Tackling the UK’s regional economic inequality: binding constraints and avenues for policy intervention

Abstract

We analyse binding constraints to productivity growth in the UK’s regions outside London and the greater South East. These analyses challenge a number of common arguments about the UK’s regional economic inequality problem. 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 generalised 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 degrees; (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. We also find some suggestive evidence consistent with constraints on access to early-stage equity financing for high-growth-potential SMEs in certain regions.