Despite the Johnson government's manifesto commitment to level up, a cost of living crisis threatens to intensify inequalities across the UK, writes Andrew Pendleton.
It’s two years since the Johnson government swept to power with core manifesto commitments that included the compelling but amorphous promise to level up. Yet as the UK emerges from the pandemic, a cost of living crisis threatens to intensify inequalities, including those that exist between different parts of the UK.
Prime Minister Johnson has talked about ‘higher wages, and a higher living wage, and higher productivity’ as part of the agenda, but beyond the notion that the process of levelling up includes a focus on ‘left behind’ Northern and Midland post-industrial towns, the definition of the problem has remained elusive. But the looming crisis in living costs points towards a clearer focus, which places the welfare of households at the heart of the levelling up agenda.
It would be easy to argue that the places in the UK most in need of levelling up are those with low productivity and Gross Value Added (GVA) – surrounded by weak economic structures – as well as poor social and physical infrastructure. While many places that have these characteristics should indeed be the focus of efforts to rebalance the UK economy, it does not mean that policy should therefore necessarily have as its central aim, as is often assumed, increasing aggregate economic strength as measured by GVA.
One more fundamental aspect that has not received much attention in the debate – but should be at the heart of the matter, especially in the current context – is the stark difference that exists between household incomes in wealthier and poorer places in England. There are a variety of ways to measure this, but the Office for National Statistics’ (ONS)) Gross Disposable Household Income (GDHI) provides good insight.
There are two, linked, principal reasons for centring localised measures of household income in preference to the aggregate strength of a local economy in the levelling-up policy debate.
The first is that value trickled in from the top, for instance by drawing-in big firms, is highly portable, whereas household income is less so. While GVA is earned in one location, it may accrue as household income to a wealthy suburb or to a parent company in another part of the UK or to an owner of capital who shifts their earnings to another, perhaps lower tax, jurisdiction. To level up, we need value that sticks to the inside of places rather than sliding away. Even a cursory glance at GDHI per capita – which is measured after housing costs, taxes and benefits – shows not only disparity but chronically low average levels of disposable income in northern and midland local authority areas, compared to places in the South East.
Figure 1: Gross Disposable Household Income per capita by Local Authority area. Blue columns represent local authority areas in the South East (London and the South East), orange columns represent local authority areas in the North and Midlands (East Midlands, West Midlands, North East, North West, and Yorkshire and Humberside), light grey columns represent the remaining regions and devolved nations.
In Figure 1, it’s important to note that while the higher household incomes are clearly skewed in favour of London and the South East, places with some of the lowest (sub £16,000 per annum) average disposable incomes include large cities such as Manchester, Liverpool and Birmingham and second-tier cities such as Nottingham. In other words, it is not just ‘red wall’ former industrial towns. This means that a very significant number of households are living on insufficient incomes, something we already knew in aggregate and that has worsened since the pandemic.
The second reason is that GVA per capita or per hour worked and average household incomes can diverge. As the OECD observes ‘Many factors can contribute to such a divergence; for instance, changes in the government’s policies related to taxes or social benefits, or in how companies allocate their earnings between dividends, retained earnings and compensation of employees.’ So it does not follow – at least not in the short- to medium-run – that efforts to boost growth in GVA will benefit all or even most households in a local area.
Figure 2: GVA per hour worked plotted against GDHI per capita (with local authority deprivation rank in brackets). There is a correlation between higher per capita household income and GVA per hour worked, but it is not strong and there are many groups of outliers (courtesy of the New Economics Foundation/Emmet Kiberd).
For instance, as Figure 2 shows, across English local authorities, places with very low household incomes do not always have very low GVA. It would be easy to dismiss these places with lower household income and higher GVA as outliers. But again they include the core cities of Manchester, Birmingham and Liverpool as well as towns with strong, productive industries, such as Sunderland and Coventry. A very large number of people – many of them with disposable household incomes significantly below the national average – live in these places.
The apparent correlation between rising GVA and higher levels of household income in Figure 2 is not compelling and it is probable that places that started wealthy have simply become wealthier and this process has strengthened their economies. Conversely, low average household incomes are a very accurate predictor of deprivation – in Figure 2 the deprivation rank of the labelled local authorities is in brackets, with a lower score being more deprived – whereas some places with around average GVA are nevertheless highly deprived.
Average disposable household incomes, though shockingly low across large swathes of England, are nevertheless still quite aggregated across relatively large areas. The ONS also provides a modelled, more detailed neighbourhood-level (Medium Super Output Area – MSOA) dataset on household income.
Figure 3: Estimates of average household income (before and after housing costs) in MSOAs in Manchester (blue) and Blackpool (orange) reveal that, aside from a small number of high-income neighbourhoods in Manchester, there is very little difference between the two places.
This dataset reveals an interesting picture of places such as Manchester (which I would argue has the highest levelling-up need in England). Figure 3 compares Manchester with Blackpool – a town often closely associated with the levelling up agenda and the most deprived local authority area in England – and shows that aside from a small number of neighbourhoods in which household income is much higher, in most there is little difference between the two.
This hints at the problems of a local economic development model concentrated on ‘agglomeration’: growth of GVA in the bigger cities. Over time, little has changed, despite the efforts of many areas to boost GVA and so to miss the issue of chronically low household incomes in the levelling up policy debate would be a grave error. Household incomes are a better indicator of the needs of people who live in a place and, if levelling up is truly about people and places, a more accurate pointer to policy.
For one thing, in political terms, the way in which people are most likely to feel more levelled up – especially in the current economic climate – is if they see their household income go up. For another, many people’s incomes are chronically low after decades of the model that has seen investment trickled down from the top. It is time to prioritise trickle up economics in which government policy is focussed on boosting people’s household incomes.
Why not let poorer households become the drivers of regeneration by improving averages from the bottom upwards. Not only will this help ease the current crisis in living standards, but it could be a cornerstone of local improvements as investors are drawn to higher levels of money and demand in local economies. As Alfie Stirling of the New Economics Foundation argued, boosting the incomes of those at the lower end of the distribution is a fillip to consumption because poorer households are either under-consuming or borrowing at high cost.
Obviously, levelling up will involve a package of policies, which will include investment in key infrastructure, especially that which can help achieve the government’s other manifesto ambition of net zero carbon emissions. Some of the town centre improvements envisaged in highly deprived places such as Nottingham or already supported by the government’s towns and levelling up funds are also necessary.
But improving household income in places where even the local authority-wide average is very low should absolutely be at the core of the agenda. This requires a long-term broad-based policy agenda, but quick wins can be achieved by boosting welfare benefits and by freeing up and funding local authority income support trials as well as through bigger increases in the living wage. Of equal importance is the expansion of the ‘social wage’ through more free, collective service provision, especially childcare and public transport, which in effect boosts households’ income available to spend on other things.
None of this is to argue against inward investment in England’s North and Midlands. But unless household income increases are at the centre of the policy agenda, the very high likelihood is that investment trickled down from the top will simply be soaked up and drained away before it reaches any of those whose levelling up need is most acute. That would be poor politics as well as bad economics, especially faced with a cost of living crisis.