Problem Register - #8 · Economy, Tax & Public Spending
Productivity stagnation and regional inequality
Priority Score
- Scale5/5
- Severity4/5
- Cost of inaction5/5
- Tractability3/5
- Deliverability2/5
- Cross-partisan viability4/5
- Time-criticality3/5
Seven dimensions, each scored 1-5 and summed to a total out of 35. It is a triage and communication tool to compare problems - not a measure of truth. How it is derived is set out in The Method.
The problem
UK productivity - output per hour worked, the ultimate source of rising wages and living standards - has barely grown since the 2008 financial crisis. The stagnation is also extremely unequal across the country: a highly productive London and South East, and second cities that badly underperform their European equivalents.
The evidence
UK output per hour grew about 2.3% a year in the quarter-century to 2007, and only about 0.2% a year between 2007 and 2019 - a near-total stall. The Resolution Foundation has estimated the cumulative cost at roughly £8,300 per household relative to comparable economies. Productivity in Birmingham is around 37% below London's, and the UK's major regional cities underperform their counterparts in France and Germany to an unusual degree.
Why the market fails
Productivity growth depends heavily on public goods - transport networks, research, education, the institutions of a city - that markets under-provide; and on coordination failures - a productive city needs firms, skills, housing and transport to develop together, and no single firm can deliver that. Agglomeration effects mean an under-invested place can stay stuck in a low-productivity equilibrium that the market alone will not lift it out of.
Why it has persisted
The policy attention span is short and the institutional memory shorter - regional policy has cycled through regional development agencies, enterprise zones, the Northern Powerhouse and Levelling Up without sustained, predictable investment. The payoff horizon for transport and skills investment is long; funding has been competitive, piecemeal and stop-start; and decision-making is unusually centralised.
Who bears the cost
Workers across most of the country, through two decades of near-flat real wages; the regions held in a low-productivity equilibrium; and the public finances, which depend on growth.
Policy direction - outline only
Proposed mechanism
Multi-year, formula-based (not competitive-bidding) investment settlements for city-regions; genuine fiscal and decision-making devolution to mayoral authorities; and a binding long-term capital pipeline for urban transport.
Must resolve
How much to concentrate investment in places with the best growth prospects versus places with the greatest need - a genuine value choice, to be surfaced for public debate rather than buried in technical language; the degree of fiscal devolution; and the institutional vehicle.
Main risks
Investment spread too thin to reach critical mass; devolution without local capacity; benefits arriving beyond the political horizon and so being abandoned early.