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Dr Neil Lee

Regional inequality may be the price for growth

Authors: Dr Neil Lee Neil Lee

28 October 2010

The Local Growth White Paper was presented to a sparsely populated commons, with the bulk of the headlines covering the new Local Enterprise Partnerships (LEPS) announcement. In short, most big cities got them (although they didn’t always get the name). Notable exceptions include Newcastle and Hull.

But there is a broader, more interesting story underlying the paper. The unspoken theme is a move towards market based urban policy, with incentives for local areas to grow and funding tied to this. The new homes bonus will provide incentives for cities to grow. So will the options being considered for business rates to be retained locally. Nobody is arguing with this: everybody is keen for growth, particularly right now.

Yet while the policy is market based, the rhetoric is about rebalancing – encouraging growth outside London and the South East and in industries other than financial services. And this is the problem.

From what we know about market processes, they’re unlikely to achieve rebalancing. The market will continue to shift activity towards more productive parts of the economy (London and the South East). Increasing incentives won’t change this; it will make it happen more quickly.

Allowing local authorities to keep their own business rates – if the government proceeds with this idea – would provide a classic example of this disparity trap. As an incentive for local authorities to promote growth, this looks like a great policy.

But, by rewarding the authorities that see the strongest growth in private enterprise, it would leave less money for those areas that need investment most. This could result in differential outcomes, as government is better funded in places where the private sector is stronger.

So as powers are decentralised, so will outcomes, and greater disparities in outcomes may be the price for growth.

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