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Labour will have to focus heavily on developing service exports to deliver faster economic growth, according to an analysis that warns that the UK’s Northern regions continue to lag far behind the more prosperous South East.
The potential for increasing productivity and wages is heavily skewed towards the South East, driven by exporting activity in high-value services, such as IT and finance, the Centre for Cities think-tank said on Monday.
“If we build more in London and the Greater South East we know that will have a positive growth effect, even though politics makes that difficult,” said Andrew Carter, chief executive of Centre for Cities.
He added that making it easier to build in existing prosperous areas was one of the fastest routes to growth.
Labour has pledged to invest in all regions as part of its forthcoming industrial strategy, alongside plans to expand English devolution and empower local mayors.
The government’s industrial strategy green paper describes narrowing the gap between the South East and other regions as “key” to raising growth overall, with advanced manufacturing identified as a target sector.
However, Tony Travers, professor in the government department at the London School of Economics, said Labour would need to make hard choices if it wanted to deliver rapid improvements to GDP.
“The government has sold itself on kick-starting growth, but this analysis underlines just how dependent they are on London and the South East to achieve that goal. The reality is they have to decide to live with it, or try to change it and risk ending up with less growth,” he said.
The report highlighted the abiding economic north-south divide, with eight of the 10 cities with the highest average wages found in the Greater South East despite the pledges of successive governments to reduce inequality.
Since 1997, despite initiatives to narrow the UK’s regional economic disparities such as the Northern Powerhouse and Levelling Up, “there has been no change based on wages”, the report said.
The average worker in London now earns £20,000 a year more than their counterpart in Burnley, the city with the lowest pay, it found.
Cities needed to create conditions to “attract more cutting-edge companies if they are to be more prosperous”, regardless of which sectors the companies operated in, the report concluded.
Carter said the findings highlighted the need to boost planning reforms and focus on industrial strategy in areas of the economy with the highest growth potential.
A ranking of cities by the number of “new economy” businesses per head of population, operating in areas such as AI, advanced materials, fintech or life sciences, skewed heavily towards London and the South East.
The top seven places were all located in the South East, while seven of the bottom 10 cities were in the north of England.
The think-tank also said the role of manufacturing should not be “over emphasised” in any drive to raise wages outside of the South East, adding the sector was set to play an “ever smaller” role in the economy overall.
“It is unlikely that a place will see a sustained improvement in the performance of its export base that is not led by high-value service activities,” it added.
The report also cautioned against over-dependence on one sector, lest it decline, pointing to Aberdeen’s reliance on oil and gas exports, noting that where places have dominant industries they should seek to diversify their economies.
The Treasury said it remained committed to regional growth, based on devolution, investment and regulatory reform.
“Growth is the number one mission of this government’s ‘plan for change’ and ensuring growth is felt in all regions of the UK is a core part of that,” a spokesperson added.