national implications of local and regional investments in already-prosperous cannot be known in advance (McCann, Citation2023b), in that they may well lead to further decline in already-weaker regions as further growth in already-prosperous regions. The net effects of these opposing impacts are unknown.

Back in the late 1970s and early 1980s London was not prosperous in comparison to other global cities such as New York and Tokyo. At the same time, the UK interregional economic system had enjoyed more than three decades of convergence. The collective thinking which emerged across Whitehall, was that it was critical for the UK for London to be boosted as a global city, as this will provide the economic motor which will pull the rest of the UK regions along with it. Numerous large-scale infrastructure and redevelopment projects in productivity-enhancing investments (O’Brien & Miscampbell, Citation2020) in and around London were commenced in order to drive this process (McCann, Citation2023a), of which the London Docklands was the largest, and this process has continued for four decades.Footnote¹ In the case of the UK, however, more than thirty years of cross-regional and cross-country data now confirm that the UK experienced greater regional imbalances with no net nationally positive economic outcomes (McCann, Citation2016). In the UK, the underlying switch from convergence to divergence processes, began around 35 years ago (McCann, Citation2016) at the exactly the same time that most of these projects were being commenced or implemented, meaning that the growth of London and its hinterland appears to have been largely at the expense of the UK’s weaker regions (McCann, Citation2016, Citation2020, Citation2023a). As such, many of the London-located investments since the 1980s, which were at the time branded as ‘national’ investments in transport, research and cultural infrastructure, today increasingly look simply like nationally-funded or privately-funded local investments primarily benefiting the local London and hinterland regional economy. Any future policy proposals regarding devolution, spatial planning or Levelling Up agenda, such as, for example, via a reconsideration or reformulation of the UK transport infrastructure systems or the proposed building of new towns to address housing shortages (Francis, Citation2023), therefore require a careful consideration of whether the implications of these decisions are primarily local, regional or national in nature. In this context, high-capacity rail systems are meant to act as a spur to both Levelling Up and sustainable mobility transitions, and OECD-wide evidence generally supports the Levelling Up-type impacts of nationwide high-capacity and high-speed infrastructure on the economic performance of mega-regions (Glocker, Citation2018). The cancellation of these schemes in the UK, apparently without prior detailed consultation with either the National Infrastructure Commission (Walker, Citation2023; Sparrow, Citation2023) or other government departments (Williams & Georgiadis, Citation2023), cannot be substituted and compensated for by assorted and largely unplanned ‘illustrative’ local schemes (Williams, Citation2023). The cutting of the Manchester HS2 section, as with the earlier cutting of the eastern leg of HS2, will almost certainly be damaging to investors’ perceptions of northern regions as locations for investment (Jolly, Citation2023), while having no real adverse effects on London and the South of England. The tiny scale of HS2 investments in the overall economy means that its cutting will have no observable positive effects on the UK’s overall debt and liability standing in fixed income markets, whereas if anything, the lack of consistency or any long-term strategy which is subject to short-term unstructured political interference will have a negative effect on global investors’ perceptions of the UK (Pratley, Citation2023)

A second question concerns the scale of what is required to realise the long-term benefits of Levelling Up. Governance decentralisation is not the same thing as genuine devolution, and nor is devolution the same thing as Levelling Up. Indeed, when observing the scale of resources and legal powers applied to Levelling Up, the implication here is that much of what in the UK is termed Levelling Up may not, in reality be about rebalancing the interregional inequalities, but rather a political project of limited decentralisation.

There is currently lots of discussion regarding different approaches to devolution. There is lots of hyper-localist and communitarian thinking which spans the political spectrum (Kruger, Citation2022; New Local, Citation2023; CLES, Citation2023; APPGLBN, Citation2023), aiming to address very local challenges under the banner of Levelling Up, but there are very few voices calling for larger institutional and governance systems. At the same time there are lots of agglomeration-based approaches focussed on rebuilding large city centres (RF, Citation2023a, Citation2023b), but much less regarding helping smaller places with specific skills or technological niches. Addressing these various issues requires asking difficult questions regarding the institutional and governance scales being proposed and implemented for devolution, especially in England. As already mentioned, the current governance devolution trends within England are towards spatial and population scales which are very small by OECD standards (McCann, Citation2016, Citation2022; Pope et al., Citation2022), and this is likely to severely limit the ability of these new sub-central governance bodies to bring about any meaningful change in the arena of the economy. Promoting local civic engagement is essential, but this, of itself, will have little or no effects on the economic challenges facing weaker regions. Similarly, while rebuilding, enlarging and regalvanising large city centres is absolutely essential for rejuvenating regional economies, smaller towns tend to rely on more specialist production and service niches, and enhancing the resilience and upgrading of regional supply-chains, specialist skills niches and infrastructure linking such places to the larger cities, is also essential (Hildreth & Bailey, Citation2023), as is done in many other OECD countries. This is precisely why both the UK2070 Commission (UK2070, Citation2020) and the now disbanded Industrial Strategy Council (ISC, Citation2021) both recommended that economic policy should be devolved to the scale of the former UK Government Office regions, rather than to the much smaller types of county-based institutions currently being advocated (Paun et al., Citation2021). Paradoxically, while voter preferences tend to prefer smaller more local governance set-ups (McCann, Citation2016), meaningful economic responses require larger institutional structures in order for policies regarding smaller places to be effective. Most of the UK currently lacks sufficiently large meso-levels institutions to realise these benefits (McCann, Citation2022), and explains why so much of the 2010 localism agenda failed (McCann et al., Citation2023) and why many of the current county-based devolution-related proposals are also likely to fail. Moreover, the likely weakness of these small-scale proposed devolved bodies is also magnified by the fact that the overall resources being deployed to genuine Levelling Up are both tiny and fragmented in comparison to the scale of the regional productivity challenge we face.

To give a sense of perspective here, for over thirty years Germany has been spending some £75bn per annum on their version of Levelling Up (Enenkel, Citation2021; Enenkel & Rösel, Citation2022), a yearly figure which is similar in scale to the lockdown furlough scheme (Enenkel & Rösel, Citation2022) or more relevantly for our purposes here, to the whole of the forecast construction cost of HS2 spread across two decades, prior to its cancellation by Rishi Sunak. In marked contrast, UK today, spends only around 5%−6% of this number annually on genuine Levelling Up actions and activities (McCann, Citation2022), while Germany spends annually around 15–20 times as much annually on Levelling Up as the UK does. Not surprisingly, in productivity and prosperity terms, Germany today is not only much less interregionally unequal than the UK, but the UK is now more interregionally unequal than Germany was at the time of reunification in 1990 (Carrascal-Incera et al., Citation2020). In addition, Germany is richer than the UK today by a degree which is greater than was the case for West Germany over the UK in 1990 (Carrascal-Incera et al., Citation2020). The experience of Germany therefore suggests that Brexit and the ensuing political shocks have not spurred anything like the concomitant increase in publicly-funded resources required for Levelling Up to work in the UK, irrespective of the prevailing political narratives or voter preferences. In other words, international peer-country comparisons of both institutional structures and policy expenditures implies that the nature and scale of what is currently being debated politically in the UK under the heading of ‘Levelling Up’ is vastly underpowered. Indeed, in reality, much of what is currently being debated is what the late Lord Bob Kerslake called ‘pea shooter’ and ‘sticking plaster’ policies which are too little and too short-lived (UK2070, Citation2019). As such, both the institutional and fiscal scales at which Levelling Up is currently being debated and implemented are likely to be far too small to be meaningful and effective in the long-run in comparison with the economic headwinds that weaker regions are facing. Moreover, these oncoming headwinds are likely to be even stronger in the future as the UK transitions to a greener economy. Although many of the UK’s economically weaker regions have the potential for new employment opportunities associated with green transitions (Birkett et al., Citation2022; Corfe & Norman, Citation2021), these same economically weaker regions also face more economic disruption associated with climate change mitigation transitions (Corfe & Norman, Citation2021), due primarily to the fact that they are more carbon intensive in terms of production and carbon extensive in terms of supply chain composition.

The arguments above contend that regional policy has to be at the heart of any sensible strategy for UK national growth (Wolf, Citation2023). Moreover, there is now a growing cross-party consensus that widening interregional divides are not inevitable outcomes, and that a lack of ambition, policy short-termism and increasing governance centralisation have all hampered past government efforts to address these issues (Turner et al., Citation2023). Therefore, even the late-coming attention to these Levelling Up-types of issues across the UK academic, government, institutional and policy circles is a welcome step in the right direction, although there is still a very long way to go before the UK fully addresses these issues, if ever (Wolf, Citation2023). Comparisons across other OECD countries show that highly devolved federal states are typically far more sophisticated in addressing these issues than the UK (McCann, Citation2016). However, even in comparison to the other three large unitary OECD states which have been devolving for several decades, namely France, Japan and South Korea, the UK remains well behind the curve in terms of its own self-understanding of the challenges associated with Levelling Up economics. This is largely a result of a longstanding lack of consideration of these issues on the part of much of the UK academic economics profession and UK government institutions (McCann, Citation2023a, Citation2024), as well as a political myopia and short-termist thinking. As such, the scale and effectiveness of the policies introduced to address these issues in the near future may well be insufficient to the challenges faced. Therefore, while the 2022 Levelling Up White Paper initiated a shift in thinking on many fronts, whether in the long-run this sets in train a genuine sea-change in UK policy-making regarding regional economic issues still remains to be seen.