Northern UK has an economic potential gap of 34 billion

14 September 2015 5 min. read
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The North has an economic potential gap of £34 billion, as it continues to be less productive than the rest of the UK. According to a recent KPMG report, improving infrastructure, increasing innovation, keeping skilled workers and creating more business friendly rules are key to economic improvement in the region.

The North of the England – made up of the three northern regions North West, North East, and Yorkshire and the Humber – has an economic output of £289 billion. Making the region twice as economically powerful as Scotland and the tenth most powerful if compared to national economies in the EU. To differentiate the North, as well as create a brand for the region, the concept of the ‘northern powerhouse’ has for some time been trending as a political idea. In line with giving the idea institutional form, both national and regional leaders – including George Osborn – have discussed ways of enhancing the regional power.

In a recent report from KPMG and IPPR North, the current economic state of the region is carefully considered, as well as potential key steps towards turning the region into the economic powerhouse that it could become. According to the ‘Rhetoric to reality: A business agenda for the northern powerhouse’ report, devolution of powers from region to cities is expected – when fully utilised – to create considerable economic levers for growth.

Northern England growth relative to EU countries

Holding back your horses
The report highlights that the region continues to show relatively lacklustre figures relative to the UK as a whole as well as the wider EU. GDP growth in the region remains lacklustre, trailing behind all but one EU economy.

It is not merely poor growth that is holding back the region, but also the generally low productivity rates of the region and the UK. The UK as a whole is between 23% and 32% behind other European economies, like Germany, France and the Netherlands, in terms of productivity. The North continues to lag behind the UK average of £30.05 per hour, coming in at £26.88 per hour.

A lack of investment in infrastructure is also causing issues for the region. Transport infrastructure spending to the region, as expenditures per head, was £166 in 2013/14, half that of London and somewhat under the national average of £189. The future is expected to see continued underinvestment in transport spending as London continues to eat the lion share.

Infrastructure spending expected 2015 - 2016

The central issue with the lower investment in transportation infrastructure is that it makes it harder for the region to act as a single economic powerhouse as the cities in the region are not sufficiently interwoven.  The report finds that the long commute time between the relatively close centres of Leeds and Manchester results in 40% fewer commuter journeys than there should be.

The final issue highlighted relates to skills within the region. The North has a lower level of skills on average, as educated people tend to migrate towards regions holding hubs such as London. This is expected to become a serious issue for the region, as by 2022 over half of the jobs expected to be created in the region will require a level 3 qualification or above. Only one in 20 jobs expected to require no qualification at all.

Migrants exiting the North

Investing in the future
Improving on productivity is one area in which the North would be able to fuel its economic engines. The report highlights that the lower productivity since 2003, compared to the national average, has seen its economy lag by 1.8% or £5 billion. Furthermore, the northern economy would be £34 billion (11.9%) larger if it was able to halve the gap between its own output per head and the national level.

One way in which to improve productivity is to improve connectivity. By reducing the travel time between Leeds and Manchester by 20 minutes, wages in the region could be increased by 1.06–2.7% as more people become willing to take the journey. The investment in the HS2 high speed rail service is seen to be worth a potential £2.1–3.2 billion per annum in the North of England by 2037.

Drivers of economic growth

Investment in innovation is another path through which the region may be able to attain an economic boost. The North therefore needs to create a positive business environment in which innovation and entrepreneurship can flourish. One way forward is to create clear policies about how and where local businesses can turn for support in their ambitions to be innovative. Investment in innovation, as well as the development of strong integrated and coordinated economic policy, will be required according to the report.

“The North has huge potential; it should be in the premier league of world economies but is currently condemned to mediocrity because of lack of investment,” concludes Richard Threlfall, KPMG’s UK head of Infrastructure, Building & Construction. “We need a massive increase in public investment in the region, to trigger a virtuous cycle of increased business confidence, private investment, more jobs and a more productive workforce.”