The Northern Powerhouse Independent Economic Review
The Northern PowerhouseIndependent Economic ReviewFinal Executive Summary Report24 June 2016
The Northern Powerhouse Independent Economic ReviewFinal Executive Summary ReportContentsThe Northern Powerhouse . . . at a Glance . i1. Introduction . 12. Understanding the North’s Prosperity and Productivity Gaps . 63. The North’s Competitive Advantage and Sector Strengths . 114. Scenarios for Future Growth in the North . 165. Looking Forward . 25Annex A: Learning from the Past . A-1Annex B: ‘Prime’ and ‘Enabling’ Capability Maps . B-1Annex C: Glossary . C-1Contact:Simon PringleRebecca PatesLuke DelahuntyTel:Approved by:Simon PringleDate:0161 475 unty@sqw.co.uk24 June 2016Directorwww.sqw.co.uk
The Northern Powerhouse Independent Economic ReviewFinal Executive Summary ReportThe Northern Powerhouse . . . at a GlanceSource: SQWi
The Northern Powerhouse Independent Economic ReviewFinal Executive Summary Report1. IntroductionThe North of England is home to 16m people (nearly one quarter of the UK population) and7.2m jobs, and generated an economic output of around 290bn of Gross Value Added (GVA)in 2015, about one fifth of the UK’s total. The area has a wealth of high profile and growingbusinesses, and rich sets of expertise creativity, and assets. But, there remain persistent gapsin GVA per capita and productivity performance compared to the rest of the UK. HM Treasuryanalysis has showed that if the North’s economy grew as quickly as the UK average to 2030instead of at the slower rate experienced in the past two decades, its economic output wouldbe 37bn higher in real terms1.It was with this opportunity in sight that the Chancellor set out a vision in August 2014 tobetter connect the North and for it to become ‘one Northern Powerhouse’, acting together todrive economic outcomes greater than the sum of its parts. The Chancellor’s announcementwas followed by HM Treasury’s ‘Fixing the Foundations’ report in 2015, which committed todevolve further powers to the North (and elsewhere). The Autumn Statement in late 2015then defined a range of investments in the North’s science and business base to boostproductivity performance and encourage a ‘rebalancing’ of the UK’s economy.Introducing the Independent Economic ReviewAgainst this background, in late October 2015, SQW Ltd and Cambridge Econometrics Ltd(CE), supported by Steer Davies Gleave (SDG) Ltd, John Jarvis Consulting, and (as peerreviewers) Professors Philip McCann (Groningen), Ron Martin (Cambridge) and RogerVickerman (Kent), were appointed by Transport for the North (TfN) on behalf of widerpartners, to undertake an Independent Economic Review (IER) of the NorthernPowerhouse (NPh). Partners’ intentions in commissioning the IER were threefold, namelyto provide: Data, evidence, and intelligence to underpin TfN’s Northern TransportStrategy in Spring 2016, as an input to the Spring 2016 Budget, and subsequentproposals for transport investment. The evidence and arguments around which the ‘narrative’ for the NPh could beforged and developed. The analytic bedrock on which subsequent NPh development – including, butnot limited to, strategy and action planning – could be built and progressed for thefuture.What the Review was . . . and what it was notThe Review sought to characterise the North’s economic position and the driversunderpinning its performance, and identify opportunities where ‘pan-Northern’ effort cansensibly support existing ‘local’ activities. Whilst key elements of the work drilled down intotransport specifics, the Review as a whole was intended to reflect on the wider ancellors-speech-at-the-cbis-2015-annual-dinner.1
The Northern Powerhouse Independent Economic ReviewFinal Executive Summary Report‘ecosystem’ in the North of England, of which transport is a vital part. Figure 1-1 introducesthe concept of the broader ‘economic ecosystem’, which has underpinned thinking throughoutthe IER, and recognises the relationships and interplays different parts of the economy.Figure 1-1: A depiction of the components of an ‘economic ecosystem’Source: SQWImportantly, the Review was not intended as a fully-dimensioned ‘economic baseline’ for theNorth – it focused on five specific Workstreams, detailed below, which covered a range ofdomains. Equally importantly, the IER was not about developing the NPh strategy or actionplan, nor was it concerned with any NPh governance arrangements. Rather, it relied heavilyon a review and synthesis of existing literature and evidence, with additional modelling workby Cambridge Econometrics, building on analysis of the North’s prosperity and productivitygaps, and sectoral performance, as its key evidential foundations.ApproachThe IER was undertaken between late-October 2015 and March 2016. It focused on fiveclearly defined but interrelated Workstreams which sought to understand the scale, natureand causes of the North’s ‘performance gap’, distinctive sectoral strengths andcapabilities at the level of the North, and future growth prospects for the North (seeFigure 1-2 below).2
The Northern Powerhouse Independent Economic ReviewFinal Executive Summary ReportFigure 1-2: The five component work streams of the IERSource: SQWThe IER study was a strong example of partnership working at a significant scale, overseen bythe TfN Partnership Board and northern Leaders, who have broad political and businessmembership from across the North. The project was commissioned and managed by TfN,supported by an Economic Reference Group, comprising economic leads from all 11 LocalEnterprise Partnerships (LEPs) across the North. The work commenced with a Call forEvidence in early November 2015 via the Economic Reference Group, academic networks, andkey stakeholder groups. Evidence was assessed according to its relevance, and almost 200documents, covering some 8,000 pages, were subsequently reviewed to inform Workstreams1-32. Alongside this, Cambridge Econometrics analysed the North’s GVA and productivityperformance and sectoral profile – both historically and into the future – using their LocalEconomy Forecasting Model (LEFM)3. In mid-December 2015, draft findings fromWorkstreams 1-3 were presented to the Economic Reference Group and a meeting of theNorth’s Leaders and LEP Chairs, before being presented to the TfN Executive and PartnershipBoards just before Christmas.With the evidential foundations in place, in January 2016 the IER’s focus moved on tomodelling future growth scenarios for the North, including a ‘transformational’ scenario forthe North which was ambitious but at the same time credible (Workstream 4). Concurrently,This included a range of evidence from academic and policy research, think pieces, and LEPs’ Strategic Economic Plansand underpinning evidence bases. Sources included prominent academics in the fields of economic/spatial growth,productivity performance, Smart Specialisation, and transport economics, N8, SERC, HM Treasury, BIS and DfT, IPPR,Centre for Cities, RSA City Growth Commission, The Northern Way.3 LEFM is a comprehensive database of economic, labour market and demographic data developed by CambridgeEconometrics, and is a stand-alone model providing forecasts of local economic and labour market indicators linkedexplicitly to national and regional forecasts.23
The Northern Powerhouse Independent Economic ReviewFinal Executive Summary Reportproposals for an Independent Panel to act as ‘guardians of the North’s evidence base’ goingforward were developed and tested (Workstream 5). Again, draft findings from Workstreams4 and 5 were presented to the Economic Reference Group and the North’s Leaders and LEPChairs, and then the TfN Executive and Partnership Boards in February 2016. Feedback fromall stakeholder presentations was taken on board, and a final presentation was made to theNorth’s Leaders in April 2016.Talking TermsThroughout this report, performance is defined through a general measure of prosperity,Gross Value Added (GVA) per capita, the measure most commonly used when comparingthe economies of different regions. This is for two reasons. First, GVA per capita can bedecomposed into drivers of interest such as productivity, employment and dependency rates,and performance gaps in each of these can be analysed. Second because, taken alongsidepopulation assumptions, there is a close link to the output growth aspirations and associatedscenarios, which allows us to quantify future potential growth outcomes.When defining the performance gap, the Reviewers used two alternative comparators: therest of England minus London, and also with London included. Both comparators are ofinterest. On the one hand, London’s unique characteristics as a global city and financial centre,which are unlikely to be replicable elsewhere in England, mean that it may not be a relevantbenchmark for the Northern Economy. On the other hand, one of the aims of promoting betterconnectivity across the Northern economy has been to create an economy of sufficient scaleto realise some of the advantages that a city of London’s size enjoys, which suggests that thecomparator should include London. The gap was also compared to European benchmarks,including the Rhine/Ruhr region (Germany), the Randstad (Netherland), and Lombardy(Italy).Report StructureThis report is a summary of the findings from the IER’s workstreams. It is structured asfollows: Section 2 summarises evidence on the scale, nature and causes of the North’s‘performance gap’ (Workstream 1) Section 3 presents the key sectoral strengths and capabilities of pan-northernsignificance (Workstream 3, drawing on the findings of Workstream 2) Section 4 sets out the future growth scenarios for the North, and compares a‘business as usual’ forecast to one where the North’s future is transformed bytackling the wide range of factors that are responsible for the ‘performance gap’observed in the past (Workstream 4) Section 5 outlines further evidence needs and options for ‘guardians’ of the North’sevidence base looking forward (Workstream 5).This summary report is supported by three annexes: Annex A offers some instructive learninglessons from a similar preceding initiative, The Northern Way; Annex B presents illustrative4
The Northern Powerhouse Independent Economic ReviewFinal Executive Summary Reportmaps of the north’s ‘Prime’ and ‘Enabling’ Capabilities; and Annex C provides a short glossaryof 5
The Northern Powerhouse Independent Economic ReviewFinal Executive Summary Report2. Understanding the North’s Prosperity andProductivity GapsKey Messages The North’s ‘performance gap’ (measured by GVA per capita)’ is persistent and entrenched. Its GVAper capita has consistently been some 25% below the rest of England average, and 10-15% belowthe average when London is excluded. Having been on a downward trend since the early 2000s, thegap has widened since the 2008/09 recession. Productivity accounts for the largest proportion of the ‘performance gap’, and is also associated moreclosely with the widening of the gap in the post-recession period. Nonetheless, the employment rategap has also been persistent, and largely stable over the past decade. The North’s skills gap appears to be the most important factor driving the overall ‘performance gap’,as it influences both productivity and the employment rate. This has worsened since the recession,in part due to out-migration of skilled workers to the southern regions where employment prospectsare better. Other important causes of the North’s productivity gap include under-investment (a gapwhich has widened notably since 2008), low enterprise rates, a lack of agglomeration and poorconnectivity, compared to benchmarks. The North’s sectoral mix accounts for very little of theproductivity gap.This Section summarises the nature and causes of the North’s ‘performance gap’, which isdefined through a general measure of prosperity, Gross Value Added (GVA) per capitacompared to the rest of England minus London (and with London included for an alternativeperspective). Specifically, the headline GVA per capita figure is decomposed into fourconstituents to show which contributes most to the GVA per capita gap: productivity,employment rates, jobs per worker and the age structure4. Building on this, attention is thengiven to the productivity gap, with an analysis of underlying drivers of productivityhighlighted in the literature and adopted by HM Treasury5 as key indicators, such as skills,innovation, agglomeration, and connectivity, to review the extent to which they play a part inexplaining the ‘performance gap’. The material presented here draws on CambridgeEconometrics’ in-house LEFM and the wider IER literature review, and provides the evidentialfoundations for subsequent analysis presented in this report.The scale of the North’s ‘performance gap’The North’s GVA per capita, has over the last thirty been consistently about 25% belowthe average for the rest of England, and 10-15% below the England average excludingLondon. The gap narrowed a little during the early 2000s but has widened since the 2008/09recession, as illustrated below. Prices are typically lower in regions with lower income percapita, but latest ONS data suggest this only explains about 3-4 percentage points of the gap.The ‘performance gap’ compared with comparator geographies – Rhine Ruhr region ofGermany, the Randstad region of the Netherlands and the Lombardy region of northern Italy– is larger still (30-35%).Definitions: Productivity - GVA per (workplace) job; employment rate: the proportion of the working-age populationthat is in work; jobs per worker: the ratio of workplace jobs per residence-based worker; and age structure: the share ofworking-age population in total population.5 ONS (2007) ‘Productivity Handbook’, chapter 3: Productivity Theory and Drivers.46
The Northern Powerhouse Independent Economic ReviewFinal Executive Summary ReportFigure 2-1: The North’s prosperity gap (GVA per capita) over timeSource: Cambridge EconometricsThe North’s ‘growth gap’, that is the rate of growth in terms of GVA, jobs, and the populationrelative to the benchmarks – also matters. The data indicate that in the case of GVA, the‘growth gap’ has opened since the recession, despite temporarily closing from the mid1990s through to the onset of the recession due to stronger performance in private services.The picture is similar for employment (although the growth gap started to widen slightlyearlier, from 2005 onwards) and the working age population (and, worryingly, the workingage population started to decline in 2011).What is driving the ‘performance gap’?GVA per capita performance depends on the following factors: the share of the population ofworking age (WAP), what proportion of the WAP are in work (employment rate), and howproductive those in work are (measured by the number of jobs per worker and GVA generatedper job). The question that follows is ‘which factor(s) matter most in causing the North’s‘performance gap’?’ If the gap were mostly explained by the employment rate, then policywould focus on getting more people into work (including addressing the reasons why peopleare unemployed or not in the labour market at all). If the gap were mostly explained bydifferences in productivity, policy would focus on the various drivers of productivity,including skills and transport connectivity.The evidence below shows that productivity – followed by employment – account for thelargest share of the North’s ‘performance gap’. When London is excluded, the gap with therest of England is fairly evenly split between productivity and the employment rate. However,when the North is compared to the rest of England including London, productivity stands outas the critical factor accounting for the lion’s share of the ‘performance gap’. This is becauseof relatively low employment rates and higher productivity in the capital, making productivitymore important when London is included in the comparison. Moreover, the North’sproductivity gap has remained broadly constant and demonstrated a gradual widening7
The Northern Powerhouse Independent Economic ReviewFinal Executive Summary Reportfrom the onset of the recession. These differences in productivity translate broadly intodifferences in earnings: in 2015, mean earnings of full-time workers in the North were about5% below those in the rest of England excluding London, and 16% below those in the rest ofEngland including London. So both the employment rate (more people in work) andproductivity (people in higher paid jobs) need to be improved.Table 3-2: Contributions to GVA per capita gapContribution to Gap in GVA per capita (%)with Rest of England (minus London)1992/20131992/19971997/2009GVA per capita gap2009/201313%14%13%12%Jobs per worker8%-1%9%-2%8%-2%8%-1%Employment rateWAP share7%8%7%6%-1%0%0%-2%of whichProductivityContribution to Gap in GVA per capita (%)with Rest of England1992/20131992/19971997/2009GVA per capita gapof whichProductivityJobs per workerEmployment rateWAP 5%5%1%1%1%0%Source: CE calculationsFactors driving the employment gapThere are a range of reasons (both individual and structural) why people of working age maynot be in employment. These include caring for a dependant, health problems, discrimination,lower skills, or that they cannot find work which matches their skills or pay expectations, oftenbecause of the structure of the local economy. There is limited evidence available explainingwhether the Northern economy is ‘different’ from the rest of England in these aspects. Someliterature suggest that large numbers of people in the North have become detached fromthe labour market. This is supported by data which show a larger proportion of the North’sresidents claiming incapacity and employment support, compared to the benchmarks;although the gap has fallen, this decrease has been slowing, and indeed since 2008 has shownsigns of rising. This issue is closely related to skills. The Leitch Review (2006) emphasisedthe importance of skill and qualification levels as a key determinant of whether people are inwork, and there are well documented risks that long-term unemployment can lead todeterioration of skills, thus reducing the potential supply of labour for many years.Factors driving the productivity gapThe literature on labour productivity suggests a similarly complex mix of factors in play, theseincluding skills, innovation, investment, enterprise, connectivity, sectoral mix, andgovernance. Each is explored in turn below.8
The Northern Powerhouse Independent Economic ReviewFinal Executive Summary Report Enterprise: the ‘enterprise gap’ (measured by business starts per capita) is alsorelatively persistent. Whilst there are low levels of company failure in the North,some argue this is denying the North the ‘creative destruction’ needed potentially tointroduce more innovative and efficient business and processes. Sectoral mix: according to Cambridge Econometrics’ analysis, sectoral mix accountsfor very little of the productivity gap. Differences in productivity within
The Northern Powerhouse Independent Economic Review Final Executive Summary Report 3 Figure 1-2: The five component work streams of the IER Source: SQW The IER study was a strong example of partnership working at a significant scale, overseen by the TfN Partnership Board and northern Leaders, who have broad political and business
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Northern Powerhouse Network Connectivity 34 7.1.6. Integration of NPR with HS2 35 7.1.7. A Vision for Northern Powerhouse Railfreight 36 7.1.8. Minimised Dependency on HS2 38 7.1.9. A Complete Vision for Northern Powerhouse Rail 39 7.1.10. Technical Excellence for the Northern Powerhouse 39
4 The Northern Economic Powerhouse BE Lobby Report 5 The Northern Economic Powerhouse sets out the proposition for transport and provides a platform for consideration by the LEPs and both private and public sector organisations across the North. The powerhouse plans are to work with these organisations to develop a prioritised set
