Reducing the UK’s wide geographic inequalities in incomes and productivity is a government priority. Infrastructure investment can potentially make an important contribution to ‘levelling up’ by reconfiguring activity, but the UK has so far under-invested in infrastructure compared to other countries. Putting new infrastructure in place is a long-term endeavour that will require political consensus and a changed approach to project appraisal.
The UK is one of the most spatially imbalanced countries in Europe and the industrialised world. Spatial differences follow a broad north-south pattern in terms of productivity – a measure of output produced from a given level of inputs – and productivity growth – which is key to sustaining jobs and growth in wages over time. ONS figures show that in 2018 only two out of twelve (NUTS1) regions had above-average levels of productivity: London (with 31.6% above the UK), and the South East (with 9.1% above the UK). Further, the Industrial Strategy Council, reports that over the period 1998-2017, nearly all the places with initial productivity above the UK average, and above-average productivity growth were either in the South East or in the East of Scotland. Most of the places with below-average initial productivity and below-average productivity growth were in the west or north of England.
Figure 1: Output per job by NUTS 1 region, relative to the UK, 2018
Source: Office of National Statistics
Differences in productivity and productivity growth are important enablers of higher living standards. In the long run, those places that experience faster sustained productivity growth will be more prosperous. Notwithstanding the sometimes stark within-region disparities, high productivity places such as the South East will tend to attract more investment, have higher rates of employment, and engage in more high-value activities. In contrast, relatively low productivity places will have a less skilled workforce with poorer prospects for rises in salaries and profits. These dynamics tend to create virtuous and vicious circles making it hard to change the trajectory of dispersion.
To that end, the Centre for Cities shows that in March 2020, before the UK’s first lockdown, the top 10 largest cities and towns for Universal Credit or Jobseeker’s Allowance claimant counts were in the North and the Midlands. Cities and large towns in the Greater South ranked lowest on the list. This pattern was little changed from earlier years. The ONS figures show that in 2018 Wales had the lowest levels of productivity in the UK (with 17.2% below the UK). In our Townscapes series, Goodair and Kenny (2020) find that, on average, Welsh towns are more deprived than any other region in England or Scotland. Though it is still too early to determine the full effects of the COVID-19 pandemic, recent ONS statistics show that the most deprived places have been worse hit than others. As Overman (2020) suggests, it is therefore likely that the pandemic will exacerbate existing inequalities.
While the inherent importance of spatial inequality is widely recognised, at opportune times in the electoral cycle the related ‘geography of discontent’ is leveraged by the major political parties. Most recently, in the run-up to the 2019 General Election, for example, parties professed their intention to invest in infrastructure out of London and the South East, albeit to varying degrees. Labour promised an “irreversible shift in the centre of gravity in political decision making and investment…on a scale never seen before in this country and certainly never seen before in the North and outside of London and the South East”. The Liberal Democrats promised to develop “a capital £50 billion Regional Rebalancing Programme for infrastructure spend across the nations and regions of the UK, with local and devolved authorities given a say in how it is used.” The Conservatives promised an “infrastructure revolution” including investments in Northern Powerhouse Rail, and the West Midlands Rail Hub and “up to ten freeports around the UK, benefiting some of our most deprived communities”. Upon winning the election, the new Conservative government reiterated its pledge to “levelling up across the whole UK” by investing in new rail and road schemes, improving access to broadband services and increasing education funding.
The strong focus on infrastructure both during and since the election period is aligned with the need for improved access to reliable, modern and quality infrastructure in the UK. The OECD reports that over the past three decades, the UK has underinvested in infrastructure compared with some competitor countries. In addition, a consultation on the National Infrastructure Commission’s inaugural National Infrastructure Assessment found that “much of the country’s infrastructure is under strain, not keeping pace with population growth and modern requirements”. As with productivity, there are also regional disparities in the quality of infrastructure with the South East (including London) faring better than other regions. As such, both the prospect of infrastructure investment and subsequent spending is used to inspire confidence, political support and growth.
The potential impact of infrastructure investment
Investments in infrastructure can boost economic potential in both the short and long term. In the short term, a substantial increase in government spending on labour-intensive infrastructure projects can stimulate the economy by creating jobs and supporting growth. It follows that capital investment will underpin recovery across the world in the wake of the COVID-19 pandemic. In the UK, job creation is one of the drivers for the government’s New Deal for Britain, which earmarks £640 billion of capital funding over five years. For the year 2020-21, the 2020 Spending Review provides £100 billion of capital investment, including infrastructure to drive the UK’s recovery and support jobs. This is a £27 billion real terms increase compared to 2019-20. In addition, the government’s National Infrastructure and Construction Pipeline for 2020-21 is considered key to “keeping the economy running during the COVID-19 pandemic”. As shown in the chart below, this pipeline of 340 procurement contracts across over 260 economic and social infrastructure projects is estimated at up to £37bn.
Chart 1: Estimated maximum contract value of procurements in the pipeline by sector (£’ bn)
Source: National Infrastructure and Construction Pipeline
In the medium to long term, improved access to related services such as energy, transport, water and digital connectivity has the potential boost productivity. By contributing to more efficient business operations, for example, such services increase the potential supply capacity of an economy. In the recently published National Infrastructure Strategy the government commits to investing in “well-developed transport and digital networks [to] allow businesses to grow and expand, enabling them to extend supply chains, deepen labour and product markets, collaborate, innovate and attract inward investment.”
Crucially, however, a substantial investment in economic infrastructure does not guarantee productivity-enhancing benefits in practice. As the Industrial Strategy Council reports, infrastructure is only one of the many factors that inform long term productivity differences in the UK. Other factors include workforce skills and health; local geography and institutions; and the composition of economic activity. Therefore, especially in the context of levelling up, an appropriate balance needs to be struck between the provision of economic and social infrastructure. Furthermore, related investment needs to align with broader social, environmental and economic development plans and policies.
About the author
Rehema Msulwa, Research Associate
Rehema Msulwa is a Research Associate with the Bennett Institute. Her interests lie at the nexus of where policy meets the design and delivery of capital-intensive infrastructure projects. Rehema’s research is concerned with two primary questions: 1. How are decisions to proceed with infrastructure projects ... Learn more