Treasury Officials moving North and the effect on Regional Private Investment

In recent weeks, UK Treasury officials have been scouting northern cities such as Newcastle, Leeds and Darlington to select a location to host a ‘new northern economic campus’ that will house 800 Treasury employees. This is part of a broader scheme to shift 22000 central government jobs from London in order to tackle regional inequalities and ‘level up left behind areas’. A key motive for this policy is to attract more investment to the region, but the question still remains regarding whether this will increase regional investment?


Shifting Treasury jobs to the north could provide improved incentives for regional investment. Firstly, government investment could act as a statement that viable investment opportunities exist outside of London, and therefore increase investor awareness of such opportunities. This particularly applies to foreign investors who often exclusively set their sights on the capital because they are unaware of regional investment opportunities. As foreign investors constitute a large proportion of total investment into the UK, accounting for 65 billion GBP in 2018, this could have an especially prominent effect on the economies of northern cities.


Furthermore, regional investment could be supported by the fact that its returns are far higher than the saturated London equivalents. An example of this is in the buy-to let-property market, where London yields just 3% whilst Manchester and Glasgow yield 6% and 9% respectively, although some of this variation reflects the greater risk inherent within regional property markets. This creates a strong incentive for the private sector to redirect investment away from the capital. Therefore the combination of greater investor awareness and higher yields could encourage greater regional investment and the many associated positive spillovers such as employment creation.


However, there are a number of reasons why regional investment may not increase because regional fundamentals (such as education, health and infrastructure) are far weaker than those of London. The depth and quality of labour markets is a critical determinant of investment because a highly-skilled workforce ensures high productivity and greater returns. London is the most educated region in the country, with nearly 50% of the working-age population holding degree level education, compared to 30% for Yorkshire and the North East, where the Treasury is considering relocating jobs to. If a firm required highly skilled labour, it would be less likely to invest in these northern regions because it would face additional training cost and difficulty attracting the necessary labour. Because most inwards investment is directed towards the dominant services sector, where labour is the most important input, this is a particularly strong disincentive.


Additionally, other fundamentals may not attract investment to the north. For example, start-ups are far more likely to invest in London, as it has the second most favourable ecosystems for startups in the world, after San Francisco. This is due to it being greatly internationally connected, allowing for excellent funding networks and dense concentrations of similar high tech, high growth firms. All of these factors are far more limited in the regions. Combining this with relatively poorer labour markets, the probability of greater regional investment is low.


Overall, whilst the intention of the government is admirable, shifting Treasury jobs to the north is unlikely to increase regional investment significantly because the capital’s fundamentals are far stronger. Additionally, while it does not offset the poorer regional fundamentals, the private sector does not require the central government to follow because the differing yields are already a powerful incentive to redirect investment to the north. To increase regional investment, action to address the weaker fundamentals such as the closing educational attainment gap will likely be a more effective measure.


By Jon Garner

Sector Head: Jackson Philips


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