The Prime Minister has regularly described his commitment to a ‘decade of renewal’ as a project designed to ‘tilt the economy back to the interests of working people’ and ‘reward their efforts fairly’1. Both he and the Chancellor have connected this task with the challenge of addressing regional disparities in the UK, lamenting an overreliance on too few sectors in too few regions.
That rationale frames the government’s decision to make its primary mission increased growth and higher living standards in all parts of the country (and thus enable sustainable funding for modern public services). In simple terms, the government is working to the question famously posed by Ronald Reagan in his successful bid to become US President in 1980: ‘are you better off than you were four years ago?’
The Chancellor and Prime Minister have repeatedly pointed to the economic and political threats posed by regional disparity in the UK, and the way in which it undermines trust and productive capacity
‘A new model of economic management is needed. Because a model based on the pursuit of narrow-based, narrowly-shared growth – with ever-diminishing returns – cannot produce adequate returns in growth and living standards.’2
Rachel Reeves
Moreover, the new Industrial Strategy is – in the government’s own words – ‘unashamedly place-based, recognising that stronger regional growth is critical for the competitiveness of the [eight priority sectors]’.3
However, a legacy of centralisation, policy instability and weakened local institutions compounds this challenge and requires a fundamental change in how the state serves regional economies. The Chancellor’s ‘new model of economic management’ requires the state being more reliable, capable and purposeful if it is to tackle the complex task that forms the basis of the government’s number one mission.
The UK is at an inflection point, and not just because last year saw the first change of governing party in 14 years. The surging transformations taking place across energy, defence and technology all represent major tests for the government, and in particular how it wants places across the UK to share in the risks and rewards those transitions generate. The way in which the state rises to that test will in large part determine whether the government hits its central mission and ultimately how ‘the Reagan question’ is answered come the next election.
We will focus on these three sectors of defence, energy and technology because they are a critical point at which political, security and economic dilemmas converge: from the creation of new jobs, to the impact on household bills, to national resilience, to people’s basic faith in government to support them through major industrial transitions.
These transformations are at once global and local. The sources of economic growth within these sectors – and the geopolitics that influence them – are disrupting economic geographies, emphasising a more immediate link between what happens internationally and what is felt in towns and cities across the UK.
In Scunthorpe, Port Talbot, Solihull and Aberdeen, a mixture of long-term government inaction, tariff shocks, war and volatile foreign ownership have recently demonstrated the practical need to consider the future of local places in their global context.
At the same time, old boundaries and certainties are dissolving. Siloes between industries continue to fall away as technological innovation redefines the operating model of businesses from the insurance sector to steel and creative industries.
The New Localism project championed by US academic Bruce Katz argues that a modern political economy should respond to this new era of major transformations, of the local converging with the global, and of increased uncertainty. It requires local and national leaders to intentionally drive a more agile and productive state.
‘Cities and their partners must think anew about everything from the fine print of financial instruments to the vehicles for cross sectoral collaboration to the management and disposition of public assets.’ 4
Bruce Katz
These challenges face all major advanced economies, but in the case of the UK a combination of centralism, stagnation and weakened local institutions has allowed entrenched regional inequality to endure and made the task much harder. As well as constraining investment, jobs and aggregate UK growth, this backdrop will hamper the state’s ability to cope with major transitions in the more dynamic, less siloed economy that is emerging.
The UK Government has signaled that it understands the problem this scenario presents. When launching the Modern Industrial Strategy, Keir Starmer described ‘a state that is both overbearing and feeble, poorly serving an economy that has become too reliant on a small number of places, too exposed to global volatility and too sluggish to take advantage of opportunities.’5
The Modern Industrial Strategy is part of a suite of similarly ambitious initiatives across science and technology, defence, clean power, devolution and infrastructure investment. The extent to which these various strategies will cohere and converge in a purposeful manner will determine whether the government will drive change that is felt in the places where people are less confident about their future.
The UK economy struggled to move on and renew after the Global Financial Crisis (GFC) of 2008. As the economic historian Duncan Weldon has previously argued, Britain’s core economic model – based around a heavy reliance on financial services – was badly damaged by the GFC.6 Yet rather than acknowledging this and adapting its model, the UK merely ‘stumbled on’ before being buffeted by the shocks of Brexit, Covid and Russia’s invasion of Ukraine.
The British economy has not been renewing and modernising at the scale needed to support decent incomes and realise the opportunities of the major transitions it is undergoing. Instead, stagnation came to define the period that followed 2008 along with a vicious cycle of low business investment and higher taxes for increasingly expensive and stretched public services. These were the results of a failure to take, and stick with, long term decisions about how the UK will earn its way in a changing world and confronting the trade-offs it presents.
Despite this backdrop, the UK boasts major strengths, including being home to the world’s third largest technology sector. A mixture of discrete, targeted policy interventions has enabled the development of significant modern comparative advantages in areas such as TV and film, and advanced manufacturing.
However, at the macro level, these strengths have been too small in number and too narrow in scope to support competitive growth, to reduce inequality and to shrink regional divides. The Resolution Foundation’s ’Stagnation Nation’ report captured this picture neatly, arguing that ‘while our current economic specialisation is consistent with future prosperity, our regional divides are not.’7
For years now the UK has lacked a consistent industrial policy or alternative project to which all parts of government (and crucially the Treasury) have been bought in. As a result, there has been no organising strategy against which government can assess threats and opportunities before prioritising interventions that stand a greater chance of surviving external events, internal political dynamics or electoral change.
The Boris Johnson government did make the task of addressing regional disparity a major plank of its political programme: Levelling Up. However, that project serves as a salient example of an attempt – and ultimately a failure – to address this issue.
The Levelling Up agenda was firmly pitched as a unifying offer for a country divided by Brexit, based on a diagnosis that mostly aligns with that of the current government.
‘It is the mission of this government to unite and level up across the whole UK – not just because that is morally right, but because if we fail then we are simply squandering vast reserves of human capital; we are failing to allow people to fulfil their potential and we are holding our country back.’8
Boris Johnson
However, it ultimately became clear that the project was not central to the government’s core economic strategy and its implementation – in many cases – made matters worse.
While Levelling Up led to a measure of decentralisation and the creation of new Mayoral authorities, other decisions were centralised and funding was redirected to more affluent places to the cost of deprived communities.9 This contradicted the diagnosis set out by the government and a Levelling Up White Paper that ought to have guided decision-making.
Far from providing the reliable, enabling and strategic partnership role advocated by the likes of Bruce Katz, the Johnson Government’s approach proved unpredictable, constraining and increasingly focused on the operational rather than the strategic.
Not only did the Treasury under then Chancellor Rishi Sunak fail to buy into the concept, it even moved to block the then Levelling Up department from signing off on expenditure in 2023.10 This compounded an already dire situation for local government finance, in which local authorities were grappling with the constraints of one year funding settlements and receiving contradictory advice on accessing grants which were frequently delayed.11 In the worst cases, this confusion led to councils being encouraged to apply for funding they were not eligible for.
The governments of the devolved nations of Scotland, Wales and Northern Ireland faced a similar scenario. Under the Johnson administration, Whitehall forcibly centralised spending decisions in devolved areas, removing the ability of the Devolved National Governments to design and allocate funds on matters over which they held the democratic mandate.
Specifically, the UK Government used post-Brexit legislation (the UK Internal Market Act) to create a new tool to spend directly in devolved areas over the heads of devolved governments with no regard for waste, duplication, value for money or democratic considerations. During the Bill’s passage into law, former Lord Chief Justice of England and Wales, Lord Thomas of Cwmgiedd, lamented that this move was ‘in effect, giving legislative underpinning to the now discredited principle of “Westminster knows best”’.12
As well as denying the devolved legislatures the ability to scrutinise this spend, Whitehall was suddenly responsible for delivery in areas in which it had not been active for over 20 years.
Similar dynamics played out beyond the confines of government. Universities, colleges and the third sector were prevented from playing a role that they had developed expertise and capacity to carry out.
As a result of these short-termist political changes, cuts to employability and research programmes were the inevitable consequence. Contrary to the letter and spirit of the white paper and various speeches that surrounded it, here Levelling Up was actually responsible for undermining the budgets that are broadly recognised as part of the essential mix for regional growth.
On top of this, little attempt was made to place Levelling Up in a historical context or build on what had come before. In a 2022 report on Local Economic Growth, the National Audit Office delivered a damning reflection on the government’s failure to monitor and evaluate previous policies.
‘By failing to conduct robust evaluation or even write up lessons learned from previous policies, the Department has wasted opportunities to learn and apply lessons to subsequent policies… The Department is not unusual in this regard and, in December 2021, we highlighted that much government activity is either not evaluated robustly or not evaluated at all. This is in spite of government’s commitment to evidence-based decision-making.’13
National Audit Office
Asformer government adviser Sam Freedman argued in his 2024 book Failed State, this short-termism stems from the UK Government too often making decisions in a quick, shallow and tactical manner – the result of Whitehall having become overloaded and too operational while at the same time local institutions have been hollowed out.14 Freedman identifies the long term consequence of longstanding cultural aversion to allowing local and devolved government a role in shaping and directing policy.
‘The level of disdain for local government in many central departments is often unjustified; based on a kind of elitist prejudice against the operational.’15
Sam Freedman
Freedman goes on to observe that these behaviours and assumptions have too often narrowed the options for delivery and overlooked the lessons of recent mistakes.
‘Councils do make mistakes… but those weaknesses need to be compared to actual alternative mechanisms of delivery on offer, rather than some standard no one else can meet.’16
Sam Freedman
While there will of course be examples of local authorities using Levelling Up funding to good effect, the lack of partnership working and evaluation makes it difficult to salvage positive lessons and practice.
Rather than representing a genuine attempt at change that fell short, Levelling Up arguably made the starting point for the incoming Labour government in 2024 a good deal worse than it had been in 2019. Funding had been actively redirected away from need, power had become (in many cases) even more centralised, local authorities had been pitted against one other and forced to waste resources on bids for funding that were economically unrealistic but politically unavoidable, and anchor institutions like universities and colleges had been denied a say in the economic development of the regions in which they play a vital part. Unsurprisingly, but highly consequentially, public trust had also been damaged as the Johnson Government failed to deliver on its major economic promises.
In fact, while the regional economic agenda was perhaps not promoted as a core, defining message in the 2010s – or certainly not compared to the overarching message of fiscal consolidation – then Chancellor George Osborne’s decision to drive Mayoral devolution and the ‘Northern Powerhouse’ was arguably much more consequential than the Boris Johnson experiment. The fact that that project was owned by HM Treasury serves as a reminder that any attempt at addressing regional disparity must enlist the active support of the finance ministry if it is to have a lasting impact.
The new government’s mission on growth and living standards – and Rachel Reeves’ vision of ‘securonomics’ – points to a more coherent prescription than has hitherto been the case. In a 2023 speech in Washington DC, when she was still Shadow Chancellor, Reeves set out the assumptions that would steer Labour’s economic approach throughout the rest of its time in opposition and into government:
‘It begins by accepting that the world has changed and Britain must change with it. In our age of insecurity, we have discovered the weaknesses of our old economic model.
‘Too unambitious about the role an active state can play, too willing to believe that wealth will trickle down and too reliant on the contribution of a few places, a few industries and a few people.’17
This time – more like Osborne and less like Sunak – it is the Treasury that is driving the regional economic agenda. As an overarching concept, the agenda is also shared across the highest levels of the government. The foreword to the Modern Industrial Strategy carries the signatures of the Prime Minister, the Chancellor and the then Business and Trade Secretary. This should place the policy agenda on a firmer platform compared with recent attempts to link place-based benefits with core economic outcomes.
Similarly, the Chancellor’s change to her fiscal rules in the 2024 Autumn Budget unlocked an additional £100bn of capital over five years (supplemented by a further £13bn in the 2025 Spring Statement), for major investment right across the country in infrastructure, housing, transport, research and development (R&D) and more.
How effectively that money is spent – and how it contributes to the effective delivery of the Modern Industrial Strategy and the sweep of strategies and reforms announced over the last year – will rely to varying degrees on how well UK-level decisions connect with devolved and local leadership.
Eight growth sectors – known as the IS-8 – have been chosen as priorities in a strategy that promises to ‘track the key measures of improvement across the whole economy, the IS-8, and places: business investment, Gross Value Added (GVA), labour market outcomes such as employment and wages; productivity growth; and exports.’18
The English Devolution and Community Empowerment Bill decentralises more power, creating more mayors with greater budgetary flexibility for new statutory Local Growth Plans. Integrated budget settlements will be introduced from 2026, opening up a new tool for mayors to adopt measures that are more responsive and tailored to the opportunities and partnerships available to them.
Policy banks will play a greater role in coordinating economic development, with the creation of the National Wealth Fund (NWF), significant funding growth for the British Business Bank (BBB) and a new Housing Bank. The NWF is specifically charged with two strategic objectives that should aid the development of stronger local investment opportunities, particularly for clean energy industries: ‘supporting regional and economic growth’ and ‘tackling climate change’. The NWF has earmarked £5.8bn for green steel, hydrogen, gigafactories, carbon capture and ports, tying investment to towns in weaker-performing regions such as Port Talbot, Barrow, Grimsby and Aberdeenshire.
Pension reforms – many of which were advocated in FGF’s 2023 report Rebuilding the Nation 02: Pension reform that delivers for savers and strengthens the economy19 – are driving the shift to a smaller number of ‘mega funds’ that invest more in UK infrastructure. To illustrate the imperative, Ministers have pointed to the fact that defined contribution pension funds in the UK allocate just 3% to infrastructure and 0.5% to private equity. By comparison, Canadian funds invest 11% in the former while Australian comparators allocate 5% for the latter.
The Clean Energy Industries Sector Plan aims to double investment levels in these frontier sectors to £30bn per year and support job creation across the country.
The wider Clean Energy Superpower Mission will require delivery at enormous scale and the development of more projects such as the UK’s largest solar farm in Cleve Hill, which combines local government pension funds and private capital in a significant investment.
After the 2024 general election, onshore wind was immediately opened up once more in England and Ministers have hailed the permitting of new reservoirs and solar farms as down payments on the Planning and Infrastructure Bill that serves as a totem for the government’s rhetoric on ‘backing the builders over the blockers’.
A landmark shift in UK defence strategy and funding has dramatically expanded the scale and scope of spending on security with a heavy focus on ‘spreading prosperity’, job creation and adopting the lessons from innovations in Ukraine.
The more recent commitment to ratchet national security spending up to 5% of GDP over the long term will demand a new level of ambition within a system that can be more directive given its dominant role as a customer with enormous bargaining power.
The Industrial Strategy states that the UK will become Europe’s leading defence exporter at the same time as halving the venture capital investment gap with the US. Within that, geographically-dispersed capability has been identified as an essential element of a more resilient and secure defence operation, offering new opportunities for skilled, well paid work across the UK.
The new Strategic Defence Review, published in June, includes some of the most significant reforms since World War II and was followed by a new Defence Industrial Strategy in September. These came after a ‘Statement of Intent’ published in 2024 which included a commitment to ‘prioritise UK businesses’.
The new Science and Technology Framework’s economic objectives are supported by a £20 billion investment in R&D announced at the Autumn 2024 budget. The Framework cites five priority technologies for future prosperity: artificial intelligence, quantum technologies, engineering biology, semiconductors, and advanced connectivity technologies.
The Digital and Technologies Sector Plan aims to create the UK’s first trillion dollar company by 2035 and the new AI Action Plan sets three core objectives which include the creation of AI Growth Zones. A new AI Energy Council20 has also been established to focus on how to meet the energy demands of AI and what the technology can do to support the transition to net zero.
Taken together, these various overarching and sectoral initiatives indicate a step change in the government’s willingness and ability to set the direction for, and intervene in, the nation’s industrial policy. Ensuring that all these initiatives cohere and add up to more than the sum of their parts is a significant and complex challenge. And while the ambition and the overall direction is clear, what is less so is how the state itself is expected to change in order to drive the new economic model envisaged by the Chancellor and address the regional disparities that both she and the Prime Minister have identified as being urgent.
As FGF has argued across our previous work, the UK government by itself does not, of course, have the capabilities required to deliver the full scope of its industrial policy or its national mission to drive up living standards across the UK. The government must be confident about what it can do and humble about what it cannot, acting as an orchestrator of a much broader effort: it must ‘lead with purpose, and govern in partnership’.21
The principles and tools we recommend in Part Two of this report are therefore designed to encourage a more strategic state that brings a systemic focus to the challenge of regional economic disparity. The UK Government needs to establish a more reliable, capable and purposeful state if it is to make its new, long term direction stick. If our regional imbalance is treated as peripheral, then the government risks expending enormous resources and energy on a project that will reach too few of its intended recipients and fall short both politically and economically.
Addressing regional disparity means acknowledging and embracing the complexity of ‘wicked’ problems. As we have seen, efforts to meet this task that wish away the complexity or scale of the problem can become chaotic and short-lived. That is why when recommending new tools for government to adopt, we frame our recommendations within principles that seek to apply this lesson based on proven evidence and insight around urban leadership.
The Bloomberg Center for City Leadership at Harvard University, for instance, sets out the key capabilities required to challenge these kinds of wicked problems.22
These fall under three categories:
Collaboration: the ability to identify the right partners and work well with them;
Data-analytic: the ability to collect, process, generate and analyse the data needed to serve complex challenges; and
Reflective / improvement: the ability to genuinely reflect on a problem’s complexity, generate a sound action plan and adapt based on what is working.
Regardless of the objective or the level of government, these questions can focus thinking and direction for teams dealing with complex challenges and demanding stakeholders. The tools set out in Part Two of this report seek to apply this discipline to the delivery of the government’s regional economic objectives.
Applying these lessons also requires acknowledging that the complex factors impacting on any given place include the complexity of governance itself. This means accepting that the state operates much more as a messy and interconnected network rather than anything that resembles a neat set of formal layers.
We can look back in time and to international examples for ideas on how to address this. In 1959, US President Eisenhower’s Commission on National Goals gave rise to the notion of governance as a ‘marble cake’: recognising that while government is often described as being made up of layers, in practice the functions of each level are constantly mixing and overlapping.23
Rather than expecting (non-existent) neat layers of government to create the change places need, Bruce Katz argues that ‘network connectors’ are essential to connecting the national to the regional with vision and leadership. His advice is to be clear about who does what: the centre should focus on being a reliable investor, and at the regional and devolved levels, leaders need a platform to ‘read, understand and activate’ for impact.
Many national institutions, which have a role to play in these networks, are either absent from these debates or unable to dedicate the time to translate UK policy into the regional context with success. For instance, R&D investment for innovation should be better connected to greater opportunities for adult learning in both higher and vocational settings, unlocking new, skilled employment opportunities at a larger scale.
Professor Richard Jones of Manchester University has written widely about the role of effective regional policy in innovation and argues that a strong mandate for regional growth is needed to overcome the existing barriers to opportunity. Specifically, Jones has called for Catapult Centres – created by government to turn research into practical application – to focus on regional growth to support deeper collaboration with colleges, universities and businesses acting on their local context.
‘As well as basic research, we’ll need to build up translational research, the diffusion of existing technologies into businesses, and skills development at all levels.’24
Professor Richard Jones
As we will see, this approach is informing recent decisions, with the National Wealth Fund having been set a clear instruction to support regional economic growth. However, if other bodies are not mandated to follow suit and add meaningful value to Local Growth Plans for instance, investors will understandably be less convinced about planning against them.
Decision-makers should, of course, guard against a fetishisation of place and be wary of solutions that use such a doctrine as a substitute for evidence and thoughtful analysis. However, that caution should not prevent decisive reforms that reshape how the UK Government organises its support for regional economic growth. The contributions from the UK and the US should inform how Ministers think about connecting strategy with the outcomes people will experience and the role their local context plays.
Our recommendations will fall to a mixture of actors including the UK Government, Devolved Nations and Mayors/Strategic Authorities or Local Authorities. In each case, these recommendations are based on the thesis that the state as a whole – and in its broadest conception – needs to become more reliable, capable and purposeful in pursuing regional growth.
To this end, we begin by recognising the inherited cultural and institutional norms that prevent better decision-making and propose in their place a more mature version of shared governance across the UK.
Rather than offering a sweeping, scrap-it-all-and-start-again programme of reform, the practical tools discussed below seek to learn from and scale best practice and approaches that have been proven to work, so as to allow impactful devolution to contribute to stronger growth across the UK’s regions and nations.
For the UK Government we propose tools that could enable it to direct a greater share of growth-enhancing spend across a wider geography, accompanied by the development of a stronger evidence base that is dedicated to regional growth. This can then guide smarter investment and help prevent poor value for money decisions, allowing for a virtuous circle that supports more investable propositions.
For regional and devolved leaders we recommend the creation of new institutions and partnerships aimed at delivering the outcomes set out in the UK’s Modern Industrial Strategy.
We will focus on outcomes related to energy, defence and technology but will also draw out where our recommendations could have broader application given the way in which industrial sectors are increasingly converging in a rapidly changing economy.
In producing our recommendations, we draw from research and interviews to consider UK experience and analysis as well as international examples to explore how new tools and proven models can help remove the governance barriers to innovation and local leadership.
As the government begins to pull levers and design new interventions in pursuit of its promised ‘decade of national renewal’ this report adopts a practical toolkit approach. In doing so, we hope to demonstrate the role vision and leadership at regional and devolved levels can and must play in creating stronger and more resilient local economies, raising living standards and in turn renewing hope and trust in the power of government to do good.
