Who might benefit from the devolution revolution?

Good afternoon,

This is Yael Selfin stepping in as a guest editor for this week’s TOTC, and what an exciting week in British politics to be joining you. We are now two weeks into Andy Burnham’s premiership – and while last week ended up as ‘cost of living week’, this week has been focused on some of the trickier policy issues.

What has so far received less focus is the UK’s continued economic challenges. As loyal readers will know, as of last Friday, RF estimated that the fiscal headroom for the new Chancellor stood at about £8 billion, quite a narrow margin, especially in the context of evolving geopolitical uncertainty. And I am sure I don’t need to remind you how important productivity growth is for achieving sustainable improvements in living standards, and the country’s decades-long underperformance. We can’t just sit and wait for AI to fix it. While Manchester has performed relatively well on this measure, as our reading recommendations show, taking this as a model for everywhere else is not so straightforward. Finally, thank you to the RF staff for making an extremely timely Chart of the Week on income tax by region.

Have a lovely weekend,

Yael Selfin,

Vice Chair and Chief Economist 

 KPMG in the UK 

No shortage of progress. We’re all keeping our eyes on Burnham’s plans for Britain, but let’s go back 200 years to the Napoleonic Wars as new research offers an interesting story about how labour shortages can boost productivity. Between 1792 and 1815, over 10 per cent of working-age men were pulled into the army and navy. Comparing two similar Norfolk parishes 32km apart, one deep enough for the Navy’s biggest ships and one on a shallow estuary, the deep-water parish saw twice as many labour-saving threshing machines adopted. Crucially, technology adoption was strongest where skilled mechanics were on hand and with a scarcity of labour. A potential relevance for present day Britain could be AI, where skilling up on it is seen as important. But with workers abundant rather than scarce would that diminish the incentives for firms to fully embrace the AI revolution?

Many Manchesterisms. Can Manchester be a model for fixing the UK’s economic woes? This blog takes a closer look, drawing on RF’s own work with the LSE. Since the turn of the millennium, the city-region of Manchester has been one of the fastest growing outside London, with the expansion of knowledge-intensive and tradable services playing a major role. But Greater Manchester still remains more than a third less productive than London. Much of the gains have been concentrated in the city-centre, and though universities have been a big part of attracting talent, retaining graduates remains a challenge. What’s more, the conditions that have been key to Manchester’s success and made it attractive to foreign investors are neither universal nor quick to recreate elsewhere. Replicating ‘Manchesterism’ will mean thinking about other cities’ individual productive potential and helping them to build their institutions, as well as pushing Manchester’s own transformation further.

Line of best fit. Growth theory has long assumed productivity compounds, with each year’s gain proportional to the level already reached. This paper argues that was always convenience rather than evidence. Running through US total factor productivity (TFP) data from 1890 to 2022, the authors find growth is additive, not exponential: since 1947, TFP has risen by a near-constant amount each year – about 2.5 per cent of its 1947 level. With fixed increments, the growth rate falls mechanically, from 2.5 per cent to around 1 per cent over 60 years. If you buy this and apply it to Britain, it could explain part – though by no means all – of our productivity slowdown. We may have misread a straight line as a curve.

Brains and brawn. Women are more likely to get a degree than men, have a higher ‘college premium’, and yet still earn less than men. This is the puzzle that the authors of this new paper probe. In all 21 OECD countries studied, women without degrees are paid less than their non-college male counterparts, so even though a degree gives them a relatively bigger pay boost, college-educated men are still paid more overall. Digging into this non-college gender gap in the US, the authors suggest that men benefit from a premium attached from tending to have more ‘brawn intensive’ roles (truck driving, construction, carpentry). They find these differences in occupation explain two-fifths (42 per cent) of the pay gap, suggesting it is a major factor. Separate data from the ONS shows that the gender pay gap in the UK was highest for those in skilled trades. As the Government develops its plans to put technical skills at the heart of schools, they will need to ensure these new pathways can provide equal opportunities to girls and boys.

Spending power. International students are often discussed as consumers of local economies due to visa restrictions on work. This paper makes the case for what they contribute. Using US data from 2003 to 2015, the author finds that one additional international student per thousand working-age residents raises the local employment rate by 0.19 percentage points and average wages by 0.48 per cent. The effect is driven by students’ spending on housing, groceries and tuition, boosting local income and business dynamism. International students also intensify competition, pushing labour toward higher-performing businesses and forcing the least productive ones out. Rising foreign enrolment over the study period may have created around 1.17 million jobs in the US according to the study. At a moment when trade tensions are rising and immigration policy tightening, reversing these trends could impose real costs on local economies.

Chart of the week

Today, Andy Burnham has promised to let combined authorities keep a slice of the income tax raised on their patch, and this week’s chart shows why that idea might be more attractive to some areas than others (at least until we know the details on how any rebalancing over time will work). Compare the real-terms change in income tax receipts between 2010/11 and 2023/24 with the change in core spending power (which includes grants from central government and locally raised taxes like Council Tax and business rates), and the variation across regions looks very different. Growth in Income Tax receipts has varied a lot – London is the extreme case, with receipts up 51 per cent, and Greater Manchester in second place, while the North East saw growth of just 13 per cent. At the same time, spending power has barely varied: it fell by between 18 and 23 per cent in every area, London included. The appeal of fiscal devolution is obvious where the tax base is booming, but that’s exactly the trade-off to weigh up: the more that areas keep what they raise, the more it matters how far the system also redistributes towards places with weaker growth in tax receipts. Getting that balance right is what will decide whether devolution narrows regional gaps or widens them.