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Recessions have long-lasting effects. After the 2008 recession, it took five years for economic output to recover, and it took until the end of 2019 for wages to fully rebound. But some local areas took even longer to recover; 26 places are still below pre-crisis levels of output some 12 years later. Many areas are simply not resilient to economic shocks let alone in a position to thrive over the long run.

Given the unprecedented economic shock caused by Covid-19, this report is dedicated to understanding and addressing the potential long-run economic impacts at place level – seeking to ensure that we do not suffer another lost decade. Its major contribution is to explore the possible economic recovery paths for different groups of local authorities within the context of the government’s “levelling up” agenda and to reveal the 5 key tests for inclusive economic recovery.

The potential long-run economic impact on places

  • The UK’s productivity crisis will deepen. 76% of local authorities will not recover their expected level of output based on the pre-crisis trend after five years.
  • Vulnerable places will fall further behind. Output in the twenty most vulnerable places (places at particular risk of a prolonged economic recovery) will be an average of 18% below the expected level based on the pre-crisis trend after five years.
  • Regional inequalities will increase. Northern Ireland (55%) and the North East (50%) have the highest proportion of vulnerable local authorities.
  • Household finances of the most vulnerable will take a big hit. Average earnings in the twenty poorest local authorities will fall from £18,600 per annum to £17,300 in real terms in the three years after lockdown.
  • The great national wage stagnation will continue. Across all local authorities, earnings will fall by an average of £1,600 in real terms over the same period.
GVA indexed to pre-crisis trend 5 years after lockdown by local authority

The crisis will make levelling up harder

  • Before the Covid-19 outbreak, the government’s commitment to levelling up could be seen in their focus on supporting former “Red Wall” areas and the development of the Towns Fund.
  • CPP analysis suggests that both Red Wall and Towns Fund areas have a high proportion of vulnerable local authorities – those that we expect to particularly struggle in recovering from this crisis.
  • Nearly 50% of Red Wall and 40% of Towns Fund local authorities are vulnerable, compared to 23% across the UK as a whole. There are only four Towns Fund local authorities that are “resilient” – out of a total of 90 – and none from Red Wall areas. On average, our scenario projects a 12% permanent output loss for Red Wall areas and an 11% loss for those covered by the Towns Fund. This compares to a permanent loss of 5% in the South East.

Areas that are hit hardest initially are not necessarily the most vulnerable places in the long run

  • While parts of the North of England and Northern Ireland will struggle the most over the long run, our analysis suggests that parts of the Midlands face the largest initial impacts from Covid-19 and the associated economic shutdowns.
  • These local authorities have significantly larger manufacturing sectors than average, a sector which the Office for Budget Responsibility expects to contract by 55% in Q2 2020. Manufacturing accounts for 28%of economic output in the twenty worst hit local authorities (based on initial impact), compared to an average of 10% across the UK as a whole.
  • But some of the places hardest hit initially may not be the same places as those that struggle over the long run. This is because the initial economic hit is driven by sector concentration within local areas rather than underlying factors that support local resilience to economic shocks that we define as a high level of skills, low unemployment or a speedy recovery from a previous recession.
Average GVA loss in 2020 quarter 2 in local authorities by region and for local authorities in the Red Wall and covered by the Towns Fund
Average GVA loss vs trend after 5 years in local authorities by region and for local authorities in the Red Wall and covered by the Towns Fund

5 tests for inclusive economic renewal

  • In response to this crisis, the government must first shore-up the worst affected local economies to avoid the ‘levelling down’ of some areas. Secondly, to avoid large permanent losses in some of the country’s most vulnerable places, it must return to a revitalised levelling up agenda.
  • In this context, we outline 5 key tests for inclusive economic renewal. The related recommendations will be necessary but not sufficient to achieve these ambitious targets and CPP will be working to develop these further.

Test 1
Shoring up. Economic activity, income and unemployment to return to pre-crisis levels by the end of 2021 in the hardest hit areas. Immediate policy measures include:

  1. Extend the government’s furlough scheme beyond October for the worst affected sectors.
  2. Making employer support conditional on the provision of good jobs

Test 2
Levelling up. Halve the gap in skills and good jobs between vulnerable and resilient areas within a generation. Immediate policy measures include:

  1. Repurposing the National Retraining Scheme (NRS)
    and National Skills Fund (NSF).
  2. Skilling up workers on the furlough scheme.

Test 3
Levelling up. Halve the gap in health between vulnerable and resilient areas within a generation. This can be achieved by:

  1. Increasing and safeguarding public health budgets at
    a local level.
  2. Broadening the definition of, and action on, health prevention to include the social determinants of health.

Test 4
Levelling up. Completely close the investment gap between vulnerable and resilient areas within a generation.

  1. Updating HM Treasury Green Book to facilitate the
    appraisal of policies on regional rebalancing.
  2. Redirecting health R&D to poorer health areas.

Test 5
Levelling up. Reduce by half the inequalities both between and within places within a generation. Immediate policy measures include:

  1. Local and national government leaders agreeing to maintain the new definition of key workers and urgently reviewing their contracts and status – with social care a priority.
  2. Appointing a National Mayoral Council to be a critical feature of Whitehall decision making on strategic economic and social policy issues.