Dame Kate Barker was appointed an external member of the Monetary Policy Committee of the Bank of England between 2001-2010. During this time, she led reviews for Government on UK Housing Supply (2004) and Land-Use Planning (2006). Among other roles she was a non-executive director of Taylor Wimpey plc (2011-20) and a member of the National Infrastructure Commission (2017-20).
This interview was conducted on 19 September 2021.
Q: What can you tell me about your role in regional growth and development?
Looking back at my time in the Bank of England – Peter Jay always used to ask us whether we thought we took regional differences into account enough. My standard response to that was ‘I wasn’t so sure it was regional differences that monetary policy has to worry about so much as sectoral differences.’ Sectors that are exporting or importing, or small businesses, or sectors that were very susceptible to economic cycles like the car industry.
I was less sure that changing interest rates really had very much regional effect. A lot of this concern may have come from the remarks that Eddie George was once held to have made about unemployment in the North. Something like ‘Unemployment in the North East was a price worth paying to control the South East housing market.’ I’m not sure he ever really said that. I suppose the reason why you might think that putting interest rates up would be disadvantageous to the North East or even the West Midlands is because they have bigger manufacturing and exporting sectors relatively or more price sensitive sectors.
London is a big exporter, but financial services are just not quite as price sensitive in that way. So there probably were some regional implications of changing interest rates and the other effect, which in some ways you can’t really take account of, is that if an area or a region hasn’t recovered during an upswing, then interest rate rises can come in before they’ve recovered and that was a problem.
Because you can only set one interest rate it’s really difficult to worry about possible effects on inequality of higher or lower interest rates. You would always look to fiscal policy or government policy in other ways to try and handle some of that.
The other major involvement was work I did in reviewing housing, planning and major infrastructure.. When I was working on housing and planning, there was a provision for regional spatial strategies. The regional government offices that were mainly responsible for producing regional spatial strategies were obviously wide-ranging, rather than the way that nowadays a lot of this work is done down at authority level.
I can actually remember asking the Treasury particularly whether they wanted a set of proposals that were explicitly aimed more at constraining growth in the South East in the favour of growth outside the South East. My recollection of this, is the HMT said they were not very keen on that. nYou can see that today in the argument that’s going on about housing policy. Some people in government really want to try and make the South East and areas around Oxford and Cambridge take more housing and grow faster and achieve their potential, and there’s another set of people who think that there’s just too much economic activity in the South and if we don’t have it in the South it will get forced up north rather like toothpaste. That’s an unresolved policy question that kicks around. Do we really believe that if we constrain London, Cambridge, Oxford and all those places, that the activity would move north in the UK? Or do we think it would go somewhere else internationally? That’s a discussion that has drifted away now that we’re talking about Levelling -Up.
Also in the early 2000s, there were rather ill-thought-through public sector objectives that existed. An objective for ODPM [the Office of the Deputy Prime Minister], was that every region should grow fast enough to start closing the gap with London and the South East. But London and the South East had to go on growing just as fast as they had been. This meant that what you were aiming to do is make the whole economy grow quite a bit faster which wasn’t realistic. But of course, it avoided anybody saying, ‘You’re trying to constrain the South East at the expense of other places.’
There was sub-national policy with aims for regions to grow. Unofficially the tension between encouraging growth in the South East versus elsewhere is a false dichotomy because to get the whole economy to grow more it needs to be on all cylinders.
Q: How do you think about where to focus investment regionally?
My view in 2010, particularly related to housing, was that it didn’t make much sense economically to constrain the South East. The reasons for constraining the South East that would have made sense to me were actual physical constraints such as water – and I think this remains an issue. East Anglia is a really dry region, and the soil is rather fertile. If you do have a big expansion of housing in East Anglia, around Cambridge, the question is have you got a way to get the water there to ensure that you can sustain the growth in housing? And not have summers where you have to say to the farmers, ‘Oh by the way so that people can flush their loos I’m afraid you can’t water your crops?’
After I’d completed the housing review, and encouraged by it, there was an environmental review of growth in the South East. It came out saying, ‘It’s fine we probably can produce enough water,’ but those were the sort of constraints that troubled me. I don’t think I thought enough about whether putting more housing in the North would actually just move activity there. I’ve never really believed in building housing and people will come. You have to do a heck of a lot more than that. What I did believe was that some areas, for example around Newcastle-upon-Tyne, badly needed to improve the nature of their housing stock.
When you’re thinking about what you want to build for the future it matters what you’ve got already, and how your population is changing and what you want to encourage. When I was working on infrastructure planning – we did think much more about regions because I was challenged to propose a national plan on infrastructure. We went instead for a series of national plana: a transport plan, s a water plan, etc. The reason for that wasn’t because they all have to become holistic – if you want to have a national plan you just never get there because there’ll always be something you haven’t got. Some bits of infrastructure don’t affect the spatial geography very much, for example where you put nuclear power stations. It’s sectors such as water and transport that really affect what you can do.
Q: What were the models that you were using and what models do you now think are best to use to determine where it is best to spend your marginal pound?
There are several ways of looking at this. So somewhere like London has ultimately a capacity problem. How many jobs are you really going to fit in the centre of London and have it still work as a coherent and cohesive place?
Professor Diane Coyle has a lot to say here. She’s absolutely right about the Matthew Effect that if you worry too much about the value from the marginal pound you suck in more resources to places that are already well off. I suspect the solution to that, and this is where probably my own views have changed, is that it’s not just about the marginal pound it’s also about the marginal piece of welfare.
Thinking in that way, you might improve people’s welfare more by investing outside of London, because commuting into London isn’t a great thing to do. Then you might start to consider reconfiguring the UK so that people are able to move away from London much more. But you have to be wary about this because there are some huge benefits from the fact that you have a lot of people doing finance in the same place. Such as incredibly deep labour markets. Specialist law firms. It’s hard to see how you could recreate some of that.
But now we have more possibilities to work and draw on resources in a wider geographic scale. The kind of incentive to get everybody travelling into London has probably shifted. The issues are not just skills and infrastructure but it’s how to make the places outside London somewhere you want to live and where you want to work. Take Cambridgeshire. Cambridge itself is fantastically successful and attractive. At the top of Cambridgeshire, you’ve got Peterborough, which is different. It’s not like Glasgow and Edinburgh but more like the North of England because it’s a manufacturing place. Then you’ve got East Cambridgeshire which is very agricultural and within easy geographic reach of Cambridge. Some of the towns there can seem rather sad places with not that much economic activity. And often it’s quite difficult to get into Cambridge because the roads and other transport links are poor. What can be done to change that? Well, (a) you could improve the road, but (b) you would want to work on cultural facilities and building better social infrastructure and boring things like buses. I’m a bit of a believer in buses so that people from outlying areas can travel around more easily. But none of these proposals are quick fixes.
The same really applies across the UK. If you think about some places, it’s not just that they haven’t got skills or that they haven’t got good transport links. They are just somewhat unappealing. I come from Stoke-on-Trent, which has pretty good transport links, it’s on the West Coast main line, the M6 runs up past it and the A50 runs across to Nottingham and Derby. But it’s still a struggling place. If you improve skills for people in Stoke, what do they do? Many, like me, move on. So, thinking about what you would do to make it attractive, it’s going to be more about social infrastructure and about making it look nicer with having a decent city centre. Some of that is a lot worse than when I grew up there.
Q: When you were doing your work with Cambridge and Cambridgeshire. What was your assessment of local government capability and the ability to respond to the recommendations?
Cambridge is a funny local authority in that it sits like the yolk in a poached egg in the middle of South Cambridgeshire. It has one, rather than a range, of local authorities around it. In the years before I chaired the review, a lot of work had been done to get South Cambridge and Cambridge to work together on housing and infrastructure. They were advanced with their planning and competent.
Some of the other local authorities seemed to be as clear sighted (though of course I was not able to spend much time with them. The first Combined Authority Mayor seemed to find it hard to persuade the local authorities to work together, but the new Labour Mayor seems initially more likely to succeed in that. You need the CA Mayor to be competent, to draw them together and help them to recognise the trade-offs among each other.
Q: Would you say there was ever a conversation about the ability of all regions to grow?
It’s impossible to set interest rates perfectly for all regions or all sectors. We certainly did worry to some extent about sectors at the Bank of England, specifically the financial sector and the exporting sectors. Did we ever think about the weaker regions as a drag on growth? I’m not sure that we did. I can’t remember in the Monetary Policy Committee [MPC] context, looking much at the kind of data that I’m now very familiar with about differential regional productivity.
I looked at this question in the context of the regional strategies, but I can’t remember the MPC itself thinking about it. We certainly talked about productivity. But we talked about it in a very model-driven way.
We tended to take the view that our job is to keep inflation under control without unduly constraining the overall capacity of the economy. Now, we did worry in that regard of course about stopping the economy unnecessarily and building up problems down the line. We had a lot of interest in what the Bank’s regional agents had to say. We talked a lot to businesses around the country, I can’t however recall the agents ever presenting to us and saying, ‘Well clearly these regions really need a rate hike and these regions don’t.’ We tended to think about everything in a macroeconomic way.
I’m not sure we thought that, if we really boiled the South East over, it would feed the North. There was certainly some evidence that people commuted into London from greater and greater distances. What the overheating of London did tend to achieve was to move back-offices out, but it didn’t move out some of the higher quality jobs in the ways that you might expect. Agglomeration – people really want to keep those high-quality jobs together.
If you’ve got a high-quality workforce that all lives and works around London it’s not easy to tell them, as the BBC did, you’ve all got to get on with it in Salford. This is partly because the transition is quite a slow burn. I think governments can do it, like the ONS moving to Newport which was initially very difficult. Now I think that has become really successful, and you wouldn’t move it back. But it certainly went through a stage of weaker performance which was quite a hard thing to defend.
Q: Do you think about the UK as one entity, or did you think the right interest rate for one place might be wrong for another?
What we would have thought about was the exporting sector. I can certainly think of times when we worried about the strength of the sterling. The basis of that worry tended to be about destroying business activity that wouldn’t come back.
It was therefore a hysteresis worry, more than an explicit worry about the West Midlands and the North East. It was more a worry about the damage you’re doing to the whole economy. The challenge is – if we had thought explicitly about the regions, would we have systematically run the economy hotter to try and stimulate them? It would have been quite a difficult argument to run if you had an inflation target. It is not entirely clear to me it was open to us, to run the economy hot and inflation high. I suspect that the MPC would have looked to the government in a way to do other things to spread economic activity out, we would have felt that using monetary policy to do it would be very imperfect.
Q: It’s interesting to me how much we thought of the macroeconomy as essentially a single unit.
I think that’s right, I mean the MPC was aware that policy had different effects in different places, but we didn’t think of it as something we could change. We certainly didn’t talk about it very much.
Q: Would the consideration of the regional impacts now be a relevant consideration for economists at the bank?
I think they worry about regions and productivity, but how much would that be relevant to the monthly macro process?
There’s more interest in regional policy generally than there was five or six years ago. But it went through cycles. When you were in power Ed, there was quite a lot of interest in regional policy with the regional special strategies and the regional government offices. There was a clear interest in trying to do different things in different regions.
That then vanished in the early years of the Cameron government with the abolition of the regional government offices. Everything went down to much lower levels. This made it quite hard to think about some policy issues. I really missed the regional level, although in some places it was too big. The South East region certainly didn’t work very well because it wasn’t coherent. If you went to the North East or to Yorkshire and the Humber, there they did see themselves as a region.
The regional level was lost, and now it’s being rediscovered under Levelling Up. The motivation to level up is interesting. We might think: ‘If we run the economy differently we could get more growth because the region has performed better.’ The way it’s motivated is ‘We’ve really got to do something about the regions because of the populist threat.’ They seem to be different motivations for worrying. They might come to the same thing in policy terms.
The city regions agenda may be a continuation of the productivity focus. But the towns approach is saying, ‘What about the rubbish places?’
Q: Do you think having a dual mandate would have changed this regional approach?
It certainly wasn’t the case that the MPC didn’t think about unemployment, but I guess what we thought was that we should keep the ‘output gap’ close to zero. We seriously believed that if we did that, it would result over, say, 10 years to be better for employment because you haven’t let the economy get out of control and then had to hit it on the head. Danny Blanchflower thought that we should worry much more about unemployment because, he said, people care about unemployment more. It’s more costly to them than inflation.
My feeling was that I didn’t see the conflict. If we had a dual mandate would we have behaved differently? I think we probably wouldn’t in the period I was there because it was easy. I was in the Bank mainly in a fortunate period. Would we have behaved differently in the financial crisis? No, because we pulled out all the stops because it’s clearly the right thing to do for the economy and for longer-term inflation as well.
It’s not obvious to me that had we been worried about unemployment, that we would have cut interest rates further since we cut them a long way or done much more quantitative easing. I can’t really think of a period where unemployment and inflation during my time would have come into conflict.
Interestingly they may be coming into conflict now in the Bank, and I think the reason that they didn’t previously come into conflict so much is that the importation of cheaper goods from abroad enabled us to keep inflation down while running the economy reasonably hot, and the labour market was very competitive. We didn’t have trouble controlling wages. Now, whether people get decent real incomes or not has become more challenging. But I think we were able to deliver what we used to call the Goldilocks economy up to the financial crisis.
Q: What did you learn from the work with the Industrial Strategy Council about how to promote regional growth?
If you want to improve a place, you have to do it all. You have to have good governance, you have to have good skills, you have to have good social infrastructure, you have to have good physical infrastructure, and you have to have a competent local authority.
If you just focus on one of those, physical infrastructure but not skills, you will find it more difficult. In the UK we just keep changing policies. We change the way we’re thinking about regions and local stuff the whole time, so that if you’re a council you’re forever having things swung around.
Councils are very political so the best example of a council that was successful is Manchester. The poster children throughout all this are Howard Bernstein and Richard Leese. They had a clear vision for Manchester and the competence to deliver it. There was little political change there and that’s relatively unusual. The worst thing we do, with local authorities, is that we perpetually think of things from the centre for them to bid for. They bid for it because they all want more money, but it may not be what they really want. So devolving more to them, to think what they do want, what would be best for their region, ought to mean funds are spent in better ways.
Even worse is to get local authorities to bid for a project, but then we’ve changed the policy or the minister and that whole project has gone away. Something that makes me quite cross was local industrial strategies which happened more recently and the local effort doing that was pretty much thrown away.
Q: Was there any difference between the European various pots of money and how easy those were to access for regional areas and those that were UK-administered?
My vague impression is that the EU regional pots of money were more consistent than the UK pots of money. The challenge you have is that there are some things where you should think nationally, some things are interesting regionally, sometimes you should think about cities, and towns matter too. The question is whether you can be comfortable with all those different tiers.
Part of the problem is that levelling up is a way of doling out money to individual small places. But if centrally you find the cities a little threatening or you think regions are an anachronism, then actually you need to have the whole holistic picture and all the different elements in place. But if you don’t do that, then it doesn’t work.
ENDS