How to get inclusive economic growth

6 May 16
A new inquiry by the RSA is to consider how to use devolution to help create more prosperous communities across the country, not just in cities.

Data, statistics and theories underpinning the ‘dismal science’ of economics are often highly conceptual and occasionally pretty dry. But speaking at the launch of the OECD’s Inclusive Growth in Cities campaign, New York mayor Bill de Blasio last month reminded the room of global mayors and senior policy makers that inclusive economic growth is “not an abstract issue, but one with a real human price”. In matters of public finance, it is nowhere more vital to remind ourselves that underneath the numbers are a myriad of human stories.

So it was at the launch of the RSA’s Inclusive Growth Commission, chaired by Stephanie Flanders, former economics editor of the BBC, that the debate started with the importance of data in our inquiry on how we put people at the heart of productivity and prosperity. Devolution deals have created a platform for enhancing local growth, but the challenge now is to ensure as many people as possible are able to contribute to and benefit from that growth. Largely this will be by tackling persistent inequalities that drag down economic performance and isolate families and communities.

Framing the discussion, Jim O’Neill, Chair of our previous City Growth Commission, upon which this new work builds, and now Commercial Secretary to the Treasury, argued that inequality in the UK has actually broadly stabilised over the last decade, if not declined slightly. As such, he warned, the new commission will have to be mindful that it does not conflate ‘emotional’ debate with the ‘objective facts’.

While Lord O’Neill’s data for the last decade is correct, a longer time series analysis suggests that inequality has been increasing since the 1980s (with a few exceptions) and this is particularly the case when looking at wealth inequality, which is rising fast. Between 2012 and 2014, the wealthiest 20% of households had 117 times more assets than the poorest 20% of households. Two years previously, the same comparison of wealth inequality by the Office of National Statistics showed the gap at 97 times more wealth in the top 20% of households compared with the bottom 20%.

Both of these short and long term trends suggest a deeper structural problem is in play, one that – despite calls for rebalancing the economy geographically and sectorally – has led to a persistent gulf between productivity rates in the North and South of England (skewed markedly by London and the South East), as well as deeply entrenched and entwined social challenges that beset our cities and towns across the country.

Investment in the Northern Powerhouse is designed to address the first of these problems, connecting more closely the labour, capital and product markets of our great northern cities. Unified by an increasingly strong brand, which has earned currency as far as China, with new facilitating institutions (e.g. Transport for the North) and investment (e.g. High Speed 3, the Sir Henry Royce Institute), the Northern Powerhouse is a story that is only just beginning. It will take decades for the results to feed into the economic data.

However, the long term challenges of deindustrialisation are not so simply solved, and government’s focus on transport and infrastructure spending will only tackle one part of the underlying structural issues. Persistent economic inactivity, unemployment, low level skills and a concentration of low value added and low wage sector industries are the product of a complex web of wicked problems.

While the logic of agglomeration, connectivity and productivity – which I advocated as secretary of the City Growth Commission – is sound, a more holistic view is needed to achieve inclusive growth and widespread prosperity. Building on the City Growth Commission, the new commission will consider how place-based economic and social policy can be more closely integrated. It will consider what models might be available to allow all places – not just the major urban areas – to benefit from the opportunities of devolved policy and finance, as well as manage the risks inherent and specific to their geographies.

As Stephanie Flanders, incoming commission chair argued, we do not want to “develop approaches which will inadvertently increase the gaps between these regions, or between the centre where they are just outside, or on the fringes.” It will also consider how the wiring of central government will need to develop to facilitate a truly place-based allocation of public resources, including how social infrastructure might be accounted for as investment rather than supposedly unproductive forms of consumption.

Looking ahead to the next Spending Review, it is time to pay significant attention to what a place-based allocation of public finance would look like. The Kerslake Review of the Treasury, being undertaken for the Labour party, will start to ask some of the relevant questions. The RSA Inclusive Growth Commission will look at the detail, offering practical, sometimes technical, solutions to ensure we go beyond current thinking, which as Stephanie Flanders concluded, means – despite recent progress in establishing single, city-based investment funds – “we are still hard-wired in this country to think centrally, and in terms of pots instead of places”.

The financial crisis has squeezed the fiscal capacity of nation states to respond to inequalities in traditional ways by – as the OECD observes – taking a “traditional discussion of growth and equality” which presents “decision makers with a binary choice: either we should promote growth or we should prioritise redistribution; either we should make labour markets more flexible or we should make them fairer; either we should promote welfare spending or we should keep taxes low to promote economic activity.”

Instead, a new model is needed, one in which the norms, institutions and assumptions of economic policy and public finance are designed to create, a priori, inclusive, dynamic and resilient local economies. The next waves of devolution presents an ideal opportunity to understand the human stories that underlie Gini-coefficients and other national or regional headline statistics. To erase emotion from economics is to forget a fundamental tenet of local economic development; people need to be at the heart of any push for productivity and prosperity.

  • Charlotte Alldritt
    Charlotte Alldritt
    director of public services and communities, RSA and director of the RSA Inclusive Growth Commission

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