20 January 2025

To make us richer, Labour must embrace the cutting edge

By

As part of its mission to drive up living standards, the Government wants to put more money in people’s pockets in every part of the UK. This is quite some task. For a long time, pockets in some parts of the country have substantially more money in them, and greater potential to add more than others. 

There are big differences in pay across the country. Cities Outlook 2025 shows that the average worker in London or Slough earned by last August what the average worker in Huddersfield or Burnley earned in the whole of 2024. Workers in the Greater South East earned a cool £8,400 more than those elsewhere in the country. 

These differences come about because of the ability of different cities and large towns to attract the emerging cutting-edge of the economy. High-pay cities like London, Cambridge and Reading have more than twice as many cutting-edge firms – and three times as many cutting-edge jobs – as places with the lowest pay such as Middlesbrough, Burnley and Huddersfield.  

This frontier of the economy, which today includes areas like AI and fintech, is important for both regional and national growth because it is likely to come up with new innovations that will push up future living standards. (And it has been the underperformance of this part of the economy that explains much of why productivity growth has been so desperately poor since 2008.) 

The Government hopes to address this through its industrial strategy. It has made a good start. In last October’s green paper, it identified eight broad sectors it wants to see growth from. As a group, these sectors, such as life sciences and financial services, cover the exporting part of the economy – the bit that brings money (and thus prosperity) into the UK.  

Labour intend to take a more sector-specific approach in its forthcoming white paper. And there is room to do so. Finance, for example, includes back-office call centres as well as fintech. It is the latter that is likely to deliver a boost to prosperity. 

But there are big pitfalls here. It requires politicians to get out their crystal balls and predict which sectors are going to be the growth sectors of tomorrow. We can be pretty confident that some of these sectors don’t even exist yet, making this task nigh-on impossible. 

The good news is that they don’t need to be overly specific. While they should focus further on the cutting edge of the economy, they don’t need to go beyond that. 

Looking at the location of cutting-edge companies tells us two things. The first is that they prefer an urban location because of the benefits that cities offer (namely access to large pools of workers and other cutting-edge companies). And the second is that they co-locate because they largely look for similar things in a location. If a city is attractive to one type of cutting-edge company, the chances are that it will be attractive to another type too. This is definitely the case in London. It isn’t as strongly the case in Manchester as it should be. 

There will be some national sector policies that make sense. Regulation and intellectual property rights will likely impact on the growth of AI, for example. But this will be more of the exception than the rule.  

But the most important thing will be to have places that are attractive to the growth of tomorrow’s economy. Where the UK stands out as an outlier compared to the G7 leaders of the US, France and Germany is that our big cities, such as Manchester and Birmingham, do not play this role to the extent they should in the UK. This is bad for both regional and national prosperity. 

Of course, this analysis of pay divides says nothing of housing costs. While pay is much higher in the Greater South East, the briefest of searches on Zoopla or Rightmove will tell you that rents and house prices are much higher too.  

This though is not an inevitability, but a policy choice. If when creating the modern planning system in 1947 we had created one akin to other western European countries, we would have built around 4.3 million more homes. This would have moderated price growth in the Greater South East in particular. 

So we currently have an economy that doesn’t generate enough prosperity in Wales, the North and the Midlands. And we have a planning system that removes the prosperity generated in the Greater South East straight out of the pockets of workers and into the pockets of landlords, while also blocking future growth. 

These are big problems to solve. If the Government is to put more money in workers’ pockets across the country, then a bold industrial strategy and reform to the planning system are the places to start. How successful this will be will depend on how bold it will be on planning in the face of inevitable opposition. And it’ll depend on how serious it is about its industrial strategy. How much money backs up the words in the strategy document will be the key sign of the latter. 

It also has very little time. The Government needs to act now for the benefits to be felt before the public goes back to the polls in 2029. A gradual approach won’t be enough: 2025 has to be a year of delivery.

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Paul Swinney is Director of Policy and Research at Centre for Cities.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.