‘Levelling up’ – Is HS3 the way?

The most frequently mentioned promise in the 2019 UK general election was to ‘level up the UK’.  This referred to helping underperforming areas, especially in the North, close the regional income and wealth divide which has become one of the largest in the developed world. The pledge evidently won over voters in these areas, gaining Labour ‘Red Wall’ seats that they ordinarily would not have expected to have taken. How likely the government is to fulfil this promise remains up for debate.

The extent of regional inequalities left the government no choice but to address the issue. A 2018 study by the Office of National Statistics found that UK productivity (GDP per hour worked) was 50 USD. However, this figure masks large regional differences – London’s GDP per hour worked was 32% higher than this average whilst the North East and Yorkshire were both 20% lower. Moreover, 2018 data showed that incomes in Yorkshire were 11% below the UK average hourly wage of 14.88 GBP, whilst London salaries were 19% above this. Additionally, in the past decade, 34% of new jobs have been created in the capital, despite only 15% of the population residing there. In contrast, only 1% of new jobs created were in the North East, even though it constitutes 5% of the population. Given these substantial differences in productivity, income, and opportunity, most observers agree that drastic intervention is required.

The most prominent policy idea on the ‘levelling up’ agenda is the construction of a high-speed rail link from Leeds to Manchester, the HS3. It aims to specifically combat the severe regional disparities in annual transport expenditure per capita – spending in London per head is triple that of Yorkshire (903 GBP per annum against 276 GBP). The main benefit is the improvement in labour mobility. The reduction in journey times from 50 minutes to an estimated 30 minutes will allow labour to move more easily and cheaply between northern cities, increasing the depth and quality of the labour market. An Ernst & Young survey found that 34% of firms factor in the skill of the local labour force when making investment decisions, so a higher quality labour market will attract more investment which in turn would create high skilled jobs, reducing the regional opportunity gap.

However, the construction of high-speed links would only be beneficial for specific regions. The main beneficiaries, Manchester, Birmingham and Leeds are already the leading cities for investment and employment. In 2018 there were 37 foreign direct investment (FDI) projects in Manchester and 22 each in Leeds and Birmingham, compared to just 6 each for Sheffield and Newcastle. In the same year, London attracted 460 FDI projects. Additionally, coastal and rural areas, such as Blackpool which contains 8 of the 10 most deprived neighbourhoods in the country, and Middlesbrough, which has the UK’s highest proportion of the most deprived areas, are ignored. In fact, it seems that as employment is created and investment attracted into Leeds and Manchester, the income and opportunity gap between these cities and areas such as Blackpool and Middlesbrough will widen. This would increase regional inequalities, contrary to the objective of the policy.

In summary, the construction of high-speed rail links could produce immense benefits for the cities that they pass through. Beneficiary cities such as Leeds and Manchester would likely experience increased productivity, income and opportunity convergence with London, but they may pull ahead of other areas that do not receive benefit from the projects. Because the regional income and wealth gap is driven by deep-rooted structural issues such as poorer education. infrastructure and health, the impact of HS3 will be limited because, as it only solves part of the issue. Finally, it is noteworthy that inequality within regions is as prominent as inequality between regions, which the government must also seek to address.

 

By Jon Garner

Sector Head: Jackson Philips

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