Infrastructure spending: reversing or encouraging regional inequality?

Published: 9 December 2019
Author: David Bell

The gap between rich and poor areas in the UK is larger than any other Western European country. David Bell, Professor of Economics at University of Stirling, analyses the General Election 2019 manifesto pledges to reverse the upward trend in regional inequality.

The gap between rich and poor areas in the UK is larger than that in any other Western European country. In 2017, Gross Value Added per person in Camden and the City of London was more than 34 times greater than that in Ards and North Down, the U.K.’s poorest area. In 1997, the ratio of the richest to the poorest area was 19.5. Since 1997, GVA in East Ayrshire and North Ayrshire (currently, the U.K.’s second poorest area) has fallen by more than 30% relative to the UK average, while that in Camden and the City of London has increased by 45%. The gap between the richest and poorest parts of the UK is large and has been widening.

Perhaps driven by a concern that these vast differences in income were undermining social and political cohesion and knowing that, post-Brexit, those EU policies specifically aimed at enhancing cohesion would come to an end, the 2017 Conservative Party manifesto committed to the establishment of

“A United Kingdom Shared Prosperity Fund, taken from money coming back to the UK as we leave the EU, to reduce inequalities between communities across our four nations.” (Conservative party manifesto 2017)

The Shared Prosperity Fund (SPF) is to replace the EU Structural Funds. These were established decades ago to reduce economic disparities across the EU. Currently they are worth about £2.1bn per annum to the UK. However, UK public expenditure in 2019-20 will be around £750 million - so the commitment to the SPF is worth only around 0.3% of public spending.

The SPF will join a cluttered landscape of regional intervention designed by the current government. The main existing policies that direct support to specific locations are the Towns Fund in England and the UK-wide City Deals programme. The Towns Fund will be worth £241 million in 2020-21. The City Deals, which were introduced in 2011, are difficult to cost, given their complex financial structures and multiple partnerships. To give some idea of scale, the UK government committed £2.3 billion to the first wave of these deals, which accounted for 40 separate programs, which are spread over varying time periods. Therefore, like the SPF, they do not represent a significant proportion of total government spending.

Taken together, it would be difficult to describe existing programs as forming a coherent strategy for reducing regional inequalities. Perhaps the hope is that UK government intervention and modest funding will be catalytic in bringing new momentum to economic activity in the left-behind regions. Whether this can be achieved has certainly not yet been proven.

So how might the policies proposed in the 2019 election political manifestos contribute to reversing the upward trend in regional inequality?

The Conservative manifesto references the SPF. It adds no further detail other than to commit at least £500 million from the fund to enhancing the skills of disadvantaged people. Its design has not substantively progressed since 2017, even though the closure of EU structural funding is imminent.

The Conservatives plan to establish a National Infrastructure Strategy, setting aside £100 billion over the next five years for this task. Although full details are not available, the published costings for 2020-21 include £500 million for reversing Beeching cuts to train services; £500 million for repairing potholes, and £257 million to buy out hospital car parking rights. This hardly seems to provide the basis for a strategic approach to regional inequality.

There is also a commitment to devolving powers from Westminster. “Full devolution” is planned across England. How this will be designed is to be set out in a White Paper in 2020. Of particular interest will be the extent to which this process results in greater devolution of taxation within England. However, such exercises have failed to gain traction in the past.

The Labour manifesto proposes a more radical shift of power to the regions and more regionally-directed spending. Local Transformation Funds will be established in the devolved nations and English regions to bring forward locally determined infrastructure projects. There is also a commitment to establish Regional Development Banks. A shift of power away from Westminster is to be led by establishing government offices in the regions, and a new division of the Treasury, the National Transformation Fund Unit, will be sited in the north of England.

The Liberal Democrat’s manifesto commits to a “Regional Rebalancing Programme” of £50bn for capital spending on infrastructure. The nations and regions would determine how it is distributed. In addition, the British Business Bank will be regionalised. The Lib-Dems also propose a shift in power away from Westminster towards local authorities and the regions in England, but again details of how this might be achieved are not specified. Indeed, all of the manifestoes include promises to shift power away from Westminster, but none have very clear proposals. All have plans for significant increases in spending on infrastructure in the regions, but none of the manifestos discuss the possibility of transferring the kinds of tax powers to the regions that would be considered normal in other developed democracies.

The parties are offering eye-watering funding for infrasturucture projects, with Labour leading the charge. Its proposals for substantial increases in infrastructure spending are justified by taking a different approach to analysing the public finances, focusing on government net worth instead of government debt. Ultimately it is bond markets which decide whether such a strategy is credible or not.

Thus, although all three parties propose significant increases in infrastructure spending spread across the UK and some extension of power to regions within England, none address the issue of regional inequality directly. For the left-behind areas, more attention is directed towards investing in infrastructure than in people. And the mechanisms by which extra spending on roads, rail and other forms of infrastructure will reverse the growth in UK regional inequality are by no means clear.

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