Tackling the UK’s regional economic inequality: Binding constraints and avenues for policy intervention

For most of the 20th century, inequality in GDP per capita between UK regions – while not insignificant – was relatively low by European standards (Rosés and Wolf 2018). In the 1980s and 1990s, however, regional economic inequality began to rise in most industrialised economies (IMF 2019). The UK stands out for how far this has developed: by the 2010s the UK had become one of the most regionally unequal of the world’s industrialised economies in terms of GDP per capita, productivity, and disposable income (McCann 2020). There are three reasons to be concerned about the UK’s large and rising regional inequalities. First, inequalities in GDP per capita and productivity across regions are mirrored with inequalities in several other socio-economic indicators, including disposable incomes, life expectancy, and educational attainment (Farquharson, McNally, and Tahir 2022; Marmot 2020). Second, as in other countries, rising regional economic inequalities have been linked to a changing political geography – dubbed a ‘geography of discontent’ (McCann 2020) – which may feed political instability. Third, the UK has a large and growing national productivity problem, with a fall in productivity growth post-2007 larger than any other G7 country except Italy (Office for National Statistics 2022). If productivity can be boosted in lagging regions, this opens the possibility for gains in both equity and efficiency. What are the defining features of the UK’s regional economic inequality problem? In Section 2, we present five stylised facts. These illustrate that the UK’s regional economic inequality problem today is best characterised by productivity differentials between London and the greater South East of England vs. the rest, largely driven by the underperformance of non-London cities. Earlier differences in employment rates and in industrial structure across regions have narrowed, leaving within-industry productivity differentials the prime driver of divergent regional economic performance. And, while different education mixes across regions mechanically drive a large portion of average productivity and earnings differentials, there is still a large regional productivity gap even controlling for education.