Sunday, May 31, 2020
Levelling up has become even more of an uphill task
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on This is an excerpt.

A long time ago, though not in a galaxy far, far away, we were in a different world. I am talking about early March in this country, less than three months ago. When, on March 11, Rishi Sunak presented his first budget, the economic costs of this coronavirus outbreak were starting to become clear.

The chancellor announced a small package of measures, intended to help hardest hit firm and, by the time he stood up on budget day, the Bank of England had cut interest rates from 0.75% to 0.25%, unveiled a new term funding scheme for small firms and relaxed the countercyclical capital buffer for banks.

Most of the budget, indeed most of the debate in government at that time, was, however, about the so-called “levelling up” agenda. Sunak had made it clear before the budget that he was not going to miss the opportunity to try to deliver on that agenda, mainly through a substantial boost to infrastructure spending. I do not blame him for that, even though his efforts have bene subsequently overshadowed. Budgets had become rare events – there was not one during the whole of 2019 – so he had to seize the moment.

What is clear, however, is that levelling up to improve the situation of “left behind” towns and regions presents an enormous challenge. This is partly, of course, because of Brexit. Every credible analysis, including the government’s own, shows that the biggest negative effects of leaving the EU will be on the regions. The government’s own assessment saw the northeast hit hardest, followed by the West Midlands, Northern Ireland and the northwest.

It is also because the trends firmly point in the other direction. On Thursday EY, the accountancy giant, published its 2020 UK Attractiveness Survey. The survey has for more than two decades recorded inward investment, foreign direct investment (FDI) projects, and ranked this country against competitors.

There was good and bad news in the survey. As an EU member, the UK was successful in attracting FDI, both from the rest of Europe and the rest of the world. Lighter-touch regulations, particularly in the labour market, helped, as did the English language and other factors. For many firms, a UK location was an attractive proposition for accessing the EU single market.

The bad news in the survey is that, while inward investment has continued, the UK lost top spot in 2019, for the first time since 1997. And, to add insult to injury for those who have little time for the entente cordiale, it was lost to France. Our near neighbour had 1,197 projects, the UK 1,109.

The good news, for those looking to the future, is that this country appears to be establishing a new comparative advantage in digital technology. Last year the UK secured 30% of all European FDI in digital technology, with 432 projects, which was more than France and Germany combined. Since 2013, digital technology has accounted for the biggest number of UK inward investment projects.

This, as I say, is good news, and it is logical. Digital technology is much less reliant on single market membership, or existing patterns of trade. The UK suffers from a lack of competitiveness in many sectors, but not in digital technology, including areas like fintech, financial technology.

This success, however, highlights the challenge in levelling up the economy. For foreign investors, digital investment mainly means London. It is London, by and large, where there is a successful tech cluster, with the right people, infrastructure and business climate. It meant that last year, 69% of digital projects were in London, and most of the rest was in or close to the UK’s so-called core cities; Birmingham, Bristol, Cardiff, Edinburgh, Glasgow, Leeds, Liverpool, Manchester, Newcastle, Nottingham and Sheffield. Small-town Britain barely got a look-in.

It also meant that last year, 538 inward investment projects were in London, 48.5% of the total. Yes, almost half of all FDI projects were in the capital, and its rising share of the UK total suggests that it will not be long before London has more than half of the FDI projects coming into the UK.

As Mark Gregory, EY’s chief economist, notes, the UK has “has struggled to spread the benefits of FDI beyond the larger urban centres. There’s a similar and even more concerning trend in terms of digital tech investments with 83% of FDI located in the major cities and a further 10% in large towns. Digital rebalancing is a prerequisite for successful levelling up in the UK.”

The Centre for Towns collaborated with EY on the survey. Its director, Ian Warren, also expressed concern. “Whilst we welcome a small increase in FDI projects overall, we are still worried that investment is concentrating in London and our core cities, he said. “81% of foreign direct investment to the UK took place in our Core Cities or within 30km of one. Our coastal towns in particular have seen their levels of investment plummet over the last two decades, and in the last two years the number of FDI projects has halved in our university towns. “

In the heady days of the 1980s and 1990s, much of the FDI attracted to the UK was in manufacturing, and it contributed to regional revival. Nissan in Sunderland, Toyota in Burnaston in Derbyshire and Honda in Swindon were the most high-profile examples but there were plenty of others.

That has not come to an end. Honda is closing in Swindon, but troubled Nissan has spare capacity at its Sunderland plant as a result of cancelled models and is keeping it open for the time being, despite closing a plant in Barcelona. The Derbyshire economy is reeling from Rolls-Royce’s announcement of big job cuts.

Jaguar Land Rover, the mainstay of the West Midlands economy, and important for Merseyside, is looking for government help. The latest Make UK survey shows that a quarter of manufacturers plan redundancies over the next six months.

What will happen next? If early March represents a different time, 2019 is eons ago. FDI this year will be extremely depressed, as will business investment generally. Collapse might be a better way of describing it.

Have we learned anything during the crisis that offers hope? Working from home, and distance working in general, has proved itself. Many businesses have done things in 10 weeks what they were planning to do over 10 years. Could cheaper locations come into their own. When it comes to digital can you do in Stourbridge, South Shields or Stockton-on-Tees what at present you only think of dong in Shoreditch?

It would be nice to think, too, that the crisis has ushered in a new era for Wakefield, Wigan and West Bromwich. We have, however, to be realistic. Levelling up was always a huge challenge. Now it is even more of an uphill task