Paul SwinneyDirector of Policy and Research, Centre for Cities
There has been a healthy debate in recent years about how useful GDP—the central measure that economists use to gauge the performance of an economy —is as an indicator of wider standards of living. At the national level, this discussion is perhaps less interesting than it first appears—since GDP per head and living standards track each other closely—but at the local level, it is much more contentious.
There is no denying that GDP is a very narrow measure of wider standards of living, there is also no doubt that refinements could be made. However, despite its limitations, GDP tracks standards of living fairly well at the national level—with a lot of overlap between the two on things like jobs and wages. In addition, other factors that influence standards of living—such as housing, health and education—tend to track the economy even if they are not directly measured by GDP. Given this, the realities are less interesting than the theoretical argument.
When we look below the national level, it becomes much more interesting. It is here where there is a clear decoupling of the two concepts—and it is this decoupling that has implicitly driven the agenda around levelling up in recent years.
This decoupling stems from the fact that different places play different roles in the national economy. The UK economy—and specifically, the more high-skill, high-value parts of it—predominantly clusters in cities and large towns. The 62 largest urban areas in Britain account for just 9% of land but are home to 59% of jobs and 71% of knowledge-based services jobs.
Cities are attractive because they offer access to workers, customers and knowledge through face-to-face interactions. The costs, of course, tend to be higher—for example, rents, congestion and pollution. Knowledge-based service activities especially, tend to favour these benefits despite the costs because they ultimately make them more productive.
Recent structural shifts towards a more knowledge-based economy have now made the benefits even more valuable, which has, in turn, fuelled the debate around the future of so-called ‘left-behind’ places. This issue has been narrowly focused on the economy (particularly jobs), rather than on broader measures of standards of living.
Although politicians have claimed for decades that they can move high-paid jobs around the country, there is no one effective policy that they can use to achieve this. Policymakers do, however, have power over increasing access to prosperous places and redistributing the gains from it—and this is where their focus should lie.
For those who live within commutable distance of a city, access to prosperity requires two interventions. First, the underperformance of many large cities in the UK must be fixed—they are currently much less successful than their counterparts across Western Europe. Centre for Cities estimates that this underperformance costs the UK economy around £50 billion each year. If a city is failing to reach its economic potential, the areas around it also suffer—a key reason why so many towns around Birmingham struggle much more than those around London is the difference in the performance of their respective neighbouring cities.
The second intervention should be to make sure that the residents of these towns also have sufficient access to opportunity—both in terms of transport connections and skills. People living in St Albans have this to a much greater extent than those in Kidderminster.
The thornier question for policy is what to do about more isolated places, such as Barrow and Grimsby. There may well be some interventions that policy can make to improve their economies—and, if so, politicians should implement them—but their ultimate performance will be fundamentally shaped by their location, which limits the extent of what policy can do.
Improving the standards of living in these places through redistribution is a better option for policymakers. This could be done through the tax system, but also by improving the quality of public services. Unlike the economy, policy can aim to make public services as good as anywhere in the country by increasing spending on areas such as health, education and ‘pride in place’.
It is not realistic to expect the economic performance of small towns to be akin to that of much larger urban areas and in this sense, GDP does become less relevant. Policymakers should instead, work within a framework that is clear about what we expect to achieve in different parts of the country and that looks to implement a suite of policies tailored to each. Policies should, therefore, not be aimed at boosting GDP in so-called left-behind places but rather at using the tools they already have to improve the standards of living for their residents.