The political economy of regional planning: challenges and opportunities

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Presentation for the Political Economy Seminar Series

St. Catharine’s College, University of Cambridge

12 November 2025

Purpose

Context: National and regional economic plans in the UK

UK macroeconomic snapshot

• Real GDP growth has been weaker than in previous cycles over the past decade. This is partly due to supply constraints, such as pandemic-related global supply disruptions, the terms of trade shock due to the energy price surge, and labour-market shortages.
• Productivity (output per hour worked) at the end of 2024 was 1.3% lower than in the Office for Budget Responsibility’s October forecast. Meanwhile, indicators of business and consumer confidence have trended lower.
• Weak growth mainly reflects even weaker household consumption (given its large weight in GDP; at least 65%), primarily a result of the high cost of living and weak consumer confidence.
• Investment seems to have held up better in recent years, including public investment, although these follow an extended period of weak investment since 2010. It remains constrained by high levels of public debt and relatively tight monetary policy.
• The UK labour market was tighter than in previous cycles from 2016 to 2021, partly due to the less flexible market since Brexit, although it started to gradually ease since 2022. Unemployment has been rising in recent quarters in both London and the UK.
• Real effective exchange rate depreciated during Q1 and Q2 2022 (due to factors such as weak economic growth and rising commodity prices) but has appreciated in recent quarters, mainly driven by interest rate differentials with the US.

UK public finances snapshot

• Several trends in public spending over past two decades.
• Upscaling of public services in the early-2000’s.
• Sharp surge post-2008 Financial Crisis.
• Coalition Government (2010) and the “austerity” era.
• Pandemic and energy price crises (2020-2022).
• Day-to-day spending and investment spending (the two totals usually set at Spending Reviews) have generally increased in real terms in recent years. However, as a proportion of the economy, spending totals are below where they were in 2010/11.
• Acute pressures on health spending in the UK. NHS staff vacancy rates are elevated, while metrics of resource adequacy are below that of peer countries, including the number of hospital beds, doctors and nurses per capita.
• Funding for affordable (public) housing was reduced after 2010, with spending on housing and communities cut by 32% in real terms between FY2010/11 and FY2015/16, followed by some recovery such that spending in FY2022/23 was 1.7 percent above the FY2010/11 level in real terms.

• Gradual decline in funding per pupil in secondary and further/ vocational education between FY2010/11 and FY2019/20, as well as a sharper decline in higher education funding per pupil in real terms.
• Given the importance of pension obligations and the commitment to the ‘Triple Lock’, the IMF assumes pensions are to rise to around £150 billion by FY2027/28, taking into account the ageing of the population, with the ratio of the working age to retired population to decline from four-to -one to three-to one by 2050.
• Recent changes to migration policy could present a challenge.
• Rising capital spending needs to support the green transition (The Climate Change Committee’s (CCC) Balanced Pathway to Net Zero implies that annual public investment in the green transition will need to increase by £5–10 billion by 2030).
• Recent efforts to boost defence spending.

UK socioeconomic snapshot

• Several measures point to the UK underperforming peer countries on socioeconomic indicators. In US News’ latest Quality of Life Index, the UK ranks outside the Top 10 for the first time.
• The UK seems to underperform most OECD countries on life expectancy, poverty incidence and income inequality indicators.
• While the percentage of UK adults who hold below secondary-school educational qualifications is lower than the OECD’s, its share exceeds that of many comparable countries such as France, Germany, Canada and the US.

Geopolitical context

• The War in Ukraine has exposed the vulnerability of global supply chains for key agricultural commodities. It has also instigated a drive towards greater expenditure on defence and security.
• The return of President Trump fuelled an already-existent rupture in global trading and supply chains that is resulting from a wider economic and geopolitical rivalry between the US and China.
• The so-called “Tariff Wars” have caused significant anxiety amongst global investors and governments across the world, as growth forecasts have been revised downwards.
• Recent events in the Middle East continue to threaten East-West trading routes and the stability of oil prices, with implications for growth and living standards globally.
• The UK has recently signed trade agreements with the EU, US, and India to mitigate the adverse effects of such geopolitical challenges.

Poor investment record

• A fundamental reason behind the UK’s poor macroeconomic performance since the 2008 Financial Crisis has been the country’s poor record on different types of investment.
• Annual growth rates of real gross fixed capital formation (GFCF) in 2019 were barely as high as they were in the early 2000s just before the 2008 crisis, with annual growth decreasing since 2014 and that decrease picking up momentum since 2016.
• Like with GFCF, annual growth rates in business investment in 2019 were similar to those in the early 2000s, with rates again dropping since 2014 and that drop picking-up pace in 2016.
• The UK’s underperformance is clear when accounting for real GFCF per capita. By 2019, the UK’s real per-capita GFCF represented less than 70% of both France’s and Germany’s. It is worth noting also that the gap with France and Germany has widened over the course of the two decades.

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UK real gross fixed capital formation & annual growth rate

Source: Office for National Statistics

Real gross fixed capital formation per capita by country

Sources: OECD and World Bank

Growth at the heart of the Plan for Change

National industrial strategy

• Create the most favourable conditions in key UK sectors for the companies of the future to emerge here – the ones that have a transformative role to play in the clean energy transition, the tech revolution, the fundamental impact of AI on every sector, and the new geopolitics.
• Backing eight sectors (the IS-8) with the highest potential, and the frontier industries at their leading edge (Advanced Manufacturing, Creative Industries, Life Sciences, Clean Energy, Defence, Digital and Tech, Professional and Business Services and Financial Services).
• Targeting the places and clusters across the UK that support those sectors.
• Tackle high industrial electricity costs, promote free and fair trade, strengthen economic security, expand business access to finance, drive innovation, capitalise on the value of UK data, enhance skills and increase access to talent, and reduce regulatory burdens.

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Spending Review 2025

London’s macroeconomic snapshot

London’s socioeconomic snapshot

• While London tends to outperform England and the rest of the UK macroeconomically, the picture is mixed when it comes to socioeconomic outcomes.
• Londoners are generally better qualified than their UK counterparts, with skills attainment and tertiary education rates exceeding national levels. That said, apprenticeship uptakes in the capital are lower than they are nationally.
• While London enjoys higher median pay than other regions, also suffers from higher rates of poverty and homelessness than other parts of the country.
• While children’s self-reported happiness rates are higher in London than the UK, London has seen a deterioration on this front. Moreover, In 2009/10, 8% of Londoners aged 10-15 had a probable mental disorder and in the most recent survey covering 2021/22 (i.e., partially covering the pandemic period) this had risen to 19%.

The London Growth Plan

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https://growthplan.london/

Key ambitions of the London Growth Plan

Priority sectors and growth areas for London

Growth

Sectors

Interaction with other London-based plans and programmes

Challenges to national and regional economic planning

Key challenges facing the UK

Key challenges facing London

Fiscal centralisation in the UK

• The UK is one of the OECD’s most fiscally-centralised countries, meaning regional governments have a limited ability to levy their own taxes or issue debt to raise revenue.
• Less than 6% of total tax revenue in the UK is raised locally as of 2021. By comparison, the 38 OECD member-states raised just under 11% of their tax revenue locally (on average).
• Existing studies on the impact of devolution on economic growth provide inconclusive results, with some pointing to positive impacts while others could not determine any effect.
• A study by GLA Economics for the London Finance Commission concluded that the type of decentralisation determines whether it positively affects growth or not. If tax revenue is decentralised (i.e., fiscal devolution), then that would boost economic growth (other things equal). However, if expenditure is decentralised (i.e., the local government is delegated greater spending powers), then that form of devolution may not necessarily enhance growth.

Example: devolution of strategic licensing powers

• In the UK, strategic licensing powers mainly reside with boroughs and local authorities rather than strategic regional government, with central government responsible for instituting this arrangement.

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• This regime has led to various challenges and problems that have stymied London’s ability to rehabilitate its night-time economy post-pandemic.

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• Key problems with the current licensing regime in London:

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• Costly due to bureaucratic delays (especially appeals process)
• Fragmented across 32 boroughs and City of London (each with different rules).
• Unequal and penalises smaller businesses that tend to be owned and operated by people with protected characteristics.
• Does not reflect best practices in other global cities.

Strategic licensing counterfactual: night-time spending on dining in London vs New York City

How the Mayor of NYC influences licencing regulations

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• Unlike London, New York City (NYC) is widely considered a 24-hour city. In NYC, the Mayor has considerable influence over licencing rules and regulations compared to the Mayor and GLA in London.
• Using data from a 2019 report on nightlife in NYC, total monthly night-time spending on night-time dining equalled an estimated $500 million in 2016 ($653 million in 2024 dollars, or £490 million). In 2024, This compares to approximately £400 million per month in London.
• To estimate the economic impact of this difference in expenditure, assuming a spending multiplier of 2.0* (i.e., a £1 increase in retail and food spending leads to a £2 boost to GVA), London’s GVA could be boosted by at least £2 billion per year if we enhance our restaurant licencing regulations so that we could match spending levels in NYC.
• While the dining night-time spend data for NYC is from back in 2016 (compared to 2024 for London), what is telling is that the above estimate could in fact be conservative seeing as how it wouldn’t account for an increase in dining spending due to behavioural changes by NYC residents and tourists.

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* Note: Estimates for spending multipliers in developed countries range between 1.5 and 2.0 (see UK ONS Input-Output Tables and US Bureau for Economic Analysis RIMS II Multipliers for examples).

Acute spatial inequalities (economic)

Acute spatial inequalities (social)

Opportunities to enhance national and regional economic planning

The resurgence of cities in modern political economy

• Urbanisation as a trend accelerated in the 1980s, as developed countries deindustrialised in favour of constructing services-based economies. The shift to knowledge, services and innovation economies and the growing mobility of talent fuelled the re-urbanisation process in the global North, with urban renewal and regeneration the means to support this process.
• The OECD estimates that by 2080, the percentage of humans in cities and towns will have doubled from roughly 40% to 80% and the range of cities of over 1 million people will have multiplied by six from 275 to about 1,600.
• Economic activity is even more concentrated than population. 275 OECD metropolitan areas with more than 500,000 people accounted for close to 55% of total GDP produced across 29 OECD countries in 2015.
• As countries and cities pursue productivity-growth and competitive advantage in economic sectors where agglomeration benefits are important, geographic concentration of economic activity is likely to be a recurrent feature.

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“We will neglect our cities to our peril, for in neglecting them we neglect the nation.” –

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John F. Kennedy, 1962

London as an engine for ‘positive-sum’ growth

• Econometric analysis using quarterly regional economic growth data (in real terms) from 1968 to 2022 shows that London’s growth is strongly co-integrated (i.e., related closely over time) with that of the South East, South West and East Midlands.
• The relationship with the East of England is slightly weaker, as are the ones with Yorkshire and the Humber, the North East and the West Midlands. It is weakest with the North West.
• There is a correlation between geographic proximity to London and the city’s influence on economic growth. That said, London’s influence over growth in the other regions increased over time.

Strength of relationship between region’s growths and London’s (1968-2022)

Source: Office for National Statistics and GLA Economics

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Fiscal devolution counterfactual exercise

• According to the ONS, between 2010 and 2019, London’s GVA grew by 2.39% annually (on average) after adjusting for inflation.
• Comparable cities within OECD countries that have a unitary system of governance (i.e., just like the UK’s), and that enjoy greater fiscal devolution, grew by 2.56% during that same decade on average.
• If London’s annual real GVA growth between 2010 and 2019 matched the average for comparable OECD cities in unitary states with greater devolution of revenue generation, then London would have generated at least an additional £38bn in GVA over the last decade.
• This translates into just under an extra £460 per Londoner per year.
• Meanwhile, comparable cities within OECD countries that have a unitary system like the UK’s but that enjoyed either the same or less fiscal devolution grew by 2.33% annually during that same decade (on average).

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Capitalising on areas of overlap in sectoral strategies

Creative industries

Clean energy/green innovation

Digital and technologies

Financial services

Life sciences

Professional and business services

Engagement with relevant stakeholders

Green Book Review as a fundamental exercise

• HM Treasury (HMT) is publishing a simplified and shortened Green Book. It will introduce the concept of 'place-based business cases' that enable joint appraisal of the projects needed in an area, rather than on an individual basis as is currently the norm.
• Complementary to this will be improved guidance on assessing the potential for 'transformational change' in an area. HMT says the new Green Book will also make clear that it does not make decisions solely based on the Benefit Cost Ratio (BCR) nor does it endorse the use of 'arbitrary BCR thresholds' for which projects it deems value for money.
• "A BCR of less than 1 should not automatically constitute poor value for money".
• Whether these changes disadvantage delivery of major infrastructure projects in highly productive regions such as London and the South East remains a concern.

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Inequality reduction and growth

• The World Economic Forum’s inaugural Social Mobility Report (2020) finds that increasing social mobility, a key driver of income equality, by 10% would not only benefit social cohesion but also boost economic growth by nearly 5% over the next decade.
• The same report estimated that the UK’s relatively low social mobility and high inequality will cost the country nearly $130B (£102B) in additional GDP from 2020-2030.
• International Monetary Fund (IMF) research also shows that persistently high inequality is associated with lower economic growth and greater financial instability. They cite technological advancement, declining labour unionisation, and trade liberalisation as reasons.
• Improving tax progressivity on personal income, addressing wealth concentration and broadly rebalancing the sources of taxation can support the social mobility agenda. Other proposals could include expanding access to quality healthcare and education for the poor and deepening financial inclusion.

Learning from the experiences of other countries

Back in the year 2000, gross fixed capital formation in China represented nearly a third of the country’s GDP. Consider that in 2024, the equivalent percentage for the UK was just under 17.5%. In other words, even in 2024, the UK’s gross fixed capital formation share is slightly over half what China’s share was 25 years ago! Economists highlight several reasons for the country’s impressive investment record- from economic liberalisation since the late 1970s, which allowed investment in key industrial sectors and infrastructure projects in partnership with national and regional governments, to the introduction of a state-led model centred on rapid capital accumulation. China has also been judicious in selecting which frontier industries (e.g., artificial intelligence, green technology) to prioritise and invest in to adapt to the country’s present and future economic needs. Rapid investment growth followed as a result.

Similarly, India allocated almost 30% of its GDP to gross fixed capital formation in 2024. In 2000, the share was 26%. Like China, India also liberalised its economy in the 1980s but did so while allowing a relatively dirigiste federal government to sustain capital accumulation through policymaking that favoured investment in particular sectors. For example, the country launched its National Infrastructure Pipeline plan for 2019-2025, dedicating over $2.7 trillion to over 14,000 projects that invest in the infrastructure sector (e.g., energy, roads and railways). Like China, India has also been investing heavily in the electric vehicles (EV) sector under the FAME II and PLI programmes, while also launching the SEMICON India Programme to boost investment in the semiconductor industry.

Both Norway and Sweden had a higher share of their GDP allocated to gross fixed capital formation than the UK in 2024 (Norway: 22%, Sweden: 24%). Moreover, both have seen that share increase by at least 2 percentage points from 2000 to 2024. One thing to note is that in addition to higher investment, both Norway and Sweden have had higher average annual GDP growth rates between 2008 and 2024 than the UK. Like China and India, both countries have allocated considerable public investment in sectors such as energy, renewables, fintech, healthcare, and digital transformation. Last but not least, both countries also opted for more inclusive economic growth strategies by ensuring a more egalitarian income distribution. Both countries have historically had lower inequality levels than the UK.

Considerations for Budget 2025