How the Northern Powerhouse could boost SMEs – Investec Comment

Critics of the chancellor's ambition to create a Northern Powerhouse often dismiss the idea as a gimmick. The challenge of rebalancing the UK economy is certainly immense. A recent report by the Centre of Cities showed that gross value added per worker in 2013 in the areas covered by the Northern Powerhouse was 13 per cent below the British average and 29 per cent behind that of London.

 

But if politicians really can deliver on a coordinated plan of infrastructure investment and greater regional devolution, alongside other important reforms, there is every chance the scheme could be a success. And it would have sizeable benefits for small businesses across the country. Why? 

 

First, over the long haul, increased connectivity due to road investment and high speed rail will better integrate northern cities with each other and London. Projects that reduce transport times will make it easier for companies along the routes to exploit a larger market. For a retailer based in Sheffield, for example, if an upgrade cuts the journey to Leeds from 45 to 30 minutes, that may induce more people to move around to do their shopping.

 

 

Better connectivity, if it cuts commuting times, will also make it easier for businesses to find staff. And if greater connectivity boosts the economic vibrancy of the Northern Powerhouse region, it could help these areas retain highly-skilled people who might otherwise have moved to London.

 

This could have implications for businesses based in the capital and the South East too. The North could become a more unified single market, with a larger talent pool, making it a more attractive destination for expansion within the UK. Investec, for example, has just launched a full-service investment banking offering led by Dan Sheahan, to reinforce its long term commitment to build its business across the North of England. Shorter commuting times due to projects like High Speed Two would also potentially increase the talent pool for businesses in London, while helping to alleviate some of the upward pressure on house prices in the capital.

 

In theory, greater regional devolution will also lead to local decision-making that is more in tune with local needs, creating a better environment for businesses in the area. Devolution is not always a good thing. There is a risk that extra layers of government become extra layers of bureaucracy, thereby stifling business growth. However, there are instances of regional devolution in the UK already – London, for example – where a directly-elected mayor has become a standard bearer for local businesses without necessarily adding to the barriers those companies face.

 

 

As part of his devolution plans, the chancellor is decentralising some control of business rates. This could potentially lead to tax competition within the UK, with areas cutting rates in order to attract more businesses. Given austerity and the requirement for local authorities to balance their budgets, however, it remains to be seen whether this will be a significant factor.

 

Rebalancing the UK economy is a generation long challenge, and successive governments will need to be committed to the Northern Powerhouse for it to be successful. Better infrastructure and devolution of power will also not be enough in themselves: narrowing the gap between London and the northern cities in terms of education outcomes is another key priority. But the potential pay-off is significant. Levelling up the North of England, while not knocking down London, could create a virtuous circle of prosperity for the whole of the UK.