September 27, 2016

Remind Us - What Was the Northern Powerhouse?

In the heady days before the end of June 2016 a former Chancellor of the Exchequer by the name of George Osborne was seemingly given a free hand to pursue his dream of a 'Northern Powerhouse'. Quite what this term was meant to represent in practice was somewhat ephemeral, but it certainly included transport links and attracting significant overseas investment

One thing was certain - plans for investment in Manchester and the other core cities in the region was at the very heart of the plan. Manchester, relative to much of the North at least, had already attracted some significant investment and is at the geographical fulcrum of the heavily populated parts of the North (situated roughly at the centre of a cluster of the other major cities - Leeds, Liverpool and Sheffield) and had cultivated an enviable pot of political, educational and cultural capital, enabling it to be marketable both at home and overseas. 

The economic plan would be supported by a devolution agenda with the election of mayors for city regions, starting in the Manchester City Region.  The city regions would take responsibility for the allocation and spending of certain public funds, allowing a departure from the centralised spending and investment controlled at Whitehall which is almost unequalled in the developed world.  Although greater accountability for fiscal control at a regional level would clearly be a double edged sword,  the theory is that allocation of funds at a local level would permit targeted spending and investment, avoiding inefficiency and waste perceived where decisions are made in Whitehall.   Control over spending at a local level would encourage entrepreneurial initiatives to attract private sector investment.

Investment was to be attracted in a number of areas, but all forms of the plan place a particular emphasis in rail projects to improve connectivity.  Other important issues would be digital communications (perhaps just as important as physical connections in the modern age) and ensuring that there would be enough energy available to support growth.   

Perhaps most importantly the intention was to generate co-operation between local authorities to encourage investment decisions which would benefit entire city regions and, ultimately perhaps, the North as a whole.  The first body set up to take a pan-northern view being Transport for the North, which is due to become incorporated by statute in 2017.  Whether sufficient coherence at a city region level in the key settlements, let alone across the North as a whole, is possible remains to be seen.

Things were looking up for some of those people of the North.

The Northern Powerhouse Independent Economic Review – June 2016

When historians look back at this time, it may be that the high water mark for the economic plan behind the Northern Powerhouse occurred in June 2016 with the publication of a report authored by SQW Ltd and Cambridge Econometrics entitled "The Northern Powerhouse Independent Economic Review".  This had been commissioned by Transport for the North and, although clearly having a focus on transport, provided a detailed assessment of the difficulties the North of England had encountered over the last few decades which had led to a substantial 'performance gap' when compared to the rest of England.  The report goes on to identify the comparative advantages which benefited the North and the framework of a plan to close the performance gap.

The report is well worth reading but it can be summarised as follows:

  • The North has a persistent 'performance gap', with its average GVA (Gross Value Added) per capita averaging about 25% below the rest of England, and 10 to 15% when London is removed.  Although these figures would be significantly skewed by the presence of the genuine, extant powerhouse which is the South East in these figures, it is worth noting that the anticipated trend is for this performance gap between the North and the rest to widen rather than to close if a 'business as usual' approach to growth was to continue in the North. 
  • When the North is compared with industrial regions in Europe the North fares even worse, with a performance gap of 30-35% when compared with the Rhine Ruhr region in Germany, the Randstad region of the Netherlands and the Lombardy region of Northern Italy.
  • This 'performance gap' is very significant for the UK economy as a whole given that the North of England is home to 16 million people – nearly one quarter of the UK population.
  • Relatively low productivity is responsible for a large proportion of the 'performance gap' (accounting for around 17 percentage points) with the employment rate accounting for around 5 percentage points.
  • The factors which are driving low productivity are numerous but it is clear that poor connectivity and transport, and a corresponding lack of 'agglomeration' between the major urban areas of the North, was a significant culprit. 
  • Other issues contributing to the 'productivity gap' relate to relative shortfalls in terms of technology, investment, enterprise and skills.
  • Having said this the North has a comparative advantage in four key 'Prime' areas, namely in Advanced Manufacturing, Health Innovation, Energy and Digital.  These are supported by three 'Enabling' capabilities, namely Financial and Professional Services, Logistics and Education (primarily Higher Education).  These areas together currently account for around 30% of all jobs in the North and just over 35% of GVA for the region and, together with the quality of life in the North (read - the low cost of housing), combine to create a distinctive and coherent offering as a platform for growth.
  • The report envisaged several scenarios for future growth in the North, focussing on the development of the Prime and Enabling capabilities described above with an associated effect on suppliers and local spending.  To achieve this the report stated that "transformational improvements to the North's transport connectivity are critical, both between and within cities" along with "substantial improvements in the skills base and graduate retention and attraction, innovation performance, and inward investment [being] necessary across the North."
  • The anticipated outcome of this transformational approach to the fortunes of the North would be great indeed.  An HM Treasury analysis in 2014 suggested a difference in output of some £37 billion in real terms by 2030 when compared to 'Business as Usual' (i.e. growth without interference).  The SQW report anticipated that the effects of this 'transformed' future (again when compared with 'Business as Usual') would lead to an additional increase of 15% to the GVA for the region (around £97 billion in today's prices), an additional increase in productivity of 4% and 850,000 additional jobs by 2050.
  • Although the report does not deal with the effect on the investment itself upon the local economy, spending upon infrastructure and related services is likely to be a significant boon to the industries involved in delivering the projects and the surrounding economies generally, particularly during the planning and construction phases of those projects.

 How are we Going to Get there? - Agglomeration and Connectivity

The report looks hard at the beneficial effects of agglomeration and connectivity, noting that a lack of agglomeration between the of medium sized (but physically close) cities means that the North is failing to capture its economic potential.  Evidence from the UK, US, Europe and Japan implies that taking steps which effectively double a city's 'agglomeration' is associated with an increase in productivity in the range of 3-8% generally and up to 20-30% in the service sector.  The individual cities of the North are said to be too small to take advantage of the positive effects associated with the concentration of economic activities, and its population is spread out across a number of cities and city areas.  To maximise agglomeration would allow "the North to boost its economic performance more than if each part of the North acted independently".

The report is clear; this agglomeration benefit is not yet felt because "the North is fragmented by poor transport links between key settlements".  The report states unequivocally that "it is no longer the case that the North has spare transport capacity to accommodate growth".  In reality the North "has some of the most crowded rail services in the country, rail journey times are slow (and correlated with low levels of longer-distance commuting), and the road network is also becoming congested increasingly."  The report concludes on this issue that this lack of capacity "is creating a real constraint on the ability of the North to respond to changes in the global market and enable the greatest possible rate of growth, especially in the North's 'Prime' and Enabling' capabilities."

SQW therefore made several recommendations for harnessing this 'agglomeration effect', including targeted investment in new road infrastructure, enhanced public transport connectivity within city regions/towns, enhanced city-centre to city-centre links, along with global connectivity (ports and airports) to allow people to meet customers, suppliers and collaborators, and for the import and export of goods.  This investment would have to be long term with the effects building up over some 20 to 25 years.

This all sounds great – when is it going to happen?

June 2016 was not only notable for the publication of the SQW report.  Readers may also recall that on 23 June 2016 the EU in/out referendum took place in the UK. If you search carefully you may be able to find articles discussing the outcome and effect of this event, which we will not deal with here. The political classes and intelligent media poured much scorn on the voting patterns in the North, whom Mr Osborne was said to be doing his best to help, for casting their votes against the interests of the nation. One of the many easy dichotomies formed in public sentiment was that, in England at least, there was a split between metropolitan and sophisticated London voting remain and the rest, particularly those in the North, who voted to leave the EU.

The reality is not so clear. Within the North, Manchester voted clearly to remain (with a 60/40 split), as did neighbouring Stockport and Trafford.  Leeds also voted to remain (along with its wealthy hinterlands of York and Harrogate), Liverpool (along with Sefton and the Wirral) and Newcastle. It may be the case that these were the city regions for whom, to a greater or lesser degree, the pre - June 2016 settlement was working, with further optimism for the future being generated by the promise of additional investment and attention.  The relationship of these city regions to the areas that surround them (the smaller towns and less urban areas often having been deeply affected by de-industrialisation) is perhaps a microcosm of the relationship between London and the rest of England.  In one sense the outcome of the vote in individual areas can be seen as a litmus test for the level of inclusion in the modern democratic and economic system in the UK.

Reading between the lines of the SQW report, the Northern Powerhouse as envisaged at the time may well have been a cause for optimism in those city regions, perhaps at the expense of the balance of the North.  Although the objective of the report was clearly designed to cover the whole of the North, the majority of the solutions (the development of the high value 'Prime' and 'Enabling' capacities, the proposals for the agglomeration of the city regions, higher education etc) will be based around the cities/their regions, rather than the smaller towns and less urban areas.

What is less clear was the benefit, if any, to those outside those city regions.  For instance, the report ominously acknowledges that the project "would also imply a substantial restructuring of the North's economy" and, furthermore, that "as skills, productivity, and average earnings increased across the North as a whole, firms engaged in lower value added activities that are also tradeable (notably in manufacturing) would come under increasing pressure to change their product ranges and processes to be able to compete in a higher labour-cost environment." 

As the report further acknowledges "the metropolitan districts of Leeds, Liverpool, Manchester, Newcastle upon Tyne and Sheffield together account for some 20 – 25% of the North's GVA and employment in services" and would therefore benefit most from the Northern Powerhouse project.  This raises the issues – is this just the same 20 to 25% of the population of the North who largely voted to remain within the EU, i.e. those who passed the litmus test as to the level of inclusion in the pre-June 2016 economic and democratic settlement?  If so, what of the other 75%?

So what to do?

It seems that there is a clear tension between the steps which might make economic sense for the North (as set out in the SQW report) and redressing the political and social issues in the North disclosed to a degree by the outcome of the referendum.  In addition, the Northern Powerhouse was lucky in that it had a powerful proponent in the person of George Osborne.  There was often a sense during that time that any investment directed at the North (and Manchester in particular) would leave other less prosperous regions, such as the South West, behind.

As reported in the Financial Times on the 5 August 2016, since taking office Theresa May has refused to mention the Northern Powerhouse and talked instead of spreading wealth beyond “just one or two cities”, with the apparent view that the plan is too "Manchester-centric".  Time will tell whether the Northern Powerhouse project will come to fruition, in whole or in part.  Of course the infrastructure plan is just facet of the wider steps needed to make the project work.  For the project to get off the ground a substantial level of political will and co-operation is necessary, including at all levels of central and regional government, between the local authorities of the North and on the part of the private sector, both domestic and overseas.  That requires the alignment of a number of potentially obstinate stars.

However, it cannot be in the interests of the nation as a whole for the gap between the North and the rest of England, and the developed world beyond, to continue to widen.