Can devolution help close regional productivity gaps in the UK?

Reading Time: 3 minutes

The UK is pursuing one of its most ambitious devolution programmes in decades. Yet the success of devolution will depend not only on which responsibilities and decision-making powers are transferred to local governments, but also on whether local institutions have the capacity to use them effectively.

Daniela Glocker, OECD Economics Department

The United Kingdom faces a long-standing productivity challenge. Productivity remains considerably higher in London and parts of the South East than in many other parts of the country, contributing to substantial differences in wages, employment opportunities and living standards. At the same time, productivity growth has slowed across much of the country, including in some traditionally high-performing regions (Figure 1).

Figure 1. Labour productivity varies widely across UK regions

Note: Labour productivity measured as GVA per hour worked.
Source: ONS Local Indicators -Experimental (database).

Successive governments have therefore sought ways to strengthen economic performance across all regions. The current government’s Growth Mission places devolution at the centre of this effort, with new Strategic Authorities being created across England and additional powers being transferred to local governments. But can devolution itself deliver stronger growth?

The local dimension of productivity growth

The latest OECD Economic Survey of the United Kingdom argues that devolution can support productivity growth because many of the factors shaping economic performance are inherently local. Skills shortages differ across labour markets, innovation ecosystems are built around local networks of firms and universities, and infrastructure priorities vary widely between places. Local governments are therefore often better placed than central government to identify growth bottlenecks and coordinate policy responses. But devolution changes who makes decisions, not necessarily a government’s ability to deliver them.

Responsibilities alone are not enough

The UK’s devolution debate is often framed around the question of which economic responsibilities should be transferred from central to local government. Yet the effectiveness of devolution depends as much on local capacity as on the responsibilities themselves.

Some authorities have developed sophisticated economic analysis capabilities, strong delivery mechanisms and well-established partnerships with businesses and universities. Others face significant constraints related to staffing, expertise and financial resources. These differences matter because productivity-enhancing policies typically require sustained commitment and coordination. Success depends on whether local institutions possess the capacity and resources required to develop and implement long-term economic strategies.

Fiscal devolution raises the stakes

Capacity is becoming increasingly important as the government considers shifting some revenue-raising powers to the local level. Local governments remain considerably more dependent on central government funding than their counterparts in many other OECD countries. Following the Global Financial Crisis, spending restraint, fragmented funding arrangements and repeated changes to grants contributed to a decline in local governments’ real spending power (Figure 2). This often made long-term planning difficult, limited the ability of many authorities to build and retain expertise and develop long-term economic strategies. The government has begun to address some of these challenges. Recent reforms aim to simplify local government funding, provide greater funding certainty and strengthen local autonomy. These are welcome steps. More predictable funding and greater flexibility can help local authorities align policies more closely with local needs and opportunities.

However, strengthening institutional capacity takes time. As local governments take on greater responsibilities and potentially greater fiscal autonomy, differences in institutional capacity become increasingly important. Greater autonomy can support growth by allowing policies to reflect local economic conditions and priorities, but it also raises the stakes of institutional quality. If local governments differ substantially in their ability to design, implement and evaluate policies, more devolution could inadvertently widen regional disparities rather than reduce them. Areas with stronger institutions may be better placed to translate additional powers and resources into better economic outcomes, while those with weaker capacity risk falling further behind. Strengthening local capacity is therefore essential to ensure that greater fiscal responsibility translates into stronger growth across all regions, rather than only those with the strongest institutions.

Making devolution work

Building stronger institutions therefore needs to be viewed as an economic priority. The Survey highlights the importance of:

• prioritising training and staffing;
• strengthening analytical capacity of local government;
• improving policy evaluation;
• providing greater funding certainty;
• encouraging learning across departments and levels of government.

The UK has launched one of the most ambitious devolution programmes in years, but its productivity challenge will not be solved by devolution alone. National reforms to strengthen investment, innovation and skills remain essential. But effective devolution can help ensure that these reforms are adapted to local circumstances and translated into stronger outcomes on the ground.

The key challenge is not simply how many powers are devolved, but whether local governments have the capacity and resources needed to use those powers effectively. Devolution is most likely to succeed when greater local responsibility is matched by stronger local institutions. If this balance can be achieved, devolution can become more than a governance reform. It can help ensure that productivity gains spread more broadly across the country, rather than becoming concentrated in places that are already performing well.

References:

OECD (2026), OECD Economic Surveys: United Kingdom 2026, OECD Publishing, Paris, https://doi.org/10.1787/aa997c6e-en.