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Understanding local economic growth 

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Over the coming weeks, we are publishing a series of blogs on local economic growth and key concepts to consider when thinking about economic growth policies. In addition to providing some summer reading, we’re using the series to test-drive a way of explaining concepts in economic growth that we hope to use in new training and resources. As such, we are keen to hear from readers, particularly those in local and central government, if they find these useful and accessible, and if there are other topics you would like to see us cover.

This first blog focuses on some broad definitions. Further blogs will look at the components of economic growth, and some key concepts that affect the impact of economic growth policies.

What is local economic growth?

A local economy grows when it increases the amount of goods and services it produces. It can do this by adding more of the things (‘factors of production’) that are used to produce goods and services – workers, buildings, machines, technologies, etc. Or it can do it by producing more with its existing factors of production (‘increasing productivity’).

To the extent that workers live locally and that residents own the other factors of production – buildings, machines, etc. – then local output results in local incomes for residents. Sometimes we might be interested in the total size of an economy – this can be important, for example, in determining who wins wars. But at the local level we’re usually more interested in output per person or household incomes, as these are what will matter most for determining local living standards.

This highlights another important distinction – often we’re as interested in the level of living standards (is a place rich or poor) as we are in how fast it is growing. Sometimes people might talk about local economic performance to help make this distinction, although sometimes when they do this they are still talking about local growth. Often, when people talk about local economic growth, they find themselves muddling the two.

Our next two blogs will talk in more detail about how economists measure output and productivity and the rest of the series will talk about some of the factors that influence them. For example, more skilled workers generally means higher incomes and greater productivity in a local area. A higher proportion of the population of working age, and the number of those who are working will generally mean more output per worker. Increasing these proportions will result in economic growth and increased local incomes. But places can be rich regardless – for example, a small place with a high proportion of wealthy retirees.

There are many things that can happen at local, national and international level that will influence local economic growth. A new local road, a vote to leave the EU or to raise interest rates, disruption to global supply chains or a global pandemic will all impact economic growth of cities and towns. Understanding the factors that determine output and productivity can help us figure out what these changes might mean for different local areas and what policy might do to respond to them.

How does local government improve economic growth?

There are many interventions that can impact on local economic performance and on growth. For example, thinking just about employment and skills:

  • Delivering skills training to people who aren’t in employment,
  • Promoting in-work training to further the skills of newly qualified apprentices,
  • Offering grants for knowledge-intensive businesses to move into the area, or
  • Improving transport so that more skilled people can commute into the area

These will have different benefits for different parts of the economy, different costs, and may have unintended consequences.

The justification for why, and to what extent, government might need to intervene will differ a lot across different policies. When choosing when and how to run projects to support local economic growth, a closer look at the rationale is important. What is the evidence that there is a problem? How do we know that different projects or policies would address it? Why should local government intervene? Often, there is a jump straight to a ‘solution’ before fully understanding the problem. We’ll consider these issues more in a later blog.

While our focus will be on local policy, it’s also important to remember that for local government there are limits to the policy levers available. For example, councils and Combined Authorities may be able to signpost businesses to support in navigating the export market, offer loans with favourable terms to access finance, or cushion the blow of a pandemic. But those interventions only mitigate or amplify effects of much wider factors.

There are other constraints on policy levers—including regulatory, such as whether a place has powers over their adult education budget or franchising buses; financial, in the funding available for particular interventions; or political appetite, like building in the Green Belt.

Better understanding what local policy can do requires an understanding of what drives differences in local economic performance and growth. We hope the rest of this blog series provides a useful overview to key concepts.

Up next

The next blog in our series Understanding key concepts in local economic growth will be on GVA. Sign up to our newsletter to get an update on our next blogs, briefings and events.