00Executive Summary

There are two big problems with commentary on the UK economy in the international context.

The first is a fascination with short-term growth figures. Both commentators and both main parties fall into this trap. Recent evidence of the latter is the Prime Minister’s claims in his speech announcing the 2024 General Election that the UK is growing faster than France, Germany and the US, and Labour’s commitment for the UK to achieve the highest sustained growth in the G7.

And the second is that most analysis is done exclusively at the national level, ignoring what the geography of the economy of each country tells us about their relative performance.

The first is a problem because looking at short-term changes only misses a much bigger and more worrying picture – that there is a large prosperity gap between the UK and the leading economies of the G7. The average worker in France, Germany and the US produces 14 per cent, 13 per cent and 22 per cent more per hour respectively than the average UK worker. This productivity underperformance ultimately results in lower living standards and a greater tax burden in the UK than in these peer countries.

The second is a problem because it misses a large part of the explanation as to why this prosperity gap exists. And that is because some of the largest cities in the UK outside the capital, such as Birmingham, Manchester, and Glasgow, do not make the contribution to the UK economy that their peer cities such as Los Angeles, Lyon, and Frankfurt make to their national economies.

The UK’s large cities inherently should offer the benefits that high productivity, knowledge-intensive activities are looking for – namely access to a deep pool of skilled workers and access to knowledge through a network of other high-skilled businesses, a process known as agglomeration. But places like Newcastle, Birmingham and Leeds do not appear to be doing this as much as they should.

There are 112 cities in the G7 the size of Nottingham or larger, but of the bottom twenty for productivity, seven are British. They are in effect the sick men of the G7, with the recent stuttering of London adding to the UK’s woes.

The report assesses the scale of the benefits large UK cities offer to businesses compared to their G7 peers to better understand this underperformance. It looks at each city’s ‘hardware’ – its built environment and transport system – its ‘software’ – the skills of its residents – and its ‘operator’ – how institutions affect local economic policy.

It finds that a combination of a mixed picture on skills and underperforming transport networks – underpinned by relatively low-density built environments that make public transport more difficult to sustain – shrink the size of the skilled labour pool, making them in reality smaller cities than they appear to be on paper. They have a planning system that is out of kilter with other G7 countries that makes it difficult to change their urban form. And the UK’s exceptionally centralised state means that these cities do not have the freedoms that other G7 cities have to make the investment required to address their challenges.

The scale of the challenge is large. The next Government should put improving the UK’s economic performance at the centre of its governing agenda, by setting the goal of becoming richer than Germany.

While catching up with Germany is a more realistic goal than becoming more prosperous than the US (the leader of the G7 pack), it would still require a big uplift in performance – indicative modelling suggests this would be £181 billion in 2018 prices, an 8.8 per cent increase in the size of the economy.

This clearly will not happen within one parliament. And so to deliver on this goal the next government needs to do the following:

• Set out a long-term strategy to close the UK’s prosperity gap backed with sufficient funding to match the scale of the challenge.
• Improve national prosperity by tackling the underperformance of the large cities outside London, which make up 57 per cent of the national prosperity gap. Becoming more prosperous than Germany is plausible, but doing so without first ensuring the big cities are driving the national economy is not.
• Enhance the appeal of the city centres of the UK’s large cities to knowledge-intensive work, by increasing the number of high-skilled workers who can access city centre jobs in a reasonable commute. The large cities will need more graduates, better transport infrastructure, and a denser urban form to provide greater accessibility than their G7 peers.

Alongside a number of national policy changes that are space blind, such as the UK’s trading relationship with Europe and policies to encourage business investment, which fall outside the scope of this report, this report recommends:

• Planning reform, moving the UK away from its uniquely discretionary system and the uncertainty this creates towards a rules-based one that is more common in other G7 countries.
• Deeper devolution to bring large UK cities more in line with their G7 comparators: more control over spending, the ability to raise their own taxes and for all to have transport powers akin to what London has with Transport for London.
• A UK version of the US CHIPS Act designed to boost cutting edge activities in the UK’s largest cities, spending £15.9 billion over 10 years in Birmingham, Glasgow, Manchester and Leeds to encourage innovation through their leading universities, invest in their city centres and create or extend their transport funding. Much of this funding has already been earmarked by the last government but has not been spent.