Economist Lord O’Neill discusses the outlook for regional inequality
Economist Lord O’Neill outlines how the pandemic has begun redrawing the UK’s map of regional inequality and why now is the time to take bold action.
The UK is one of the most regionally unequal countries in the developed world. Only London, Scotland and the south-east equal or exceed average national earnings, with Wales as much as 10% behind, according to data for 2018 published by the Office for National Statistics. In 2019, a study by the University of Sheffield ranked the UK as having a higher level of regional inequality than any other country in the Organisation for Economic Co-operation and Development. And the pandemic risks widening the gap even further, affecting businesses on a highly localised basis.
No one is better placed to assess the problems and potentials of the UK’s regions than Lord O’Neill of Gatley, an economist of 40 years, and an expert in intranational and international economic trends. He is perhaps best known for coining the term Bric (Brazil, Russia, India, China) in 2001 to describe the world’s emerging superpowers, as well as his work in government as Commercial Secretary to the Treasury from May 2015 to September 2016.
O’Neill was recruited to support the Northern Powerhouse project under David Cameron but soon decided its work would be more effective beyond the push-and-pull of national politics. Following the fateful referendum of June 2016 and the swapping of Cameron for Theresa May, O’Neill joined the Northern Powerhouse Partnership (NPP) established by ex-Chancellor George Osborne to continue the project’s work outside of government.
“Since the Cameron government embraced the Northern Powerhouse, there’s been a staggering degree of volatility by the subsequent two prime ministers and their governments on policies towards it. There’s a lot of rhetoric but, in terms of actual policies, it’s been really volatile,” says O’Neill of the recent approach to the Northern Powerhouse. “It’s evidenced by the constant delaying of the devolution agenda, the constant delaying of proper commitments to Northern Powerhouse Rail and a lot of talk about ‘levelling up’ that never seems to be followed by action.”
As Vice-Chair of the NPP, O’Neill has outlined six areas of progress required to make the project a success: devolution, improved transport and infrastructure, education, skills, greater business involvement and “a genuine, different ambition” for the north. “We want to create a degree of credibility that makes it impossible for decision makers to avoid,” he says of the NPP’s work. “Our ambition is to make it so compelling that any government of today or the future will find it impossible to resist pursuing policies to support what I believe is at the core of making Britain a better and more successful country.”
The NPP believes the devolution of spending on health, infrastructure, post-secondary education and investment to metro mayors – who were first elected in 2017 – will better target regional inequality and improve growth. Devolution is a contentious issue, especially in today’s polarised political landscape, and the government has delayed a white paper on the subject four times since announcing it as part of the Queen’s Speech 2019.
The pandemic has thrown a fresh spanner in the works. It’s unclear how the health impacts, as well as the economic fallout from months of national and localised lockdowns, will interact with the existing landscape of regional inequality. O’Neill has spent much of his career analysing the direction of economic travel but advises pandemic pundits to exhibit a degree of caution.
“We’re still in the middle of it, so we don’t quite know its impact,” he says. “But the places that are being hit the worst in the second wave are, by and large, the places that are the weakest in terms of equality and productivity. It looks like the pandemic is making those least advantaged suffer even more than those with greater advantage. It probably reflects a lot of the underlying problems in those societies relative to the country’s more prosperous societies.
Instead of providing loans through the banking system, I would have just given companies money
“Many would suggest the pandemic is going to make the geographic divide worse without government intervention. Look at the example of education, with students not being able to take exams during the summer. Until the government was forced to change its algorithm, the consequences would have made things even worse for students in the poorest areas. They didn’t give a lot of weight to those who argue you have to take into account local economic and social circumstances.”
The contrasting view, which O’Neill also shares, is that the pandemic may reduce London’s importance as a hub of commercial activity and draw professionals and businesses out to the regions. The sudden and necessary spread of remote working has convinced many that distance, be it between employee and employer or business and client, need not be an obstacle to productivity. Our relationship with big cities and their glossy offices might be forever changed as a result.
“If you look at what’s going on in the housing market, more and more people are seriously considering living further from the centre of London and considering that, in the future, they don’t need to be in London the way they thought they did in the past,” he says. “Oddly, this pandemic might be resulting in a reallocation of choices and resources that start to change regional inequality, even without government intervention.”
Route to recovery
As the pandemic began to escalate in March, O’Neill recommended that the government adopt a series of creative and unprecedented stimulus measures. The furlough scheme largely resembled O’Neill’s call for direct income support or, as he termed it, “people’s quantitative easing”, but he suggests more “audacious” action could have been taken elsewhere.
“Instead of providing loans through the banking system, I would have just given companies money. It would have cost similar amounts, but you wouldn’t have the debt overhang that we now have,” he says. “Secondly, I think the era of low inflation targeting has come to an end. The government should give the Bank of England a broader remit, which I would call nominal GDP targeting. It would be much more imaginative than continuing to focus on low inflation at a time when we’ve had low inflation for getting on 15 years.”
The scope of the Bank of England is another contentious issue. Having slashed interest rates from 0.75% to 0.25% on 11 March, and then to a historic low of 0.1% eight days later, the Bank has little room for manoeuvre. It’s left the nine-strong Monetary Policy Committee in open disagreement over taking the unprecedented step of setting negative interest rates, with external member Silvana Tenreyro in favour, Deputy Governor Sir Dave Ramsden against and Governor Andrew Bailey somewhere in the middle.
Pointing towards other forms of economic stimulus as likely to be more effective, O’Neill dismisses the discussion as a distraction: “The almost inane academic argument about whether the Bank of England will go to negative interest rates is pitiful. It’s neither here nor there.”
Balance of power
The private sector has its role to play in the recovery and redressing inequality, too. O’Neill says the pursuit of profit alone has skewed outcomes away from those best for society – flying in the face of economic theory – but he is hopeful that the pandemic will provide the necessary impetus for change. Now, he says, is the time for companies to move away from simple profit maximisation and towards goal optimisation, taking into account their carbon emissions and measures of equality of opportunity and income. O’Neill credits his own awakening on “profit with purpose” to the global financial crisis of 2008 and, after leaving the world of finance in 2013, another project he completed for the Cameron government.
“One of the huge influences on me was an independent review into antimicrobial resistance that I led. I discovered that the top three pharmaceutical companies in America spend more money buying back their own shares than the entire 10-year solution of 29 different global interventions for antimicrobial resistance,” he explains. “You could literally solve antimicrobial resistance, in terms of the money, with what they spend on manipulating their own share price. That’s a prevalent part of pre-Covid modern capitalism.
“Hopefully, one of the lasting legacies of the pandemic is that it will be a lot harder for companies to manage their own balance sheets through share buy-backs,” he says. “We have constant rising reported profits and exceptionally low interest rates, yet we also have an era of really weak private sector investment spending. That is something a textbook would tell you is never supposed to happen.”
The advice for finance professionals in helping to shape the post-Covid landscape, therefore, is simple: “Stop being at the heart of sophisticated manipulation of balance sheets, because that’s what’s causing so many problems for the credibility of capitalism. Genuine risk-taking should be highly rewarded, but manipulation of balance sheets and quarterly reports for the appearance of great performance is just morally unacceptable.”
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