Double trouble

22 Apr 10
Never mind a double-dip recession. Many regions and sectors in the UK are already facing a double economic whammy. In the second of their mini-series, Roger Latham and Malcolm Prowle argue that radical action is needed
By Roger Latham and Malcolm Prowle

22 April 2010 

Never mind a double-dip recession. Many regions and sectors in the UK are already facing a double economic whammy. In the second of their mini-series, Roger Latham and Malcolm Prowle argue that radical action is needed

The launch of the party manifestos increased the clamour for answers to the burning question: how will the next ­government get to grips with our £167bn deficit? None of the main parties has offered a coherent plan for filling the financial black hole without destroying public services and increasing un­­employment, poverty and health inequalities.

This is clearly a serious omission, but simply offering a list of budget cuts and potential revenue streams is not the answer either. In the end, the deficit will be pared down only if we can grow our economy, provide employment and generate additional tax revenues. As ever, ‘it’s the economy, stupid’. However, there are serious problems with the UK economy, which make it hard to be optimistic for the future.

Most obviously, there are huge imbalances between the regional economies of London and the Southeast, and the rest of the UK (see figure 1). These existed for many years before the large growth in the financial services sector, but the situation has worsened in the past 20 years.

In almost no other developed country does the largest city dominate to the extent that London does in the UK. Furthermore, in some countries, such as the US and the Netherlands, the capital is not the largest city and this provides a balancing effect between two centres. It is only in the UK that the capital city dominates both demographically and politically.

London and the Southeast also have disproportionate levels of economic activity, as illustrated by the Gross Value Added of different regions. In turn, this is reflected in gross average earnings, which are much greater in London and the Southeast. Not only does London ­dominate the UK demographically and politically, it is much richer as well.

Allied to this geographical imbalance is a sectoral imbalance in the economy, particularly between the financial services sector and manufacturing.

Between 2000 and 2007 there was large growth in the total gross domestic product of the country (44%) but a significant contraction in the proportion of that GDP from manufacturing. In fact, the absolute contribution from manufacturing barely increased and the bulk of the GDP growth came from the financial and real estate sectors, much of which is concentrated in London and the Southeast.
Furthermore, the imbalance between manufacturing and financial services is worse in the UK than in comparable ­developed countries (see figure 2).

So what are the implications of this double imbalance? First, this variability is an intrinsic weakness in itself for two ­reasons. It impedes recovery when one part of the economy is overheating while ­others are still suffering recession. It also creates vulnerability for public services if all the UK’s eggs are in one basket. In addition:

- wide inequalities in income, wealth, health status, and housing standards create public sector community dependency
- the strength of London and the Southeast leads to other parts of the UK being over-reliant on public sector employment
- pressures on the housing market in the Southeast mean that low-income workers are unable to afford homes and first-time buyers cannot get a foot on the housing ladder
- the overheated housing market in the Southeast leads to inflationary pricing bubbles that eventually burst and cause huge economic damage
- insolvency rates, unemployment levels and the state of household finances between 2008 and 2010 show a skewing of recessionary pain and hardship towards regions other than London and the Southeast.
- manufacturing now comprises just 11% of GDP but provides 50% of exports. The lack of domestic confidence and demand makes export-led growth critical to the recovery. But an under-represented manufacturing sector means the economy might not be able to take full advantage of any upturn in global demand. 

The consequences of these economic imbalances are huge and need urgent attention by policy makers.

Chancellor Alistair Darling’s Budget last month made some limited moves in the right direction, with changes to Stamp Duty aimed at stimulating the first-time buyer end of the housing market. He also used some of the additional revenues gained from the tax on bankers’ bonuses to set up a growth capital fund for small and medium-sized enterprises.

And there were other limited measures to stimulate manufacturing industry and to move civil servants from London.

However, governments have usually been extremely half-hearted in addressing these imbalances, preferring to focus on the overall headline growth of a deregulated economy, rather than aiming for a suitable balance between regions and sectors. The social and financial problems involved have been mitigated by higher levels of public spending under­pinned by the buoyancy of financial services. But the collapse of this sector and the loss of tax revenues mean we face large cuts in public spending. The underlying problems now begin to surface and it becomes imperative that the economic imbalances are addressed.

So what might be done? 
First, there should be much greater decentralisation of public and third sector jobs. In spite of token efforts to transfer jobs out of London, there is still a massive preponderance of governmental and quasi-governmental jobs in the capital. There is no logic to this in this age of modern communications.

This focus on London also stimulates a concentration of jobs in the head offices of third sector organisations, even though accommodation and staffing costs in the capital are much higher than elsewhere. By taking a lead, government will encourage charitable bodies to relocate their head offices out of London as some, such as Oxfam and World Vision, have already done.

Similarly, while the government cannot direct the private sector as to where it locates jobs, it can encourage the private sector to locate jobs (and especially highly skilled ones) to different parts of the country through planning consents and other measures.

There is also a pressing need to focus on the role of manufacturing industry to help produce a resurgence in the sector.  This point has been emphasised for many years by, among others, Sir John Rose, the chief executive of Rolls Royce (one of the few remaining UK examples of world-class manufacturing industry).

Until recently, this view seems to have fallen on deaf years as a consequence of the euphoria about the financial services sector. The chancellor in his Budget and the manifestos of all the political parties now seem to have given some recognition to the importance of this issue.

Implementing these changes will be very difficult in view of the vast number of vested interests that would be threatened. However, the financial crisis should have taught us the dangers of over-­dependency on a single sector and a more balanced economy should lead to a stable, equitable and, ultimately, more ­economically secure society.

Roger Latham is a former chief executive of Nottinghamshire County Council and a visiting fellow at Nottingham Business School. Malcolm Prowle is professor of business performance at Nottingham Business School

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