By Dan Corry, FGF Chief Economist, and Alex Bevan, FGF Research Fellow.
One of the criticisms levelled at Keir Starmer’s administration is that it struggled to find a north star. As FGF Associate Phil Tinline argued in an article for Prospect Magazine last week, what this essentially left him with was ‘mere administration’, rather than purposeful government.
By contrast, Andy Burnham’s government has so far been far more self-assured at diagnosing the problem. There may still be gaps in that diagnosis, but there is certainly a clearer theory of what needs to change for Britain’s economy to grow healthily again; where power has become too concentrated or too dispersed, and how that limits the political and economic fortunes of the nation.
Chancellor John Healey’s speech on Monday put that diagnosis on display again. A series of misjudged policy decisions over the past 40 years, he argued, had led to the “economic enablers [being] privatised and outsourced, leaving accountability to a thicket of arms-length bodies and regulators, too often without the predictability or the pace that underpins a thriving market economy.”
Diagnosing the problem is just one side of the coin, though, and a good deal of political punditry criticised Healey for offering no remarkably different solutions for the British economy than his predecessor. Some of this criticism may well be fair. Healey’s promise to adhere to Rachel Reeves’ fiscal rules doesn’t offer a radical departure on fiscal policy, and the Chancellor referred to this administration as a “continuity Labour government with a change of leader“. Although with little room to manoeuvre there anyway, and with markets nervous, some feel of continuity makes good sense.
Reflected in Monday’s speech was a more subtle assumption, however, that seems now to have made its way firmly into Treasury thinking: that changing the way the state works is fundamental to achieving this government’s economic ambitions.
Regional growth is becoming core business
Perhaps the most significant aspect of the speech – and arguably where he did break most from his predecessor – was the way it positioned regional growth. The Chancellor didn’t speak about regional growth as a desirable side-effect of economic policy, or something government might pursue alongside its other priorities. Instead regional growth was described as ‘the way’ to deliver a stronger economy, which is distinct from Reeves, who talked the language of regional growth in her Washington securonomics speech and second Mais lecture, but in between when posed with tough choices, she doubled down on London and South East, for example through her backing for Heathrow expansion and the Oxford-Cambridge growth corridor.
That is an important shift. It represents a fundamental change from the language and approach of the previous Conservative government’s Levelling Up agenda which tinkered at the edges and failed to give proper momentum to their ambition. Burnham’s government, by contrast, is no longer simply thinking about how to redistribute some of the benefits of growth to places that have missed out. It is increasingly considering how the UK’s political economy can be organised so that different parts of the country are better able to generate and shape growth in the first place. FGF has long argued that making this core business – without an opt-out for those less keen – is the only way to secure a payoff for the political and financial capital that will be poured into this devolution project.
Some of the more practical announcements in Monday’s speech in support of this shift are welcome. FGF has made the case that public finance institutions need to be much more closely connected to place, so the Chancellor’s call for the British Business Bank (BBB) and National Wealth Fund (NWF) to play a more active role in supporting regional growth is certainly a good start.
The government could go further here and look at the case for a slimmed down, more strategic BBB in favour of new regional ‘gap funder’ business banks. This kind of new institution – one that is close enough to understand the local economy, but large enough to act at scale – could do a better job of connecting available finance with small businesses and go on to offer wider products tailored to the local economy.
The Chancellor’s changes to the Treasury Green Book, that governs the way that new projects are assessed, are an important nod in the same direction. The Green Book is the subject of a recent FGF report with detailed proposals on changing the way that it’s used to increase public investment in areas outside of London and the South East. Reducing the ‘discount rate’ (used to calculate how future costs and benefits should be valued in today’s terms) should increase the likelihood of government funding going to projects whose benefits take longer to materialise – which is often the case in areas outside London and the South East. And the Chancellor’s proposed use of ‘economic potential analysis’ could help the government think more seriously about transformational projects in the North and elsewhere that carry some risk and uncertainty and so often get blocked at the moment.
Regulation: a welcome change of direction
The new government’s mantra of ‘growth in every postcode’ will only come if we get the infrastructure we need and encourage private investment and activity in all places. Poor, unnecessarily burdensome and slow moving regulation can be a barrier to that and so it was important that the Chancellor talked about some important regulatory changes. We need a regulatory system that is more flexible, that is focused on outcomes (not process), and that is willing to experiment, rather than pursuing a risk-averse approach.
Healey’s plans to give regulators greater scope to relax rules in order to test new approaches and support innovation will certainly help with this, as will the clampdown on vexatious judicial reviews that slow everything down and choke off much needed investment. Targeting a 25% reduction in the cost to business of regulation also makes sense.
But the Chancellor should be cautious not to fall too much into the cult of deregulation: overstating the role of regulation in Britain’s growth problem and pursuing soundbite-driven but ineffective ‘red tape challenges’ and the like to fix them. There are real regulatory barriers to investment and innovation that must be, and are being, addressed. But regulation is not the primary cause of Britain’s weak productivity or regional disparities. Changing this should be about allowing the state to enable productive activity across the country, rather than treating deregulation as an end in itself.
Invest in good decision-making
Despite all of these promising signals from Westminster, devolving power and enabling greater regional spending are not, by themselves, guarantees of stable, long-term national economic growth. And the idea that they will automatically lead to that outcome is still unproven – even if the evidence from abroad and the success of Greater Manchester do give good grounds for optimism.
Rebalancing growth-friendly investment must be accompanied by a new level of focus on understanding what is possible and what works. Assigning a share of income tax to English regions, and ultimately pursuing more ambitious fiscal devolution, will create new opportunities for Mayors and local leaders to make decisions that better match the shape of a local challenge, from skills to train travel. National government therefore needs a much stronger capability to learn whether this is actually being delivered.
To aid this, the government should make evaluation of the various elements of its place-based economic policy mandatory. It’s welcome that the government has committed to f accounting officer responsibility being at the regional rather than national level, and that should help shine a light on the level of preparation behind decisions being made locally. We think an Evidence and Evaluation Service for Local Growth with cooperation across the nations – as well as the English regions – could give those decisions a better chance of reaching the desired outcome.
This matters politically as well as economically. Making evidence and evaluation more solidly part of the process of re-wiring the state would signal that the UK Government is willing to step back from micro-managing regional economic affairs, and so mark a refreshing break with the confusion of the past.
A step in the right direction
If this government wants ‘growth in every postcode’ to become more than a slogan, the UK needs greater devolution and a central state that is more invested in that same outcome. Monday’s speech was a further step in that direction. It may indeed signal that the new and as yet untested configuration of economic powers between No 10 North (and south), the Treasury and the Ministry of Housing, Communities and Local Government is capable of delivering growth across the UK.
The test now is whether this increasingly confident diagnosis can be translated into institutions and governance arrangements that are capable of delivering it — and whether government at all levels is willing to learn from what works, what does not, and what must continue to change.
