Sir Martin Donnelly worked at HM Treasury in the 1980s and the European Commission in the early 1990s before returning to the UK Civil Service. He held a variety of posts in the Cabinet Office and Foreign and Commonwealth Office relating to international trade and European affairs, before becoming Permanent Secretary at the then-Department for Business, Innovation and Skills in 2010. He left that post in 2016.
This interview was conducted on 21 April 2022.
Q: Could you tell us about your role in growth and regional policy over the past few decades?
I joined the Treasury in 1980 and held a series of junior roles – including as a private secretary. I then worked on European issues, including four years in Brussels doing the single market in financial services.
I came back to the Treasury in the early ‘90s doing some controlling of defence spending, and then became involved in the run up to Economic and Monetary Union from the British perspective. I joined the Cabinet Office and I worked on European economic reform, including the Lisbon Process, for four years. Then I worked on international economic policy in the Foreign Office, including trade. I did some work on oil and I had a brief stint with the telecoms regulator. Finally, I became the Permanent Secretary – the senior official – in the Department of Business Innovation and Skills for six years from 2010.
Q: How would you characterise the evolution of economic policy over that period?
In the early ‘80s – obviously, this is a subjective perception – there was very little in the way of active regional policy. The focus was on macroeconomic stability, and a controlled reduction in public spending. That meant that regional programmes were being cut.
Insofar as there was a regional policy, the main element of it was closing the coal mines in 1983-84, which had a massive and continuing generational impact (following on from closure of steel and textiles through the late ‘70s).
I think the lesson which officials took from the late ‘70s period was that subsidising declining industries didn’t work. The early eighties orthodoxy was, ‘let market forces work and then we’ll see what happens’ – both because the alternative hadn’t seemed to work well and also because it was a cheaper way of doing it. There was no real understanding of the long-term implications for areas of facing pit closures, steel closures, industrial towns. There was a feeling that they would regenerate, or people would move. That approach carried on through the late ‘80s, with the exception of Michael Heseltine’s approach.
I wasn’t close to regional economic policy in the late ‘80s or early ‘90s. From a European policy perspective, we were focused on innovation and seeking to keep up with the global trends of the ‘90s. You could see already what was happening in the first wave of internet businesses. The need to get people online – insofar as we were focusing on the regional dimension – was from a ‘modernisation’ point of view.
I cannot say that in my jobs – until I took over in the business department – there was much of a focus on the economic aspects of regional development. Policies were national, with the addition of a few crowd-pleasing local initiatives. That isn’t a criticism, but they were designed with public impact in mind. Otherwise, the underlying feeling was ‘the rising tide raises all boats. Let’s improve education. Let’s work on the new infrastructure. Let’s look at what we’re doing on universities’.
Q: Was this move from the regional to the national in the 1980s philosophical, or just coincidence?
For the reasons that I gave, I think there was a feeling that regional interventionism had failed in the ‘70s – or at least that it was too difficult. There was a feeling that it costs too much. There was a feeling that market forces will determine where people go, and the infrastructure of the place they leave behind was all a bit secondary. That was a shared view – a shared prejudice you may say, an unconscious starting point – in the Treasury, which was never very good on regional policy anyway.
Q: Was this still how you thought when you arrived in BIS [Department for Business, Innovation and Skills] in 2010?
By 2010, we’d clearly made a mess of regulating the financial system – by trying to come in with a slightly lighter touch than the Americans as a way of attracting business to the UK. We’d allowed our regulators to take some extremely poor decisions. We were in the catch-up phase of the recession, which was back to classic Treasury comfort zone: we’ve got to cut public spending. Austerity was the term for this. The cuts to public spending that I saw were not designed to benefit or to save pro-economic growth or regional priority policies. They were across the board.
It was fortunate for the regions and the nations that there was still regional development money coming from Brussels in that period. Departmental funding was reduced by 30%, and European funding became the key driver through 2010-12. We then managed to refocus. We got a national industrial strategy agreed, and an innovation strategy. This built on work done under the previous Labour government, where Peter Mandelson was involved.
The interesting thing for me about this was that our industrial strategy was consciously sectoral. Our innovation policy was also consciously ‘building on excellence’. We took a lesson from 2000s: the example that we used about regions was that we were trying to set up nanotech centres in each of the regional development agencies. We gave each of them too little money and they all failed. We would consciously not use that model. We would find out where the best advanced manufacturing was, where the best biotech was, where the best digital starts up to were, and we would support those. We would not try to spread it out around the country because we didn’t think that worked. That was our starting point.
You can argue about the details, but it basically meant that the ‘Catapult’ model of innovation – public-private sector partnership. We drew heavily on German experience with the Fraunhofer Centres, driven by Vince Cable with help from people like Will Hutton. That model works well partly because it stayed away from what some of us saw as pork barrel politics – ‘you’ve had that, I want this’ – which had messed up previous initiatives.
Similarly, we limited the number of key sectors so that not everybody was an industrial strategy priority. That meant that regional development of policy wasn’t part of our strategy then. We were still working on ‘the rising tide lifts all boats’ philosophy. We didn’t see ourselves as responsible for regional policy at that time.
Q: What about the emergence of the devolution and Northern Powerhouse agendas late in the 2010s?
My personal view is that this was a belated recognition by the Treasury – for whom anything outside the M25 was uncharted, if not potentially hostile, territory – that we weren’t making the most of the assets across the country.
There was a perfectly legitimate political reason for that. Manchester got an awful lot of attention and money. My impression talking to people in places like Sheffield was they didn’t think this was a Northern Powerhouse strategy so much as a ‘Manchester plus’ strategy. Remind me, where Mr Osborne’s constituency was again?
It undoubtedly helped to remind people that you could have poles of growth outside the South East. I think that what we were learning – which was consistent with that – was that university towns were proving major hubs of innovative growth. That was true everywhere. Let’s not mention Cambridge or Bristol or Southampton, but places which you wouldn’t think of as obvious: Strathclyde. Middlesbrough. There were a whole set of digital startups coming out of locally-focused universities. We were looking for ways to support that bottom-up growth, without seeking to run it or constrain it from the centre.
The drawback with that, of course, was that there were some areas where this was working less well – places like Stoke-on-Trent or bits of the West Midlands. That became more difficult. I think the model that said ‘go local, not regional’, and ‘let’s support excellence that we find, particularly building on universities’, was a very important one.
The other thing I’m going to bang the drum for was that we realised one of the problems which we had had for at least 50 years was a consistent under-investment in human capital, in training. The 1964 Labour government introduced Industrial Training Boards but they fell by the wayside over time (apart from in construction). In the 2010s, we consciously built on that to bring in the Apprenticeship Levy, which was a ringfence from Treasury funding for apprentices. Some of us hoped that could be extended into wider areas of training. It was designed to deal with business complaints that they didn’t have enough skilled labour.
When we introduced it and said, ‘here you are – the businesses which train people will get rewarded and the businesses which don’t train them could pay the levy’, businesses did not respond enthusiastically. I was disappointed, if not totally surprised. That did mean that we were having a sectoral impact by putting more money into training in a way that had not been happening through the market system. Again, it wasn’t consciously regional.
One other important factor – for which I think the Labour government deserves credit, which then got built on by the Coalition – was spending on universities due to the student loan system. This avoided reductions in spending after 2010, alongside health. This meant that students around the country were being funded to go into higher education, many of them locally. This had a positive impact on all of the areas with universities and led to some expansion of universities. We did not think of that at the time as a pro-regional growth measure. In retrospect, I believe it was a very strong one. Protecting that spending was absolutely vital.
The problem was, there wasn’t very much money to spend on anything else at the time. In retrospect, we should have been much more generous with some focused additional offers to universities, to support local growth hubs and innovation centres. We did have some sectoral programmes – where e.g. you could have a year’s pay to help launch a start-up. That helped a bit. Some of the money that went into the science budget allowed people to do post-doc work which was relevant to industry. We experimented with giving businesses vouchers they could use at their local university or research centre. They were all fine but we never scaled them up enough. That was an opportunity we should have made much more of.
Q: How do you think about the role of London in the UK’s economy? Is it help or a hindrance to other places?
I would separate the economics and the politics here. You have to go with the growth hubs that you have, but you also have to put supporting policies in place. We didn’t do that for London. We did not have the correct social housing policy for example. We did improve schools – largely through the Teach First operation, building on the additional resources which had gone into schools after 1997.
We didn’t view London sufficiently as a place where we were going to have to expand – in a planned way, with social infrastructure to go with expansion – including airports, faster work on railway and other infrastructure. We did too little of that, too late.
We were relatively ignorant inside government – I hold my hands up there – on understanding enough about economic links: between back-offices from London in Leeds and Belfast and Glasgow and Bristol and so on. We did not understand enough how that worked. Other areas of the country were contributing and supporting the ‘London effect’, but we did not understand how to make sure they were getting something out of it.
The alternative was just seeing London as an entirely separate Singapore-like island – ‘nothing to do with them’. I don’t think that the evidence supports that view, but I think politically that view became more prevalent and was a problem. Then we also had difficulty working out what we meant by ‘London’. It couldn’t just be Greater London. Did it include Oxford and Cambridge, or Southampton and Bristol? What about the M4 corridor? We struggled with any coherent sense of what the right geographical model to have in our minds was.
I occasionally think that England could be just one U.S. state. We obsess about the difference between one bit of the West Midlands and somewhere 10 miles to the east of it. What early 19th century thinking is that? When I was dealing with Sheffield and we had to close the public sector business in Sheffield, we looked at what we could offer people in Leeds. People couldn’t get from Sheffield to Leeds very easily with the transport infrastructure we had – but also, culturally, they didn’t really want to go from Sheffield to Leeds.
I was trying to help out Tees Valley in a good scheme that the then-government had to get Senior Civil Service in Whitehall to ‘sponsor’ regions. I met some really good people but they were too dependent on London’s largesse because we weren’t ever prepared – and this goes back decades – to provide an autonomous taxation base for local economic development. We would complain about trying to get the two sides of the Tyne to work together, the issues of expanding the airport or improving bits of the A1 or whatever. They were much more difficult than they should have been. But wasn’t that our fault for not having given them the resources to work effectively together and allow them to learn?
I think our default position was always to centralise on these grounds: it appeared (short term) to offer more transparency and better value for money. My conclusion is that, long term, it offers neither of those things. That doesn’t mean that delegating stops at ‘local deals’, which converge on the opaque to say no more, or that there aren’t local tensions which prevent things happening. It’s that if you don’t empower people locally, you are not going to make this work. You can’t just control it all from the centre and then pat people on the head and give them a cheque.
Q: How did you think about the institutions you were inheriting – especially Regional Development Agencies (‘RDAs’) – in terms of that long-term institution building?
I arrived in the business department in October. The election was in May, and the decision to get rid of the RDAs was a political one made then. It’s like anything other of these things: the people in the department whose job was to work with the RDAs were sorry to see them go. The people who worked on innovation or whatever were prepared to try something else. I wouldn’t say that there was a strong view. Local Enterprise Partnerships were an unknown quantity, and they weren’t really trying to do the jobs that the RDAs had done. If the RDAs weren’t going to be funded, then you know there wasn’t much point in keeping them. I think would have been my base position.
It was a pendulum: at any point on the pendulum, there are some good things going on; the problem is that the British pendulum swings far too fast and far too far. It’s always Groundhog Day. We are hopeless at learning lessons from the past and almost as hopeless at learning lessons from overseas (whether it’s the US, and some people were better at that, or Europe). A lot of people were no good at that at all.
One brief example: I was involved in the ‘90s in French debts sales. The French sold their debt by piling it high and putting it out on the same day every month. We still had a bizarre system of tax stocks, which lots of people really loved. Two or three years later, the British adopted the French system, but you wouldn’t think so from the way that we described it: ‘It was all our own idea.’ That’s a lighthearted example, but we were terrible at looking at what was working elsewhere and understanding why it worked and what didn’t work so well.
The other classic example comes from how Germany, since the ‘60s, have had just one significant change in their training and apprenticeship system. For us, it was about every 18 months to two years. The German system is not perfect, but there are no prizes for knowing which one has produced better results over the decades. Fiddling is the great British public policy vice. I think there are reasons why that happens, deep in our political system.
To go back to your example about RDAs: they’d become institutionalised. Bureaucratic. There was a certain element of ‘jobs for the incumbents’ in them. All that was true. The problem was the Local Enterprise Partnerships (‘LEPs’) set up to replace them were so far out the other way. They had no resources at all. They had more business links; they were flexible; and, yes, some of them worked relatively well, just as some RDAs worked better than others. But the answer wasn’t RDAs and it wasn’t LEPs. There was never enough money. For example, I remember we had to delegate some consumer protection policy issues to local authorities. That was one less problem on my plate, but did they have the resources to do that properly? I’m afraid that’s a rhetorical question.
Q: Was there a philosophical debate, after 2010, between those who thought spatially – in terms of clusters and places – and those who thought nationally – in terms of sectors?
I missed the first four or five months of debate after the 2010 election, but I don’t think I missed very much. We had a Department for Innovation and Universities and the old Business and Enterprise department. There wasn’t a single Department of Trade and Industry. When I arrived, people were still wearing different coloured badges. They didn’t want to be together.
I had the challenge of building a single organisation out of these things, alongside making 30% cuts which required everybody to apply for their jobs. That took nine months, and you can imagine what morale was like at the end of it. We were trying to keep the show on the road for those early months.
But I think your point is a very important one. There’s always been a business department. In those days it was, and it had always been, sectoral. It’s never really done regions – leaving aside Scotland, Wales and Northern Ireland. When I was there, we saw the UK in national economic competitiveness terms. Competition policy was very important, state aid policy was very important. We thought about what sectors needed to be internationally competitive. Where they went was not even secondary: it was thirdly or fourthly. It wasn’t the business department’s concern.
Of course, we welcomed it if there were jobs in South Wales or the North East, but what we were worried about was ‘what’s the competitiveness of the UK’s digital industries? How are we doing in various tech sectors? Where are we in terms of the next stage of the digital economy. How do you modernise and bring together the construction industry so they start using low carbon bricks? Are we looking at the supply chain for oil and gas?’ Those were the issues that we focused on, and it wasn’t our job to look at regional disparity. It was very much national and sectoral. That was what the department was there for and that was what we tried to do.
When we looked at local growth, the best we could come up with was supporting nodes of excellence. We couldn’t find any other way of getting into it. One example on that: we had a really good day-long seminar with ministers, special advisers, and senior officials, to pull together our industrial strategy. It went to Cabinet, got signed off. Great. I tried to do the same nine months later on local growth. We couldn’t do it. There were just too many moving parts. It wasn’t entirely clear what the issues we were trying to deal with or what tools we had to deal with them were.
Q: How did you think about how business and managerial capacity varied across the country? You mentioned earlier the tension between London and back-office functions might be done elsewhere.
Having made those sectoral point, to be fair to myself I spent a lot of time on the road. I would frequently go out with John Cridland of the CBI [Confederation of British Industry] on his regional visits. I got to meet regional businesses. I always went to Northern Ireland, to Edinburgh, and so on. I met a lot of people. I also stayed in touch with the TUC [Trades Union Congress] (Frances O’Grady, who is seriously impressive). She would come and see us every month.
With the CBI, we would talk about these about this question of managerial capacity. It’s hard to generalise. I think you did notice the line from the Wash to South Wales. South of that – in Bristol or Southampton or Cheltenham – basically, people didn’t have a problem. They might have moaned about the trains or whatever, but Bristol famously is the only place that keeps graduates outside London.
North of that line, there would be one or two islands like that. Strathclyde in Glasgow was always an island of optimism: it’s become a Scottish MIT. It’s quite remarkable. I have learned to appreciate the ability of Scotland to function as a coherent economic unit because they can pull together skills and land access and some targeted funding, in a way which is very attractive to investment large and small. You see it in bits of the Midlands. Manchester had superb local leadership and was quite sharp elbowed. It had the Chancellor as well. All those things help.
It was less true in parts of Yorkshire, and in the North East. There was a sense of being a long way away. It was partly psychological, but I remember going to Hartlepool and the problem of not having a decent train service to the rest of the country. How do you keep people? The rest of us were not able to help very much.
I don’t think it’s a general lack of management talent, though. I would say British managers have got better over the decades. I’ve been working with them from a pretty low base and I think we’ve now got some great startups. The next generation are significantly stronger than the older one – which also had some brilliant people, but then it got more iffy.
We did and do suffer – and this is absolutely true in Whitehall too – from a lack of scientific literacy. When I worked in Paris in the Finance Ministry, one of the guys on the team had negotiated the Channel Tunnel treaty with the British from the Department of Transport. He said there were three or four of them on the French side. They’d all got an engineering background. They’d all actually designed bits of bridges. None of the UK team had any engineering or technical background at all. We see engineering and technical skills as specialist skills, like design. We don’t see it as a natural starting point for everything else. I think that is a structural weakness in Whitehall and in politics as well.
Q: Were the civil society bodies you mentioned – the CBI, the TUC – effective as regional operators? Were they a trusted source in helping you understand the economic geography of the UK?
The TUC was under a lot of pressure and didn’t have a lot of funding. The CBI was also struggling to keep members, with the pressures after the financial crisis. It’s a membership organisation, so it has the strengths and weaknesses of that.
I would say ‘no’, we did not have good quality people on the ground giving us the analysis that would have been helpful – but, then, it should have gone to the government as a whole, not just to the business department. It wasn’t primarily our job to support the West Midlands or wherever.
You get into some interesting trade-offs. One thing we’ve missed – I think the Bank of England did some analysis of this, but it didn’t get circulated very widely – was the huge pressure to reduce department footprints around the country for financial reasons. There wasn’t any money to do stuff with. There’s no point finding out more about what’s going on if you can’t then do something about it when you’re in government.
Q: Were there other departments that you thought were particularly effective in understanding this regional dimension?
With the exception of the John Prescott period, the regions were never a major issue for most core economic departments. We were concerned, of course. The Treasury was the ‘fast food’ department – with microwave policies on tax and so on. Things happen rapidly. We were the slow cookers. Things took a long time – to build productivity initiatives, get industrial strategy sector groups going, support innovation – and that was what we did. Who brought the regional dimension into this? This comes back to this problem that you can’t treat it as an afterthought. It’s not just about economics: it’s societal and it’s political.
We still have regions based on Second World War Bomber Command map lines, which says something about our approach to regional policy. We never defined what they were. We never gave them political power, autonomy and funding to engage with us. We didn’t have a local voice saying, ‘what’s important to us is X’. At best, you’ve got a dynamic council leader in, say, Manchester and a dynamic head of the university who could bid for public money. That was a transactional relationship, as with a minister like Greg Clark doing his City Deals. They were transactional and short term. They weren’t really linked to anything more widely.
The problem was, if we don’t give the region’s a voice in the political decision-making process, ‘Whitehall’ – set of potentially warring fiefdoms as it is – is never going to be able to come up with a coherent policy. We don’t know what we’re trying to do or how important it is or how committed we are in terms of funding and so on to it. We’re seeing this yet again with the so-called ‘Levelling Up agenda’, which I do not see as a coherent intellectual take on this challenge. There is no willingness to devolve power and money. Unless you do that, you’re not going to have spatial policy.
Q: How much did RDAs suffer from this lack of a political accountability mechanism?
Anything which simplifies who is responsible for what in an area enables you to give them more autonomy, funding, or support – it is a move in the right direction. Anything which says, ‘this funding comes with these strings attached…it is for this purpose only…it’s ring fenced’, the ‘challenge fund’ approaches and so on – it is a move in the wrong direction.
The political-institutional problems we face on this are immense. We haven’t even been able to get unitary authorities across the country. We’ve been trying to do that for getting on for 40 years. It must be sensible to have that, otherwise they spend time arguing with each other. The RDAs never had a political foundation or infrastructure to fit into. Some of them were little more than pretend. I never understood what the London or South East RDA did. Some of them did fit in more easily to regions with problems, but they never had the chance to make their own trade-offs really. The centre was never prepared to give that to them, because it might have led to different decisions for the ones that the centre wanted to deliver at the time. Some of that comes back to our political pendulum.
I don’t think moving to a system at local or regional level Proportional Representation is anything like a panacea, but allowing more local stability is necessary. If you are going to provide the right to increase taxes on people and have some choices over how the money is spent, then you also then have to have a better system of how we get our regions to work across boundaries.
We probably have too many. I don’t think the lines that we’ve drawn are by and large the right ones. That’s subjective because there are political identities here. Scotland isn’t necessarily much of an economic unit, but it thinks of itself increasingly as one. That helps it to become more successful as one. South Wales and North Wales are massively different, but it’s probably better they’re all in Wales than that they’re not. How do we develop the economics along with the politics? There’s no point trying to come up with a better looking regional development technical area map and say, ‘that’s the answer because it will wither and die’. It is not linked into genuine political support, and that means money.
Q: Regional development has been a major focus of the European Commission for decades now. Is there more we could learn from there?
For some years I knew more about European regional policy than I did about local government in the UK – and I’m not saying that as a compliment to me. I was conscious in the 80s that Britain was getting massively, fiscally centralised under Geoffrey Howe and then even more so Nigel Lawson.
France – that we all thought of as the Napoleonic centraliser par excellence – was becoming more economically regionalised. Mitterand set up those regions, and I was working in Alsace at the time. I saw the effect. Some of their regions, as ever, worked better than others, but nobody in France has suggested going back on this regional model. It gave you an extra source of autonomy to go to for funding. There were always local arguments, of course there were, but they were quite good at dealing with them because they were local themselves. They got the regional size about right – you can argue, but 10 to 20 units is not bad.
Germany has always been massively decentralised. It is a decentralised federal country, something we always had great trouble understanding, including in their politics. Even the Netherlands, Belgium, or Denmark have a lot of regional autonomy and funding. It goes with more of a ‘discussion culture’. You can’t just sit in an office somewhere – let’s say in 10 Downing Street – and say, ‘we’re going to do this and everybody has to do this to get the money’. That’s not how it works. You have to negotiate with lots of people. You have to bring them in, and they have their own politics and so on. A lot of places use their second chamber as a way of doing that.
You have to deal with issues of corruption, of course, and of local notables not wanting disruptive innovation. But it’s less difficult to deal with those locally than it is to try to deal with them top down. I think we have a lot to learn from how other countries have done this. Every model is culturally and historically specific, but they can and do change over time. We have to ask ourselves, why are we at one extreme of the pendulum of ‘central versus regional’? It has not been obviously successful.
Q: Have reforms since 2010, especially the advent of the city mayors, been a step forward?
I think the jury is still out. I’m pessimistic. I think there’s too much short-term party politics involved in it. I think this only works if you set up a structure and then you say, ‘everybody, here are the rules. This is how we’ll do it, everywhere. It doesn’t matter how you voted last time or next time which constituency you’re in’.
I’m slightly more optimistic that we are heading in a good direction, but it’s got to cover the whole country. It goes back to the sectoral issue: it’s important to have a national sectoral policy, and it’s important to have approach to inward investment, to startups, to building on universities and all that. But then you’ve got to look at the geography and the social structures and physical infrastructure. You can’t just cherry pick mayors in some places, because you’re then going to leave some of the country further behind than ever – Blackpool, South Herefordshire, South Durham. You’ve got to see this in national terms.
If we offered a structure which had political structures related to it – I would say based around a form of proportional representation, to give you a degree of stability – where you could work out some of these trade-offs, you could offer funding which would not be under Treasury control. That is absolutely vital, because otherwise what you can give one year, you can take away the next. That just doesn’t work. It’s got to be either hypothecated taxes or some constitutional structure.
Then, let’s be flexible. In some areas, it might be a mayor for one town or a conurbation. In others, we could try different models. I think that’s worked rather well in our university sector. I don’t know whether Manchester and Liverpool should be in a single economic super region. I think economically, probably they should. But my daughter has moved to Liverpool and tells me the politics are rather different. You have to take account of all these things. I think we have to be careful not to be little Napoleons and set out the model. Equally we can’t just say, ‘do this and you can have a mayor’ and ‘vote for us and we’ll give you some money’. That is not a model. That’s more of the same, which hasn’t served as well.
Q: What do you think has been the key success for UK policy and regional growth and what has been the key frustration?
Our success has been our ability to grow the university sector – broadly defined – and to increase the number of people going, while giving universities autonomy and progressively integrating them more into local economies. There are some outstanding examples, like Lancaster. I think that is a big plus and has served as well in lots of areas, from design to digital tech.
Our underlying problem remains excessive centralisation and the Treasury’s control of public expenditure being insulated from wider economic, social, regional priorities of government.
ENDS