Give regions power to change public sector pay rates to drive growth says new Policy Exchange report

In a new report Powering the Midlands Engine, Policy Exchange argues that relative prices for land, property and labour in the Midlands, along with other local and regional economies, need to better reflect circumstances in their local markets. To overcome the barriers to this happening, Policy Exchange suggests that the Government should commission an independent review into the impact of national pay bargaining on local economies and public services. This would need to consider wider labour market factors, such as national immigration policy and the role of a uniform national welfare system. The commission should make recommendations on whether we should transition to policies for public sector pay and transfer payments that better reflect local circumstance – and how that might be managed over ten years. 

The report considers how to increase prosperity across the Midlands and concludes that, on the back of HS2 investment and growing business momentum in the region’s largest city, we should double the size of Birmingham and aim for it to become a global city. Policy Exchange argues that the competitiveness of the Midlands will improve if the region can:

• ·         Take full devolved control over its green belt. Government should allow local planning authorities in the region to make their own decision over the best balance between development and green space. To this end, the West Midlands Combined Authority’s Spatial Investment and Delivery Plan should be made statutory. The West Midlands Combined Authority should develop its own infrastructure pipeline, and consider what it would take to substantially increase the size of Birmingham – ideally, to double it.
• ·         Devolve and liberalise regulation in new Super Enterprise Zones to boost deprived regions and allow more radical experiments with local policy. In particular, the Midlands should develop policies that accelerate innovation in manufacturing. 

While there are good reasons to be optimistic about the potential of the Midlands moving forward – compared to the G7 average, the Midlands has low air pollution, good digital connectivity, low inequality and high levels of social capital – it also faces a number of challenges. These challenges include:

• ·         Restrictive planning law set by central and local government, which has not just prevented a city like Birmingham from expanding, but which reduces competitive pressure, weakening the incentives for higher productivity and better management. If Birmingham matched the OECD average for the relative size of a third city, it would be almost twice as large, or around 2 million people.
• ·         Midlands core cities Birmingham, Nottingham and Wolverhampton have amongst the highest levels of unemployment of any major town or city in the UK.
• ·         The region’s labour market suffers from lower numbers of graduates and a high proportion of workers with low skills or no qualifications.

In a Foreword, Chancellor of the University of Birmingham and founder of Cobra Beer Lord Bilimoria said:

“Through my business and family experience, I have seen firsthand that the gulf between London and the rest of the UK, in terms of its prosperity and productivity, is one of the great challenges in public policy today. 

“This important report from Policy Exchange pinpoints the issues that hamper economic growth in the Midlands – for instance, a low skills base and a restrictive planning system – and puts forward innovative policy solutions to remedy them. I hope it is read widely across the region, not least by civic leaders in charge of writing local strategies, but also by business leaders too.

“The Midlands has a world famous history of success in manufacturing, including in the automobile sector, where it was dominant worldwide in the past, as the report highlights. The report suggests that the Midlands should focus on its comparative advantages – building its strategy around its three key strengths - manufacturing, cities, and devolution, including becoming a world leader in innovation focused advanced manufacturing.

“The truth is more firms need to recognise their role in building a more prosperous society. We also need regional leaders to take a bigger role in economic matters. This requires the Government to entrust places like the Midlands with greater powers and responsibilities. But it also requires civic leaders to step up and make decisions that reform industrial strategy in their area, much like Joseph Chamberlain, the great entrepreneur and politician, did for the region over a century ago. In that regard, I am encouraged by the work of Andy Street, the Mayor of West Midlands, and the Midlands Engine.

“It is on all of us to think about what can be done differently to deliver greater prosperity. The analysis and recommendations in this report show how we can begin to achieve that.”

Policy Exchange’s Head of Economics and Social Policy Warwick Lightfoot said:

“Britain stands out among advanced economies for the poor productivity performance of its second cities. This is not the result of a law of nature. Regional decline has been as much a result of political mistakes as economic destiny.

“The Midlands currently punches below its weight economically – but is fortunate. Unlike some areas of the UK, many of the fundamentals are in its favour, from technological developments in manufacturing to the region’s geography and close connection to London.

“While more needs to be done to address the region’s underlying weaknesses with skills and infrastructure, the reality is that these are secondary to developing world-leading sectors. If the Midlands is to substantially close the productivity gap with the rest of the G7, it will have to develop more world leading technologies of its own – and not just be a local base for production.”

ENDS

Notes to Editors

An embargoed copy of the Executive Summary and recommendations is attached to this press release. For further information, or an embargoed copy of the full report, please contact Amy Gray on 07776124660. 

Useful facts about the Midlands economy (all references in full report):

• ·         The Midlands was the UK’s first tech hub. Over the course of the nineteenth century, Birmingham produced three times more patents than any other city in the world.
• ·         In the 1950, 20% of the entire West Midlands workforce was involved in some way in the motor industry.
• ·         As the car industry declined, the city and the wider region declined too. In the decades following the war, the industry increasingly struggled with issues of poor management and trade union disputes. Nationalisation of part of British Leyland failed to turn performance around. Between 1971 and 1984 employment in manufacturing in Birmingham halved.
• ·         Today, just four of the FTSE 100 are located in the Midlands, and zero of the UK’s nine unicorns.
• ·         Productivity across the Midlands is 15% below the national average, and the region exhibits a significant long tail of underperforming firms.
• ·         Over recent decades, both the region and much of the rest of the UK have been falling further and further behind London. In 1997, GVA per head in the Midlands was 56% of the London average and near identical to the UK without London (97%). By 2015, it had fallen to 48% of the London average and 92% of the rest of the UK.
• ·         In 2015-16, the UK Government spent more than three times per person on infrastructure in London than it did in the Midlands. The current National Infrastructure Pipeline has £2.1bn in transport projects for the East Midlands and £2.8bn for the West Midlands, but £43bn just for London.
• ·         The Midlands struggles both to retain and to attract graduates. Birmingham only retains around 50% of its students, losing 76% of those who moved there specifically to study.  By contrast, London retains 77% of its graduates, and draws in 22% of other graduates who move away from their university.
• ·         89% of households in the East Midlands, and 85% in the West have broadband access, compared to an 80% G7 average.
• ·         In 2016, the Midlands was responsible for a strong 22% of UK exports in machinery and transport – but this is relative to a small base.
• ·         Since 2002, the number of pharmaceutical patents issued by the Midlands has more than halved in absolute terms. The Midlands remains a relatively small player on the international scene. In 2013, the entire Midlands issued 31.6 patents in pharmaceuticals–behind the much smaller UK leaders in Inner London West (55.1), Cambridgeshire (46.2) and Oxfordshire (42.5), and utterly dwarfed by Boston (802.3), New York (651.5) or San Francisco (528.8). The Midlands does better in medical technology, with areas like Warwickshire (40.5) or Worcestershire (24.6) competitive with Cambridgeshire (53.1) and Inner London West (26.7). Nevertheless, the industry remains tiny compared to Tokyo (947.6), San Francisco (894), Los Angeles (620.4) or Boston (596.4).