Tackling the UK's Regional Economic Inequality: Binding Constraints and Avenues for Policy Intervention

The UK is one of the most regionally unequal industrialised economies. In this paper, we analyze the UK’s regional economic inequality from the perspective of productivity disparities between large regions, focusing on the gap between London/South East vs the rest. We look at four important economic inputs – education, infrastructure, innovation, and access to finance – for each one building up a collage of evidence to gauge the extent to which it is a binding constraint on regions’ productivity growth. We then analyze interregional migration. We find little evidence consistent with the hypotheses (i) that low shares of university graduates remain the primary constraint on growth for the UK’s regions; (ii) that there is a generalized issue with access to finance for firms outside the South East; or (iii) that low or falling regional migration rates are to blame for the persistence of the UK’s regional economic inequalities. Instead, we find evidence consistent with (i) a specific relative shortage of STEM skills; (ii) binding transport infrastructure constraints within major non-London conurbations; (iii) a failure of public innovation policy to support clusters beyond the South East, in particular through the regional distribution of public support for Research and Development (R&D); and (iv) missed opportunities for higher internal mobility due to London’s overheating housing market.