The UK Productivity Puzzle, the English Regions and the Law

(Part 2 of 2)  The regulation of broadcast media considered in the last post to this blog draws attention to the real structural problems in the government and economy of the UK, and in particular of England. But it is merely a symptom of a deeper malaise, a malaise which both was a cause of Brexit and requires urgent remedial treatment if the UK is to survive as a major world economy after its break with the EU. If Parliament used the legislative tools at its disposal, there is no reason why the problem cannot be addressed.

The last posting to this blog considered how the UK broadcast media landscape, and the way in which it is regulated, reveals the serious structural defects in how the UK, and in particular England, are governed (London Calling – The BBC, Channel 4, and the Problem of the English Regions).

This, however, is not unique to broadcasting. It is merely symptomatic of a much deeper problem which now has significant implications for the economic as well as political and constitutional health of the nation.

It also entirely capable of being addressed, if Parliament used the legislative powers that are available to it, and that already have their template – however inadequately it has been designed and is currently enforced – under the Communications Act 2003.

The UK ‘Productivity Puzzle’

Economists rarely seem to agree about much. But one fact so well-substantiated that no economist disputes it is that the UK has a productivity problem. Following the financial crisis in 2008, productivity collapsed. But when the immediate crisis was over, instead of recovering to its pre-crisis levels of growth as expected, productivity flatlined.

The Productivity Problem
The UK productivity problem in a single chart. The long-term ‘cost’ of the financial crisis, in terms of the difference between the pre-crisis trend of growth in Gross Value Added (GVA) and the current GVA data is now approximately 20%. These data are accurate as at July 2018.

No directly comparable economy – France, Germany, the Eurozone as a whole, the USA – has experienced an equivalent long-term reaction to the crisis. The productivity problem is a distinctively British affair.

At this point, the economic consensus dissolves and normality reasserts itself. The causes of the problem are said to be unexplained, a ‘productivity puzzle’, and have attracted a plethora of theories, none of which yet attracts general support among economists.

The Two Nations

However, even to frame the issue in these terms is to disguise a significant reality. The UK is in fact two economies. There is London, and its south-eastern hinterland. And then there is (almost) everywhere else. Central London is one of the most productive places on earth. But many of the UK’s regions outside of London have levels of productivity which do not even reach the EU average.

These data are of more than academic interest. They reflect the economy as lived and experienced by the people of the UK on a day-to-day basis. As summarised by the recent report of the IPPR Commission on Economic Justice –

Median incomes in the North West, North East, West Midlands, Wales and the South East are now more than 30 per cent lower than in London and the South East…In London, the UK has the richest region in northern Europe, yet the stark fact is that we also have six of the ten poorest regions, making the UK the continent’s most geographically unbalanced economy.

(IPPR, Prosperity and Justice: A Plan for the New Economy, September 2018, pp. 18-19)

In England, these disparities have been exacerbated by the UK government’s policy of imposing the severest austerity cuts on an already overstretched and under-powered tier of local government. Reductions in central government grant funding to local authorities fall disproportionately on those areas (the poorest) which are least able to raise revenue from alternative sources. Without the shield provided by the devolved administrations in Scotland, Wales and Northern Ireland, councils in England have had little choice but to pass on those reductions in the form of cuts to services.

In consequence, as Gray and Barford have shown in the Cambridge Journal of Regions, Economy and Society (The depth of the cuts: the uneven geography of local government austerity, October 2018), all of the 46 councils which have now cut their spending by 30% or more are in England, many of them in what were already the most deprived parts of the country, the resultant loss of services falling most heavily on their poorest residents.

The effect, as they accurately summarise it, is that –

Austerity has actively reshaped the relationship between central and local government in Britain, shrinking the capacity of the local state, increasing inequality between local governments, and intensifying territorial injustice.

Territorial Injustice, Trump, Brexit

The big picture is not hard to discern. Successive waves of post-War de-industrialisation, culminating in the Thatcherite shock treatment of the early-1980s, destroyed much of the industrial base on which the Midlands and North of England (together with Wales, parts of Scotland and Northern Ireland) had based their wealth. At around the same time, the shift to a service sector economy and incipient globalisation were disproportionately benefiting London and the south-east.

Hence, since 1991, two million jobs have been added to the economy of London, while even Manchester (a successful city by the standards of northern England) maintains only about the same number of jobs as it had at the beginning of the Twentieth Century (BBC News: The UK towns and cities worse off than 100 years ago).

As these twin UK economies began their radical divergence, the welfare benefits system (essentially a fiscal transfer from London to the regions) was used by governments of both parties to mask the worst of the growing inequality. But it was never a solution, just a sticking plaster over a wound. And the wound, unsurprisingly, has proven too deep to heal itself. Now that austerity policies have begun to tear at the benefits system and leave it seriously frayed, the underlying damage can no longer be disguised.

To these problems, the UK’s outmoded system of over-centralised government not only has no answer, but is itself a contributory factor, aggregating economic activity in the place where political power also aggregates, and in the process exacerbating rather than addressing all the existing territorial injustices.

As I wrote shortly after the Brexit referendum (London, the Centralisation of Power, and the Causes of Brexit) it is these facts which created the material pre-conditions for Brexit.

If supporting evidence was needed, the Financial Times subsequent analysis of the data demonstrated the unmistakeable correlation between stagnant regional economies and votes to leave the EU (London economy grows at twice national rate).

The upshot is that, in an important causal sense, England voted for independence from the EU because London had already attained its independence from the rest of England. But there is no enthusiasm within the media for exploring causation at any level beyond the superficial, so these realities remain largely under-reported.

There are no direct parallels for the UK’s experience in this area, but an indirect analogy presents itself in the USA, specifically in the growing economic and cultural dislocation between the rustbelt towns of the American mid-west and the country’s thriving coastal cities. In both nations the media, being heavily concentrated in the centres of power and wealth (London, the East and West Coasts), adopts a narrative reflecting its privilege.

Accordingly, while no end of ink is spilled over the unusually florid symptoms of the disease (Brexit, Trump) – and indeed over the supposed motivations, ignorance or moral responsibility of those who voted for these outcomes – almost nothing gets said about the disease itself, its root causes, or the motivations, ignorance and moral responsibility of those who have created and perpetuated it.

By this means, the economic winners in a world of globalisation pour scorn on the losers, and suppose this to be an expression of their virtue.

Productivity and Investment

While there are some genuinely complex and puzzling features of the UK’s productivity problem, there is no mystery at all about its principal cause, which lies in the stark and growing divergence between its two economies.

For years, the economy outside London and the south-east has suffered from sustained and serious under-investment. This is made possible by a centralised political system in which all major resource allocation decisions are made in London. Although softened to some extent by devolution outside of England, there has been no such mitigation for the English regions.

The low productivity widely suffered by those regions is the inevitable outworking of this process, and by this point has become self-perpetuating. Following the financial crisis it became clear, if it had not been before, that (outside of certain small pockets of success) they had lost their ability to bounce back. This is simply what long-term under-investment does for an economy.

Philip McCann, Professor of Urban and Regional Economics at Sheffield University, who has carried out a superb study of the available data, puts it this way –

The weak long run productivity performance of the UK is largely a result of the fact that productivity benefits do not spread across the country but remain largely localised in the south generating large interregional inequalities. Meanwhile in economic terms the highly centralised and top-down UK governance system is really only appropriate for governing a country which is relatively homogenous internally, which the UK clearly is not.

(Philip McCann, The UK Regional-National Economic Problem, Routledge, 2016)

In spite of the comprehensive data supporting this view, and indeed its very obviousness to anyone familiar with the facts on the ground, it is persistently under-emphasised in most economic explanations of the so-called ‘puzzle’.

More remarkably, even supposedly sympathetic observers who recognise the issue refer to it as if the problem lay with the regions themselves. Witness the Chief Executive of the (London-based) think-tank the Centre for Cities, speaking to The Guardian –

Productivity is not a problem in the greater south-east, but it is a major issue in cities elsewhere in the country. In particular, Britain’s major cities should be leading the national economy, but instead they are causing it to lag behind that of other countries. Unless we get these places to punch at their weight, the national economy will continue to be hamstrung.

(Poor productivity outside south-east England hurting UK economy)

This, in a purportedly progressive statement encouraging the government to invest more in infrastructure outside the south-east, positively insists on its metrocentric perspective, the metropolitan subtext not so much sub-textual as emphasised with a highlighter.

A Case Study – Funding for Arts and Culture

In reality, under-investment in the regions is the result of decisions made by the centre, and the consequences that flow are economically inevitable. The regions experience the effects, but they have little to do with the cause.

Examples of a pronounced London bias in investment decisions taken by government bodies with a UK or England-wide remit could be multiplied. But one will suffice, and since this piece begins with broadcast media, a good example is the treatment of public funding in the closely related area of arts and culture.

As is widely recognised, the development of ‘cultural capital’ in the form of a wide range of arts and cultural institutions is hugely important to any area. Not only is it crucial to a place’s sense of itself – to developing and representing its shared narrative, unique voice and sense of cultural cohesion – but in a modern economy it has become a key element of the ‘offering’ that a successful town or city is expected to present to the world. A city with a thriving and diverse cultural economy not only reaps the direct financial benefit of that activity, but becomes a much more attractive place for international businesses to invest. In a globalised and competitive world, the arts matter both for their own sake and because they attract to a place the human and financial capital needed for it to provide jobs and life opportunities to its citizens.

In 2014, three experienced arts executives and teachers – Christopher Gordon, David Powell and Peter Stark – produced a report, Rebalancing Our Cultural Capital, examining the distribution of arts and cultural funding in England. Remarkably, they did so at their own expense, because none of the institutions charged with granting or scrutinising this funding had thought it necessary to compile the available data or draw any conclusions from them.

The report is a commendable piece of work. In it, Gordon, Powell and Stark show how most public arts funding in England is distributed by the Department for Digital, Culture, Media and Sport (DCMS) – which allocates Treasury (i.e. taxpayer) money, either directly or via various arms-length bodies – or by Arts Council England (ACE), which has a role in distributing both Treasury and National Lottery money.

In the latest financial year for which figures were available (2012-13), the allocation of this funding  is shown in the following graphic.

GPS Funding Chart
The aggregated DCMS and ACE funding  awarded to London and the rest of England – both in absolute terms (the pie chart) and per head of population (the bar chart) from the report Rebalancing Our Cultural Capital (Gordon, Powell and Stark, 2014).

In short, public funding for arts and culture comfortably exceeded £1 billion in 2012-13. London-based institutions were allocated (in absolute terms) almost twice the amount made available to their equivalents in the whole of the rest of England. Or to put this in terms of per capita funding, London received over ten times the sum that was allocated to all other places in England.

With these advantages, as the report goes on to show, the London institutions were able to leverage more private sector funding than those elsewhere in England, London’s total for private philanthropic capital (from individuals, companies and trusts) outweighing that of the rest of the country by a ratio of 4:1.

Even assuming, as the authors of the report do, that London will always take more than a strictly proportionate share of arts funding because of the ‘national’ status of many of its cultural institutions, the extent of this funding bias is still extreme.

In addition, its effect is compounded because funding allocated centrally – i.e. by London-based institutions to (predominantly) London-based institutions – constituted in 2014 75% of all public funding for the arts in England, a proportion that has risen even further since then as the balance of funding (which comes from local government) has been systematically diminished in the light of the austerity measures already mentioned. In England, restricted local funds do not come close to making good the distortions caused by the metrocentric bias in the distribution of central funding.

By contrast, in other major European countries, the percentage of arts funding allocated by the centre is much lower (for instance Italy 36%, Spain 15%, Germany 13%) leading to considerably reduced regional disparities.

Postscript – Arts Funding

The Rebalancing our Cultural Capital report concluded with some, in reality very modest, proposals for sharing of a little of London’s largesse with the rest of the country. These in turn attracted the attention of the House of Commons Select Committee for Culture, Media and Sport (as it was then) in its 2014 report into the Work of Arts Council England.

As part of its defensive action, ACE fielded its Chairman, Sir Peter Bazalgette – a figure of impeccably metropolitan lineage and a former television executive, whose most notable contribution to national culture, while chairman of Endemol UK, was to sell Big Brother to Channel 4. In his oral evidence to the Committee, Bazalgette sought to undermine the data on which Gordon, Powell and Stark’s work had been based, while smoothly assuring MPs that a rebalancing was already taking place and promising that it would continue.

In spite of these assurances, the Committee concluded that ‘London has long received a disproportionate share of arts funding‘, that current funding arrangements were ‘unfair‘, that ACE needed to address the problem with ‘greater urgency‘, and that adopting the Gordon, Powell and Stark recommendations ‘would do much to redress the imbalance in funding to benefit England as a whole‘.

Two years later, the Committee revisited the issue as part of its 2016 report Countries of Culture: Funding and support for the arts outside London. It found that nothing much had changed. By the time its report was published, Bazalgette had already moved on, to take up the post of Executive Chairman at ITV.


The landscape of public funding for the arts is no more unique than that of broadcast media. Both are symptoms of a deep underlying problem with the governance of the UK – and more particularly of England – by means of a system that is no longer fit for purpose given the country’s twin-track economies, and which merely reinforces and exacerbates that national economic fault line.

The productivity problem exists primarily because long-term public under-investment in the regions outside of London is bearing the fruit that under-investment always bears. It will not be addressed unless there is a sustained and serious rebalancing of the economy, and that in turn requires a fundamental change in the way England is governed.

Economic Rebalancing and the Law

Surveying the current political scene, there are very few reasons to be hopeful that this will happen. But aside from political neglect by all major parties, there is no reason at all why it should not.

If the country wishes to meet the challenges of Brexit, London and the rest of England urgently need to press the reset button on their increasingly unbalanced relationship. And doing this is actually just not all that complicated. It involves only two basic steps.

First, London is an international metropolis, one of a very small number of places that can genuinely call itself a global city. This ought to be a major advantage for the UK. It should be supported and sustained, and nothing should be done to compromise it.

Second, however, London can happily maintain its status as a world city without at the same time needing to be the centre of every aspect of UK or English national life. New York is no less a world city because the federal government of the USA is in Washington DC. London does not need to exist in an essentially imperial-colonial relationship with the regions of England in order to thrive on the international stage.

Consequently, where national institutions or public activities do not need to be located in London, they should not be. Where political and economic decisions can be made in the regions, they should be. The bias towards the capital in national resource allocation decisions should end and public resources should be allocated fairly. Regions suffering from the consequences of chronic under-investment need compensatory programmes of works – an English New Deal.

In passing, much of this might well benefit London itself, a city which, viewed from the perspective of its ordinary citizens, often appears to be groaning under the weight of its own cupidity. More importantly, if allocated a fair share in the distribution of political power, national institutions and investment, the whole of England outside the south-east would at last be in a position to close the productivity gap and play its part as the modern, successful northern European economy that it should be.

Unless and until this happens there can be no resolution of the UK’s productivity problem. In an environment shaped by Brexit, the nation will remain dangerously over-exposed to the economic success or failure of a single city. Territorial inequalities will continue to generate political trouble, of which Brexit will not be the last word.

The Law

For all the inadequacies of its design, execution and enforcement, the policy adopted by Parliament at sections 286 – 288 of the Communications Act 2003, and explored in detail the previous post (London Calling – The BBC, Channel 4, and the Problem of the English Regions) both points the way to a solution and offers a basic template for how it can be delivered.

The Act provides a legislative mechanism under which both state-owned bodies (the BBC, Channel 4) and commercial entities in need of government permissions to carry on their business (ITV, Channel 5) are required to ensure that their commercial activities are not centred only in one part of the country but are distributed appropriately across the UK.

There is nothing about a policy of this nature which is inherently limited to the context of public service broadcasting. It could readily be adapted for application across a wide range of other key sectors of the economy.

Similarly, the legislative solution to the location of Channel 4 which was mooted by the government could, rather than the half-hearted political compromise actually delivered, easily have been achieved if (as proposed) a small amount of political capital had been spent on taking it through Parliament. And again there is nothing unique to Channel 4 as an entity. An equivalent approach could be taken to any national institution based where it does not need to be, in an already over-heated south-eastern corner of England.

The question that needs to be asked why Parliament has persistently declined over many years to use the legislative tools at its disposal to achieve a thoroughgoing distribution of national institutions and economic activity across a range of sectors, for the benefit of the whole of the country – not least in circumstances in which the Communications Act, if it does nothing else, serves as adequate proof of the legal concept.

If the UK really wants to get to grips with a productivity problem that is plainly not going to resolve itself, significant legislative intervention is what will be needed.

For this reason, whatever is wrong with the detail, enforcement or practical application of the Communications Act policy, there is nothing at all wrong with its basic conception. It is a model that can and should be refined, improved and more widely-utilised. Change the law, change the country.