There are huge gaps between productivity and living standards in London and most of the rest of the country. Gross value added per head is £49k in London, and £20k in Wales and the North East. The UK as a whole has recently been running an annual balance of payments deficit nudging up to £100bn a year, but London has a surplus of at least £50bn. This means that the rest of the country has an annual deficit of around £150bn – a staggering 10% by value on all of the £1.5trn it produces.
This is the core of the levelling up problem. Vast swathes of the UK do not produce enough to sell to the rest of the world to enable them to pay their way. They depend on transfers, loans and subsidies from London. Because these are never enough, living standards in the regions are way lower on average than they are in the South East. This is the Red Wall issue.
The government seems to think that this problem can be solved by a combination of devolution and more money being spent on infrastructure, training, and subsidies, but this approach does not begin to tackle the core problem. It does not provide the left-behind areas with what they really need. This is for them to be able to produce enough goods or services to sell to the rest of the world, so they don’t need to be subsidised from elsewhere. Instead, they need profitable replacements for the industries on which they used to depend.
What could these be? More tourism and hospitality? It might work in some places but clearly, it won’t in others. New universities? There is no room for any more of them. More cottage industries? Low productivity. The only real way ahead is modern manufacturing to replace traditional industries. The problem then is that the UK is currently a very expensive place internationally to site new manufacturing facilities. So, in the current financial environment, this won’t work either. This is the dilemma the government faces. It can’t afford to fail on levelling up, but it has no way in sight to avoid this happening. On the contrary, the prosperity gap between the North and South is likely to go on steadily widening.
Is there no way out of this bind? There is a route ahead that would work, but this involves radical change. This is to alter our macroeconomic and exchange rate policies to reindustrialise the left-behind areas by running the country much more in favour of manufacturing than we do now. An exchange rate of $1.50 to £1.00 works fine for services, which are not very price sensitive and where we have many natural advantages in our geography, the English language, our legal system, our universities, and our skilled labour force. But it is lethal for manufacturing, which has none of these advantages and needs an exchange rate of around £1.00 = $1.00.
This is where the levelling up issue becomes so acute. We are currently missing out on all the advantages that manufacturing brings in train. Better, higher-paid, more stable, and more satisfying jobs. A new key role for the regions. Productivity gains are much easier to achieve in manufacturing than they are in services – producing more for the UK as a whole to sell to overseas markets, so we don’t have a massive balance of payments deficit every year.
And what will happen if we don’t do any of this? The government will pour money into subsidising the Red Wall areas, leaving them as lacking in prosperity and as poverty-stricken in terms of earning capacity as they are now. Taxes will go up – not least in the Tory inclined south of the country – to pay for all this. Disillusion will set in as all this expenditure fails to tackle the root problem.
Has the time therefore come to look at a more radical solution – to use a much lower exchange rate to make manufacturing in the UK sufficiently profitable to drive export-led growth and rising investment? This may be controversial, but it may also be the only realistic way to lift prosperity in the regions enough to make a real difference and to begin to close the prosperity gap between London and the rest of the country.