Dave Ramsden is Deputy Governor for Markets and Banking at the Bank of England. Prior to joining the Bank, Dave was Chief Economic Adviser to the Treasury and Head of the Government Economic Service from 2007 – 2017. He was responsible for advising on UK macroeconomic policy,
This interview was conducted on 20 December 2022.
Q: Could you tell us about your role in growth and region policy in the past few decades?
I was an economist in the Treasury from 1988, becoming Chief Economist in 2007, to 2017. My focus on growth and, particularly the spatial economic geography aspects of growth, came in phases. I did quite a lot on it when I was at school because I studied economics and geography, so I understood the basics of location theory. I was not really involved in the microeconomics of growth or thinking about spatial dimensions of growth for quite a lot of my career in the Treasury. I was focused on the macro and public finances side. It was only when I took on leadership of the work on whether the UK should join the Euro from 1999 to 2003, where growth was one of the five tests.
The second time and the more substantive one in terms of being involved in the detail, rather than just being aware that it was just a contextual issue for the UK, was from 2010 to the end of 2015, and particularly 2013-2015.
Q: Could you summarise the key successes and frustrations over that period in regional growth?
For quite a lot of the period, the focus for the UK was on sorting out the macro context of policy rather than focusing on regional growth. If you think 40 years ago, that takes us back to 1982, when the UK was trying to find its way in macroeconomic policy terms. The key question was – how do you provide a macro framework? So, how to achieve UK wide growth without inflation, and we obviously tried different things with varying results.
After the events of 1992 when we left the ERM, there were the first attempts of inflation targeting and the key focus was the overall trend growth in the economy and demand management, actual growth around that, and managing that, rather than focusing on the drivers of growth spatially. Obviously, we had the growth agenda from 1997 onwards. The Treasury tracked its performance in part based on divergence of regional growth from national growth. But all the focus I remember was on macro – as a macroeconomist with a range of macro-responsibilities through that time.
I would say that there was a focus from 1997, in particular, on regional divergence and spatial divergence, but it was one of many priorities that the Treasury had. It didn’t have prominence over ensuring overall growth and overall macro stability through inflation staying close to the 2% target.
Q: Did you see the spatial pattern of growth being an objective of policy? And how did that change over time?
Over that period, it certainly wasn’t the primary objective of policy. It was an objective; I seem to remember it was framed in potential growth terms. There was always a struggle because – how do you measure potential growth regionally, let alone nationally? What you must remember is that for the UK’s economic history, through the sixties and seventies there was stop-go, cost-push inflation, meaning huge economic instability. That was the context in which I learned my trade as an economist. The eighties recession, and what that did to the sectional pattern of the UK, meant that you had this huge regional and spatial divergence that opened at the regional level.
In 1997, as I recall, it was the new Labour government that introduced the focus on Regional Development Agencies (‘RDAs’). It saw things regionally rather than spatially, and government objectives were based around the regional pattern of economic activity. Which felt more like it was understandable historically because certain regions had fallen behind. Also, EU funding policy was based much more regionally than spatially. You have the RDAs, and I guess that would be for me the big evolution over that period. When we did the five tests for the Euro decision, one of those tests had an explicit spatial element to it – the city test. The investment and growth test, we had to think a bit more about the drivers of growth from a macro perspective. Then we had the global financial crisis, and we were back into dealing with macro and financial instability. Regional growth only again became a refocus area again post 2010.
Q: When you look back on the period, does it surprise you that spatial inequality has risen since 1979?
No, it doesn’t surprise me at all, given the economic geography of the UK. We have one very big global city, and then the 2nd and 3rd cities are much smaller. The most successful cluster that the UK had was linked to that global city, the financial sector. The evidence shows prioritization given over time to infrastructure in the South East, which in turn has reinforced that spatial position. Obviously now, there’s much more focus at the sub levels of the economic geography, thinking about towns and the like. Where I left the story in 2015, and where your research ends, we were still very focused on the economic geography of city regions.
Q: London is unusual compared to other countries in its power and influence, how do you see the London contribution to the UK economy?
I always saw it as a positive. Then it’s what you do with the growth and the revenues that you get from London to support other places. For me, it was never a constant sum game, it was ‘support the cluster in London, don’t give it excessive advantages’, and obviously we saw what happened with the financial instability that came out of the global financial crisis and what that did. Also make sure that you have a policy, which is where the growth drivers from 1997 I’m sure are still relevant, that supports spatial development in the rest of the country. One of the challenges was getting an adequate evidence base in terms of what was holding back regional cities. I think there was some work on that done in the Treasury’s productivity unit. And Dermot Finch who was key to that work went on the start the Centre for Cities.
I did feel there was an evidence base for regional policy, but there was a strikingly useful bit of analysis which Jim O’Neill led for the Royal Society of Arts. It was the Cities Commission in 2014. It really nailed some of the stylised facts around what was holding back city regions in particular. It set out what was roughly the right economic geography.
It was at that city region level, and based on that analysis, that we in the Treasury really built on for things like the ‘Northern Powerhouse’, and the ‘Midlands Engine’. Scotland has a very effective cluster in asset management around Edinburgh. However, getting that sort of spatial economics right between Edinburgh and Glasgow, is a question of how do you get the right size where you can really see the growth benefits. Or from really investing in infrastructure, in the commuter area so you can link the towns where people want to live to the cities where they want to work?
We started off in the UK with such a spatially unusual set up, and then we had the same problems that other countries did in terms of declining industries, but in the UK, they went further. We had real clusters of coal mining, real clusters of manufacturing, but their decline probably went further than in other countries. For example, we ended up with a very small manufacturing sector. I think that reinforced the spatial inequality challenges.
Q: When you were doing the five tests, was the UK regional dimension relevant to any of the tests? Were there any other countries you looked at, where we could learn from their experience?
One of the 18 studies was on the sectoral structure of the UK, and we thought about developing it more into the spatial structure, but we didn’t. The city test was very focused on financial services. That was the first time I had really taken stuff I had learned when I was at school and university, agglomeration economics and applied it. We didn’t do more beyond the city test.
Q: Do you have any view of the hierarchy of importance for certain policy areas in terms of the pattern of regional productivity?
They [education, adult skills, innovation, infrastructure, finance for small business] are some of the most challenging areas of public policy to crack. Successive governments tried on skills, but it’s a big challenge to first develop and fund the skills policy and then work out how you’re going to create the right governance and accountability for it to work spatially. I thought one of the biggest challenges that I faced intellectually even when I was doing the work in, 2013/2014 as the Treasury’s Chief Economist, is your instincts in the Treasury are that you don’t want to give up the control of what’s going on, but on something like skills, you do need to devolve control to the right level. For example, with the Northern Powerhouse, it was looking at Manchester, which was always the example used, because it had brought together different parts of the city region effectively and had an agenda and a strategy for taking forward already that was then built on.
Q: From the beginning of the period through to the 2010s, was it the devolution of decision making or the distribution of resources and spending, that you concluded to be more important?
In 1997 there was a significant devolution agenda, with the creation of the devolved administrations. That became a real focus, but there are multiple challenges. It’s one thing to get the economic geography right, but you’ve then got to think about how do you deliver the policies for that economic geography? How do you build the institutions? The UK has strong but quite centralist institutions. You’ve got the Treasury, you’ve got the civil service, you’ve got the Bank of England where I am now. The devolved administrations were set up. You create the political institutions. But you also need to create the supporting institutions to deliver the policies and at a micro level we have never had a consistent and stable approach to delivery.
Q: How much do you think there is a Whitehall view which is averse to devolving or how much is it variegated?
My instinct was, as an official, that there is a natural bit of a resistance to change, but you’ve got to see the case for the change. What we’d had over decades was different approaches to the delivery of policy. You went from having the RDAs that were at the regional level, then you went to Local Enterprise Partnerships (‘LEPs’), then you put in city deals and metro mayors.
Meanwhile, you’ve got the continuity of Whitehall trying to deliver at the UK level. So I’m not sure that there would be a cultural resistance to it. In the UK we’ve never had the kind of stability in the regional layer, and now we’ve got it at the macro level. But at the micro level, you’ve had lots of different attempts to deliver. I’m sure civil servants would be open to it. But it’s got to be within the context of something that you can see, it’s going to deliver on its results and it has got to be sustained by the subsequent government.
Q: Do you think that caution was consistent across the Treasury, was the Treasury’s view more cautious than other relevant Westminster departments?
We had been through the global financial crisis, and then we’d had to deal with the Euro crisis. It was around that time that I was both set the challenge by the government, by George Osborne, and joined up with the productivity side of the Treasury more systematically. But the Treasury at any time, it only has so much bandwidth. I think, for me, it was great to be able to focus on these issues, to be set the challenge by the coalition government because they were obviously very interested.
From 1997 we had a lot of macro-level UK-wide targets and we did achieve them. From my perspective I saw how it could all add up and be made to work both for the UK-wide level, and for the economic geography of the UK.
Q: You pointed to the relative stability of the macro policy regime over 25 years, even despite some very big global shocks, and contrasted that with the instability of the regional local policy regime, how important economically do you think is the instability of that policy regime?
Some related examples, giving the Bank of England independence in 1997 certainly helped create the institutional structure which ended up encouraging a whole analytical work programme around monetary policy. Then there was positive policies and a supportive economic environment, when we had the great moderation. I remember when we set up the OBR in 2010, one of the things that we were trying to encourage was more debate about fiscal policy.
I think on the regional side, it’s certainly the case that if you think about when the RDAs were created, that did create some regional capacity. At the Bank of England we have our agents network, which can support looking through the lens regionally. But there was never a strong policy-relevant evidence base, and debate about these issues has been more limited.
Q: Is that about capacity? As chief economic advisor, was it a problem that there weren’t counterparts in the RDAs or the LEPs? Did you see any sign of that changing with the bigger combined authorities?
From what I recall one of the best policy relevant analysts was a guy called Mike Emmerich, he was in the Treasury working with John Kingman. He went off and set up a think tank in Manchester, which again added to that sense that there was a capacity in that economic region. With people like John Kingman, Mike Emmerich, Dermot Finch and the growth unit of the Treasury, they would drive things forward. On the macro side of the Treasury, we were joined up with them, so we certainly weren’t working in silos, but we just had a lot on.
Q: Do you think it was more of a priority for George Osborne than it was for Gordon Brown and Alistair Darling?
No, I don’t think it was more of a priority. I think that in about 2013 and 2014, we finally had some bandwidth after the global financial crisis. As I’ve mentioned, I think the Treasury and the Civil Service has to be open. This goes back to the Euro work where we actually brought in external experts, this was a case study in how the centre could be permeable to outside thinking. When we had the bandwidth and saw that people like the Royal Society were doing the work under Jim O’Neill in a classic Treasury way, and also in an effective way in terms of developing policy you see, there’s something interesting out there, let’s let’s take the best bits of that, and develop it in certain ways, in line with the Government of the day’s priorities.
Q: In the period of the RDAs, they were really agents of central government in regions, there wasn’t an underpinning political accountability. The Northeast referendum was defeated. How much of a problem was it for the RDAs that they were not locally regionally accountable?
My hunch is that you do need accountability, but I think what the RDAs were able to do was engage with Brussels and the EU because that was where quite a lot of regional money was coming from. But they didn’t have autonomy and responsibility for things like skills or infrastructure. I think what the accountability, what the elements that you were just describing, that was a more coherent package. Whether that accountability is felt locally, I can’t really comment on. I think you had capacity in the early period, but it was based on regions rather than necessarily the appropriate economic geography. Because you’re covering a region, including all the bits in it rather than thinking that actually, the economic geography might span two or three regions.
Q: The RDAs were comprehensive, they covered every part of the country. We then went to something more voluntarist, is that a concern?
I think it’s one thing to have city regions, but then you have towns that are linked to cities and for historic reasons their development was initially not part of the city structure. I can understand why the policy has evolved to where the Levelling Up agenda is, but what do you do then for those towns? I can remember early on in the coalition government, discussing again the economic geography of the UK and what were we going to do for all the ports and seaside towns and where they fit into the economic geography.
What were we going to do for all the seaside towns that had thrived when tourism was national, not international. You would hope that things like good digital infrastructure can help more because I think one thing we’ve learned post-COVID, I know it’s outside your period, but, you know, the economic geography has changed a lot. When thinking where you go next with a regional and spatial development that can work for the UK as it is now, rather than as it was when I left this story in 2015, is going to be important.
Q: Looking back at why we’ve had that pattern of regional equality growing, what should policy be doing to address it?
Well, in the sense that the UK’s understanding of the drivers of growth at the UK level is not that different now. From the nineties or noughties, the drivers of trend growth are skills, innovation, and infrastructure. But they are also having a stable macro environment and the extent possible, stable policies. We had a great moderation, where the shocks we had were benign shocks and certainly supported. Economic outcomes from 1997 to 2007, with China coming into the global economy, brought positive supply shocks. We had a labour market that encouraged people to participate, successive improvements in labour market outcomes with each economic cycle.
What we found with the series of supply shocks that we’ve had starting with the Brexit referendum, is that there is much more focus, in the Bank of England, the Treasury and across Whitehall, on the sectoral and spatial patterns of the UK. This is because we have had shocks that have very asymmetric impacts on different parts of the economy. Brexit really affected the trade sector, Covid has really affected the sectors that require proximity such as manufacturing and physical retailing. Now you’ve got the energy shock really affecting energy intensive sectors.
At the Bank of England, we are reliant on the granular information we get from our agents to support the aggregate picture. Because we realise that, it is these sectoral, and to some extent, spatial drivers that are driving the national picture. I would be very surprised, therefore, if there didn’t remain the same focus, since we’ve been experiencing these big supply shocks. I think the Scottish referendum also made us think about spatial economics. We really focused on the economy of one part of the UK in a way the Treasury had not done before in my time there.
Q: What has happened to the pattern of labour market activity? And what has happened to the pattern of underlying productivity over 10 years? Is it more important now to understand whether there’s a spatial reason for why aggregate productivity is being held back?
I’m not sure if it’s more important, but it is probably the case that the sectoral dimension is at least as important as the spatial dimension. There’s just more focus on the fact that the UK is a very heterogeneous economy, both sectorally and spatially and trying to understand that creates the various puzzles at the macro level. When trying to understand why labour market developments are what they are, the new participation puzzle, or why productivity remains incredibly weak in the UK – the spatial dimension is an element of that. Most of the indicators we will look at will still be relatively macro. But we’ll always be conscious of spatial considerations. I would imagine that the Treasury is still very focused on it.
Q: When you look back at this period, and in terms of regional, local, spatial outcomes and the aggregate productivity performance of the economy, what is the biggest positive that you can take from this period? And what is the biggest frustration?
I think the biggest frustration in the sense of its impact on living standards is that since the global financial crisis of 2007-2009 the UK has ended up with very weak trend growth and trend productivity. Because that is foundational for everything, certainly over the kind of horizon that I think about as a monetary policy and financial stability policy maker, so that’s the biggest frustration. You can see that happening in other advanced economies. So the biggest frustration is the slowdown in advanced economies, but particularly the UK.
We are learning more and more about the productivity puzzle and the sectoral and spatial nature of it. The biggest positive is the desire to analyse it, to understand why it has happened and then to try and encourage public policy to do something about it. Because that will also support the kind of macroeconomic outcomes that we and the Treasury are focused on.
ENDS