Daniela Glocker
OECD
OECD Economic Surveys: United Kingdom 2026
Abstract
Regional productivity disparities are a major constraint on the United Kingdom’s overall productivity performance. Although interregional gaps are broadly in line with OECD averages, recent convergence has largely reflected stagnation in high-performing areas rather than sustained catch-up in lagging regions. These gaps reflect more than sectoral differences between regions. They stem from persistent structural weaknesses within regions in skills accumulation, transport and digital connectivity, spatially concentrated innovation and finance, and complex governance arrangements. Recent policy initiatives, including the 2024 Growth Mission, 2025 Industrial Strategy, as well as ongoing devolution efforts across England, seek to empower local economies through targeted investments in skills, infrastructure, and innovation ecosystems. However, sustaining productivity convergence will require consistent implementation, stronger local institutional capacity and stable multiyear frameworks that extend beyond electoral cycles. A coherent long-term approach that aligns skills, infrastructure, innovation, finance and governance is essential to unlock productivity growth across all regions.
The United Kingdom has experienced weak economic growth since the Global Financial Crisis. Over the past decade, GDP growth has been driven mainly by increases in labour supply rather than productivity-enhancing investment, while productivity growth has lagged that of many OECD peers (Figure 4.1). This reflects both slow technological progress and weak diffusion of innovation, combined with policy uncertainty and frequent changes to the economic policy framework, which have dampened business investment and reduced the effectiveness of long-term growth strategies as described in the last Economic Survey (OECD, 2024[1]).
Productivity gains are essential to increasing output, improving living standards and strengthening public finances without fuelling inflation. This is particularly important in the current context of limited fiscal space and high debt-servicing costs. Employment rates in the United Kingdom are already relatively high by international standards, leaving limited scope to boost growth through further increases in labour utilisation (OECD, 2024[1]). With demographic ageing projected to intensify pressure on public services and the labour market, future growth will depend increasingly on improving how effectively labour and capital are used, alongside adequate levels of investment, rather than on expanding factor inputs alone (see Chapter 1, (OECD, 2024[1])).
Note: G7* refers to a simple average of G7 countries without the United Kingdom.
Source: OECD Productivity Compendium (database).
Aggregate productivity trends mask substantial regional disparities within the United Kingdom. Productivity levels in Greater London and the South East remain significantly higher than in the rest of the country, while many regions continue to lag behind. In international comparison, however, the extent of regional productivity inequality in the United Kingdom is broadly aligned with the OECD average (Figure 4.2).
GVA per worker, by region (TL2 level), index average level across regions=100, 2023 or latest
Note: GVA=Gross value added. Territorial level 2 (TL2) refers to large regions within a country. In the United Kingdom there are 12 regions (i.e. North East England, North West England, Yorkshire and The Humber, East Midlands, West Midlands, East of England, Greater London, South East England, South West England, Wales, Scotland and Northern Ireland) at TL2 level. Chile, where regional disparities in labour productivity are very high, is excluded from the chart. The OECD average is calculated as an unweighted average of the OECD regions for which data are available.
Source: OECD Regional, Cities and Local Areas (database).
The United Kingdom’s weak aggregate productivity performance reflects not only persistent underperformance in lagging regions, but also prolonged stagnation in some traditionally high-performing areas. Since the Global Financial Crisis, productivity growth in Greater London has contributed negatively to national productivity growth, reflecting both weak productivity growth dynamics and the region’s large weight in the economy, with around a quarter of UK gross value added (GVA) generated in London (Figure 4.3). This pattern highlights that the country’s productivity challenge has become increasingly national in scope, rather than being confined to a narrow set of lagging regions.
At the same time, strengthening productivity performance in lagging regions remains important for raising aggregate growth and reducing spatial inequalities. Estimates suggest that narrowing productivity gaps through performance improvements in lagging regions could increase national output by several percentage points, with significant benefits for living standards and public finances (Resolution Foundation, 2019[2]). Strengthening productivity across regions is therefore not only important from an equity perspective, but also a key component of a sustainable national growth strategy.
Note: Labour productivity measured as GVA per hour worked.
Source: ONS Local Indicators -Experimental (database).
Differences in industrial and sectoral structure play a central role in shaping regional productivity outcomes in the United Kingdom. Most of the observed productivity dispersion arises from differences within regions across sectors, rather than from differences between regions (Figure 4.4). This suggests that productivity disparities are driven less by broad region-wide characteristics than by uneven performance across firms and activities within the same places. Firm‑level evidence points in the same direction, showing that recent productivity growth in the United Kingdom has been driven primarily by firms at the top of the productivity distribution, while lower‑productivity firms have exhibited limited catch‑up. Productivity dispersion between frontier and laggard firms has widened over time, with growth at the top outpacing that at the bottom, and business dynamism remaining subdued across industries (ONS, 2025[3]). This pattern points to weak diffusion of productivity‑enhancing technologies and practices across firms, including smaller firms, helping to explain why productivity gains in leading activities do not translate into broader regional convergence.
Theil index decomposition of labour productivity into within and between inequalities, 2020 constant PPP
Notes: Labour productivity is measured as GVA per worker at the level of TL2 regions and sectors, US dollars, constant prices, 2020 ROPI adjusted, and does not include Northern Ireland due to incomplete data from 2020 onwards.
Source: OECD Regions, Cities and Local Areas (database).
High-productivity, knowledge-intensive activities are concentrated in a relatively small number of region-sector combinations, while a substantial share of employment remains located in sectors with weaker productivity performance (Figure 4.5). In several regions, advanced services and technology intensive manufacturing have high productivity levels but employment is not necessarily concentrated within those sectors relative to the national average. By contrast, sectors with large employment concentration, including parts of retail, hospitality and administrative services tend to exhibit lower productivity across most regions (Figure 4.5). While some degree of co‑location between high‑productivity activities and locally consumed services is expected in dense regional economies, the persistence of large productivity gaps across firms within potentially scalable and tradable activities points to weak diffusion rather than sectoral composition alone.
The concentration of high‑productivity activities alongside large employment shares in lower‑productivity sectors within the same regions indicates that productivity gains generated in leading firms and activities have not translated into broad‑based improvements within regional economies. These patterns have been persistent over time (ONS, 2025[4]; 2025[5]) suggesting that limited diffusion across firms, sectors and places has been holding back aggregate productivity growth. This underscores the importance of policies that strengthen diffusion mechanisms within regions, rather than relying primarily on the spatial reallocation of activity across regions.
Cities play an important role in shaping these diffusion dynamics. Due to their density, economic diversity and connectivity, cities can act as engines of growth within their regions. While London performs broadly in line with OECD peers, second-tier cities in the United Kingdom tend to underperform relative to international peers of comparable size and density (OECD, 2020[6]). Weak internal and external connectivity, skill shortages, and underdeveloped local innovation ecosystems limit their role as effective hubs for diffusion and reinforce the concentration of high productivity in a narrow set of locations.
Note: The figure shows employment and labour productivity concentration across sectors and regions. Employment location quotients indicate whether a sector is over- or under-represented in a region relative to the national average. Productivity location quotients compare regional sectoral labour productivity (GVA per worker) with the national sectoral average, weighted by employment. Cells highlighted as higher–higher indicate sector–region combinations that combine above-average employment concentration with above-average productivity, while lower–lower cells indicate relatively peripheral activities.
Source: ONS.
Over the past decade, policy attention has increasingly focused on reducing regional inequalities through a series of initiatives. City deals and devolution deals intended to empower decision-making of local institutions, complemented in 2021 with the Levelling Up agenda aimed at reducing economic imbalances through investment in skills, infrastructure and housing, and supporting innovation hubs outside London and the South East. Despite these efforts, progress has been uneven, reflecting fragmented governance arrangements, uneven access to skills development and persistent gaps in technology adoption across regions.
Building on this agenda, the current government has introduced new policy frameworks, including the 2025 Industrial Strategy and the 2024 Growth Mission, which place stronger emphasis on sectoral opportunities, infrastructure investment and spatially targeted interventions, including the Oxford–Cambridge and emerging Northern growth corridors, to boost productivity, particularly in lagging regions (HM Government, 2025[7]; 2024[8]). The 2024 English Devolution White Paper further proposes to streamline local governance arrangements and expand subnational responsibilities in England (HM Government, 2024[9]). This sustained policy focus reflects the broad recognition of the need for integrated, place-based approaches that combine human capital development, improved connectivity, faster diffusion of innovation, and stronger institutional co-ordination. The effectiveness of these strategies will depend on the extent to which national sectoral priorities are translated into coherent local investment, skills and infrastructure strategies, and on whether subnational governments are equipped with the capacity, funding stability and autonomy needed to deliver them effectively.
Against this backdrop, the chapter analyses the structural drivers of regional productivity disparities and explores pathways to foster more balanced growth. Drawing on the 2024 Growth Mission and the 2025 Industrial Strategy, the chapter focuses on four interrelated drivers of regional productivity: strengthening local skills systems, improving physical and digital connectivity, increasing and accelerating the diffusion of technology and innovation within and across regions, and enhancing institutional co-ordination and local financial and administrative capacity to ensure national ambitions translate to sustainable local growth outcomes.
The general drivers of labour productivity at the regional level mirror those at the national level and can be broadly grouped into three components: human capital, physical and digital connectivity which shape effective access to markets and capital, and knowledge-based capital, including the diffusion of innovation. In the United Kingdom, these drivers are shaped by a common national policy framework, but regional outcomes diverge markedly as places compete for skilled workers, investment, and highly productive firms. Differences in local skills systems, connectivity, and the capacity to absorb and diffuse innovation therefore shape how effectively regions translate national policies into productivity gains, underscoring the need for a co-ordinated policy approach with a strong geographical dimension to boost aggregate productivity growth.
4.2.1. Strengthening local skills systems to support regional productivity
Human capital is a critical driver of productivity and economic performance. Compared to international peers, the United Kingdom performs well with respect to educational attainment of its working-age population, of which about 54% hold a tertiary degree. However, national averages mask persistent local and regional disparities in skills formation, lifelong learning participation, and school-to-work transitions. These disparities weaken productivity growth in lagging regions by constraining firms’ access to skilled labour, limiting innovation adoption, and reducing the capacity of local economies to adapt to structural change. Strengthening local skills systems is therefore essential in narrowing regional productivity gaps.
Building strong human capital foundations across regions
Regional productivity differences are partly rooted in inequalities that emerge early in the education system and accumulate over time. Early childhood development outcomes already vary across England’s regions, shaping later educational trajectories and labour market opportunities. Upon entering primary school (around age five), 68.3% of children nationally achieved a “Good Level of Development” (GLD) in 2024, but there is some regional variation. London recorded the highest share of children with a good level of development (71%), while the North West had the lowest with 65% (HM Government, 2025[10]).
These early gaps persist throughout schooling, affecting post-16 pathways, higher education and ultimately higher-quality jobs. By the end of Key Stage 2 (around age 11), 71% of pupils in London met the expected standard in reading, writing and math, compared with a share that was 11 percentage points lower for pupils in the South West. Importantly, disparities across regions have increased over time. While London has largely recovered to pre-pandemic levels, outcomes in all other regions have deteriorated by up to 4 percentage points (Figure 4.6, Panel A). At age 19, GCSE attainment rates reflect a similar pattern (Figure 4.6, Panel B).
From a productivity perspective, these gaps in education performance reduce the future supply of skilled workers in lagging regions and raise the cost of addressing these disadvantages at a later stage. After a decade of real-term cuts to education spending, it is therefore welcome that the government has increased funding into early years provision through the expansion of free childcare entitlements and higher hourly funding rates to providers (OECD, 2024[1]; HM Government, 2025[11]). This has included measures such as extending the offer of funded hours for working parents of younger children and uplifts to early years funding formula allocations to local authorities intended to support the sustainability and quality of provision (HM Government, 2025[12]). In the 2025 Budget, the government committed to a review of the early years system which is welcome. This review should particularly focus on identifying remaining policy gaps that may contribute to regional inequalities in early childhood education. Total school spending for pupils aged 5–16 increased largely driven by spending on children with special education needs and disabilities (SEND). Ongoing reforms have involved additional funding for specialist staff and services, the expansion or restructuring of specialist and alternative provision, greater use of assistive technology, and attempts to clarify statutory processes for assessment and intervention under the SEND and alternative provision improvement plan, with the aim of addressing important and persistent inequalities in outcomes (IFS, 2025[13]; IFS, 2026[14]). To ensure that these investments translate into sustained improvements in human capital, funding levels should be protected in real terms, accounting not only for rising labour costs but also increasing non-staff costs faced by schools and early years providers, such as building maintenance and energy expenses.
Note: Key Stage 2 attainment refers to the share of pupils in state-funded schools meeting the expected standard in reading, writing and maths at the end of Key Stage 2. In Panel B, GCSEs in English and Mathematics. Data shows upper-tier/unitary authorities in England. Data for Key Stage 2 attainment was not available for the following authorities: Bournemouth, Christchurch and Poole, Dorset, Buckinghamshire, North Northamptonshire, West Northamptonshire, Cumberland, Westmorland and Furness, North Yorkshire and Somerset.
Source: Department for Education; and Office for National Statistics (ONS).
Improving school-to-work transitions and reducing youth disengagement
Weak school-to-work transitions represent a key bottleneck in the regional skills pipeline and contribute directly to productivity losses. In the United Kingdom, the share of young people aged 15-24 who are not in employment, education or training (NEET) stood at 13.7% above the OECD average of 11.2% in 2024 (OECD, 2025[15]). Within England, NEET rates for 16–24-year-olds vary markedly across regions (HM Government, 2025[16]). London records the highest rate (15.2%), followed by the East Midlands (14.7%), North West (14.4%) and East of England (14.2%), all above the national average. These figures suggest that strong aggregate labour market performance does not necessarily translate into smooth school-to-work transitions for young people. By contrast, the South East (11.8%) and West Midlands (11.6%) exhibit lower NEET rates, potentially reflecting stronger vocational pathways, tighter entry-level labour markets, or more effective local support structures. These differences underline that school‑to‑work transitions are shaped by local employer engagement, institutional co-ordination and labour‑market conditions. They also reflect differences in the extent to which young people face complex and interrelated barriers to employment, including skills gaps, health issues and disengagement from education and training (HM Government, 2026[17]). While the specific bottlenecks vary across regions, their inherently local nature implies that uniform national instruments alone are unlikely to address them effectively.
Strengthening dual vocational education and training, which combines school- and work-based learning, is particularly important to ease the transition into work, especially for young people with lower qualifications. As highlighted in previous Economic Surveys (OECD, 2022[18]; 2024[1]), apprenticeships in the United Kingdom have often been used to upskill existing workers rather than to support labour-market entry. Recent reforms to the apprenticeship system aim to better target young people by lowering employer costs, including for SMEs when apprentices are under 25 through fully funding apprenticeship training and offering new incentives up to GBP 2 000 (Box 4.1). These measures represent progress, but do not change the underlying incentive structure of the apprenticeship levy, which remains largely employer driven and geographically neutral. Thus, apprenticeship numbers continue to depend on employers’ willingness to create places, favouring sectors and locations where firms already have strong capacity and demand, which suggests some potential deadweight loss, whereby money is spent on apprenticeship contracts that are likely to have come into force even without public support. In addition, evidence suggests that financial incentives alone may be insufficient to support labour market entry for more disadvantaged young people, who often require complementary guidance and support services (HM Government, 2026[17]). Its geographically neutral design also implies that funding does not vary with local labour‑market conditions, offering no additional support to regions with weaker economies where young people would benefit most. Introducing funding uplifts or higher public co-investment rates in areas with weaker labour market outcomes could support access in lagging areas, while limiting the respective administrative burden. Linking part of public funding to sustained employment or completion of apprenticeships could further help to strengthen quality incentives.
The announcement of a new Youth Guarantee signals a welcome shift towards preventing youth disengagement and support early labour market attachment. The government has committed GBP 820 million, and announced further funding of GBP 1 billion over three years (HM Government, 2026[19]; House of Commons Library, 2026[20]), to expand access for young people aged 16–24-years who are at risk of long‑term unemployment to education, apprenticeships or job-support programmes (Box 4.1). This approach is consistent with growing evidence highlighting the importance of early intervention and co-ordinated support to prevent long-term disengagement (HM Government, 2026[17]). However, delivery relies on employer participation and local administrative capacity, which varies across regions. Although the Youth Guarantee is designed as a nationwide offer for all eligible young people, its demand-led nature implies that eligibility is linked to areas with higher need, as regions with weaker labour markets tend to have larger numbers of young people meeting the criteria. However, actual funding flows depend on take up, which in turn relies on employer participation and local administrative capacity. As a result, areas with stronger employer bases and delivery systems may absorb a larger share of funding, even if underlying need is greater elsewhere. Whether this translates into effective outcomes therefore depends critically on the capacity of local institutions and delivery partners to tailor support to local labour market conditions and employer demand. Introducing targeted support linked to regions with high local youth unemployment or NEET rates to help build and sustain local delivery capacity alongside the national framework will be essential to ensure that guaranteed opportunities result in meaningful, durable employment outcomes across regions.
The UK government has reformed apprenticeships and youth employment support to strengthen labour‑market entry and early career progression for young people, particularly those at risk of long‑term unemployment.
The apprenticeship levy, introduced in 2017, is a UK-wide tax designed to encourage employer investment in training and to ensure sustainable funding for apprenticeships. Large employers with an annual pay bill of over GBP 3 million pay the levy at 0.5% of their annual wage bill, with funds available via a digital apprenticeship service account that can be used to pay for approved training. Unused funds expire and may be reallocated to fund apprenticeships in smaller firms, which can offer apprenticeships through a co-investment model.
From April 2026, the levy is being transformed into the Growth and Skills Levy, expanding permitted use of funds and refocusing support towards priority skills and early career pathways.
Key changes include:
Full public funding of training costs for SMEs hiring apprentices aged under 25, removing the previous 5% co‑investment requirement for this group.
Cash incentives for SMEs, announced in March 2026, including a payment of GBP 2 000 for each new apprentice aged 16–24 taken on as a new employee.
Restrictions on public funding for level 7 (master level) and older apprentices, with new publicly funded starts no longer available for those aged 22 and over.
Shorter expiry period of levy funds, reduced from 24 to 12 month from August 2026, to encourage faster investment in training.
Higher employer co-investment once levy funds are exhausted, requiring levy‑paying employers to contribute 25% of training costs, beyond their available levy balance, up from the previous 5%.
Introduction of apprenticeship units, allowing levy funds to be used for shorter, modular training linked to apprenticeship standards, alongside full apprenticeships.
Expansion of foundation apprenticeships as an entry‑level pathway for 16–21- year-olds, including into sectors such as hospitality and retail, construction and health and social care.
The Youth Guarantee is a national framework supporting young people aged 16–24-year-olds at risk of long‑term unemployment, ensuring access to employment, apprenticeships, education or training:
A Jobs Guarantee offering six‑month paid employment for eligible 18–24-year‑olds on Universal Credit for 18 months, with full wage subsidies. Delivery is being phased in, starting with priority areas before national rollout.
A Youth Jobs Grant, introduced in March 2026, providing GBP 3 000 to employers hiring eligible young people aged 18–24 who have been on Universal Credit for six months or more.
Access to apprenticeships, education or skills-training pathways, and work‑experience.
Personalised support delivered through Jobcentre Plus, Youth Hubs and employer engagement.
Youth Guarantee Trailblazers, testing local delivery approaches alongside the national rollout.
Linked to Universal Credit requirements, including potential sanctions for refusing suitable offers.
Source: Hm Government (HM Government, 2025[21]). (HM Government, 2025[22]) (HM Government, 2026[19])
The effectiveness of the Youth Guarantee also depends on how participation requirements are implemented in practice. Individual eligibility for the Youth Guarantee is linked to Universal Credit conditionality and may involve sanctions if a suitable opportunity is refused. While linking participation to benefit eligibility can motivate youth engagement, overly strict sanctions could risk pushing young people into unsuitable placements without addressing underlying challenges such as skills gaps, disabilities, or care responsibilities. Evidence suggests that young people facing multiple barriers benefit from sustained engagement, personalised support and trust-based relationships with service providers (HM Government, 2026[17]). The government should therefore balance participation requirements with supportive measures and sustained guidance to ensure guaranteed opportunities translate into meaningful, durable employment.
Aligning lifelong learning with regional labour market needs
While initial education and youth transitions matter, sustained productivity growth depends on the ability of workers to update and upgrade their skills throughout their working lives. Skill shortages and gaps vary widely across UK regions, contributing to recruitment difficulties and constraining firm growth (Productivity Institute, 2025[23]; HM Government, 2025[24]). Although UK adults perform reasonably well on average according to the latest OECD Survey of Adult Skills (OECD, 2024[25]), they lag OECD peers in numeracy and digital problem-solving skills, particularly outside more prosperous regions (Figure 4.7).
OECD PIAAC average Score, cycle 2, 2023
Source: OECD Education GPS: Survey of Adult Skills 2023 (PIAAC) (database); and Department for Education (2024), Survey of Adult Skills 2023: national report for England.
Despite multiple initiatives, skills mismatches persist, particularly in lagging UK regions. These include both skills shortages (jobs that employers cannot fill) and skills gaps (workers lacking proficiency in their current roles). According to the Employer Skills Survey 2024, the share of employees judged not fully proficient (skill gap density) has improved marginally over the past decade, declining from 5.7% in 2022 to 5% in 2024 (HM Government, 2025[24]). However, the South West and East Midlands recorded high skill shortage vacancy densities and above-average skill gaps (Figure 4.8), highlighting the need for targeted training provision and employer incentives to invest in upskilling. Conversely, regions such as East England or West Midlands experience lower than average shortages and skills gaps, suggesting better alignment of labour supply and demand.
Policy initiatives like Local Skills Improvement Plans (LSIPs), launched in 2022, are designed to strengthen the role of employers in identifying regional skills shortages and shaping post-16 education and training. Early pilot evaluations from the Department for Education suggest that the plans have improved dialogue between employers and training providers in areas with strong institutions, especially in digital, manufacturing, and green energy sectors, while places with weaker capacity progress more slowly and risk falling further behind unless policies are adjusted for local delivery capacity and specific labour market needs (Donald, Peck and Westwood, 2025[26]).
Share of vacancies hard to fill due to skills shortages and share of workers not fully proficient, 2024
Note: Dotted lines represent the UK average.
Source: Department for Education.
The creation of Skills England in 2025 is an important step towards greater coherence in the skills system, by bringing employer demand, LSIPs and national strategic priorities into one strategic body. Skills England has begun consolidating functions previously held by the Institute for Apprenticeships and Technical Education and is beginning to map skills gaps and training needs across regions while guiding decisions on where to fund training programs, apprenticeships, and reskilling initiatives (HM Government, 2025[27]). To deliver meaningful productivity gains, skills planning needs to explicitly align with the UK government’s Growth Mission and Industrial Strategy, ensuring that local training provision maps onto real and emerging sectoral opportunities. The government should continue to develop and refine Skills England’s data and labour market intelligence systems, including local skills mapping and standardised skills classification, to strengthen evidence-based monitoring of local skills supply and demand and enable more responsive and targeted policy interventions.
Lifelong learning is central to addressing current and emerging skills gaps. Adult learning participation in England reached 52% in 2023, well above the OECD average (40%), though still below levels in Finland and Norway (58%) and the United States (55%) (OECD, 2025[28]). Participation remains uneven, disproportionately benefitting higher-educated persons and varying across sectors and occupations, with clear regional implications (OECD, 2025[28]). In 2024, total employer investment in training was concentrated in London and the South East, largely driven by business services (HM Government, 2025[24]). While employer investment on training decreased since 2022 on average across UK regions, the North East is one notable exception. Here, investment in training per employee increased by about 50%, while both skill shortage vacancy and skill gap density decreased from 36% to 25% and from 5.9% to 4.5% respectively, highlighting the important role of training in addressing skill shortages (HM Government, 2025[24]).
Expanding lifelong learning requires an increase in investment in adult education and quality training programs. As apprenticeship incentives increasingly prioritise young entrants, there is a risk that support for upskilling existing workers becomes relatively less generous, particularly in firms with limited training capacity. In combination with rising labour cost (see Chapter 1), firms have fewer financial means for upskilling existing employees. Given that investment in general and transferable skills generates positive externalities that firms cannot fully internalise, there is a strong case for public co-investment, as discussed in the previous Economic Survey (OECD, 2024[1]). Instruments such as individual learning accounts, as used in several OECD countries such as Belgium and France, could be particularly effective in regions with weaker employer engagement. The planned Lifelong Learning Entitlement (HM Government, 2025[29]), a student finance system that gives adults a loan equivalent to four years of post-18 education, which they can use flexibly over their lifetime to fund approved degrees or modular courses at Levels 4–6, is a step into the right direction. From its introduction for course starts from 2027, the LLE is intended to widen access to flexible study pathways while aligning provision more closely with evolving skills needs. While many UK degree programmes are structured in modular formats, expanding the type of short, flexible and credit-bearing modular study envisaged under the LLE will still require adaptation by providers, clearer frameworks for credit recognition, and improved information for learners and employers. Evidence from OECD work on lifelong learning and micro credentials points to the importance of transparent qualification frameworks and accessible information systems in supporting uptake of modular provision (OECD, 2023[30]). In the UK context, discussions on the implementation of the LLE similarly emphasise the need for clearer information, guidance and links to labour market needs alongside institutional readiness (HM Government, 2025[27]). Ensuring effective implementation of the LLE therefore requires a balanced approach that combines provider capacity with stronger course transparency, guidance and labour market signalling, so that flexible learning options, such as modular, part‑time, blended or online study that can be accumulated over time and aligned with employer demand, translate into meaningful upskilling and reskilling opportunities across regions. The government should set in place a monitoring system to ensure course quality, regional availability and increase outreach and guidance for adult learners, especially those with low qualifications, to support uptake.
Retaining and attracting skills through stronger local demand and mobility
Improving regional productivity depends not only on creating and upgrading skills but also on the region’s ability to retain locally trained graduates and skilled workers, as well as to attract talent from elsewhere. Research shows that higher education graduates have a greater geographical mobility, moving towards regions with higher wages and better amenities, especially towards London and the South East (Britton et al., 2021[31]; Vignoles, 2025[32]; Xu, 2025[33]). While large cities outside London often retain a substantial share of the graduates they educate, they attract comparatively few graduates trained in other regions. Analysis at the Travel‑to‑Work Area level suggests that this reflects limited inward mobility linked to weaker local demand for high‑skill jobs, rather than low individual willingness to move (ONS, 2023[34]). As a result, regions may struggle to capture the returns to their education investments.
Challenges in retaining graduates and highly skilled workers reflect not only a labour-supply issue but also constrained local demand for high-skilled labour, which similarly limits the region’s ability to attract external talent. Fewer high-quality job opportunities and weaker employer clustering limit the incentives for skilled workers to remain in the region and to relocate to it. Within the framework of Skills England and LSIPs, there is scope to strengthen retention and attractiveness by developing local skills compacts, which complement national sector‑based skills arrangements through agreements co-led by employers, education providers, and local authorities that co-ordinate training, recruitment, and career opportunities in the region. By pooling information on employer needs, agreeing on joint action, and sharing responsibility for both training and jobs in the local economy, these compacts can help to align local skills supply with job opportunities, encourage businesses to invest in training, and give workers clearer pathways to local employment. Examples include the EU Pact for Skills and Regional Skills Partnerships, which have strengthened links between education and local labour markets (European Commission, 2025[35]; 2024[36]).
Labour mobility and effective skills matching are further constrained by housing shortages, particularly around more productive cities. Given the United Kingdom’s relatively flexible labour market, reducing these mismatches depends less on employment protection and more on reducing barriers to mobility across firms and places. Mobility is also limited by structural features of the housing market, including a relatively small and unevenly distributed private rental sector outside major urban centres and high transaction costs associated with owner‑occupation, notably stamp duty (OECD, 2022[37]; Hilber and Lyytikäinen, 2017[38]). Successive OBR assessments have pointed to weak housing supply responsiveness as a structural constraint on labour mobility and regional rebalancing (OBR, 2025[39]). The government’s planning reform agenda aims to accelerate housing delivery, increase land availability, and reduce delays in local plan adoption, and is therefore an important complement to skills policy. Yet implementation risks remain. Shortages in the construction workforce, alongside capacity constraints in local planning authorities, are likely to slow the pace at which higher housing targets can be translated into completed homes (OBR, 2025[39]). The government should continue to advance the planning reform, by also strengthening the strategic importance of construction-related skills, training and apprenticeships within a place-based productivity strategy. This can support the delivery of planning reform and ensure that improved housing supply can effectively underpin labour mobility, skills retention and the attraction of skilled workers. Policy effectiveness could be enhanced by complementary measures that support residential mobility, including expanding the availability of secure, long‑term rental housing in areas of strong labour demand and abolishing stamp duties (Chapter 1) which discourage mobility.
4.2.2. Strengthening physical and digital connectivity to unlock spatial spillovers
Adequate physical and digital infrastructure is a critical complement to supporting regional productivity growth and reducing disparities. By improving access to markets, increasing the geographic reach of local labour markets and facilitating knowledge spillovers, connectivity enables cities and regions to internalise agglomeration benefits and scale productive activity. While the UK has made progress in rolling out broadband and committed to major transport investments, infrastructure gaps remain large, particularly in less connected regions. A tight housing market and a slow planning system continue to limit the effective size and integration of labour markets, particularly outside London. Strengthening connectivity is therefore needed to support the diffusion of productivity-enhancing activity across firms and places and reducing regional productivity disparities.
Enhancing transport connectivity to facilitate agglomeration benefits
Public investment in transport infrastructure is highly concentrated. Total investment and maintenance spending remains modest by international standards (OECD, 2022[18]) contributing to below OECD average quality and efficiency (Figure 4.9). Connectivity within the United Kingdom is uneven and investment is concentrated in already well-connected areas. London and the South East benefit from dense, multimodal networks and sustained investment, while the North East, West Midlands and much of Wales continue to face weaker connectivity and ageing assets (NIC 2023). Capital spending in transport per capita in London has been more than double the UK average, contributing to stronger agglomeration returns in the capital, while limiting productivity gains in many regional cities and regions further away from metropolitan areas (Figure 4.9).
Note: Panel B includes only includes identified spending. In Panel C, labour productivity is defined as Gross Value Added (GVA) per worker. Metropolitan area is defined as a Functional Urban Area (FUA) with a population of 250 000 or more. The average across metropolitan areas is an unweighted average, including the OECD which considers metropolitan areas of 29 OECD countries for which data are available. In Panel D, metropolitan areas have a population of at least 250 000, and a small Functional Urban Area has a population of 50 000-250 000. In Panel D, OECD is a simple average of 34 OECD member countries.
Source: IFS (2025), “Where and how does the government spend its money?”; OECD Regions, Cities and Local Areas (database); and World Population Review.
Uneven connectivity in both passenger and freight infrastructure, including roads and rail, constrains labour market access, business integration, and knowledge spillovers while also affecting the efficiency of supply chains and firms’ ability to reach wider labour pools. When commuting times are long and transport networks unreliable, firms’ effective labour pools shrink, reducing opportunities for matching, learning and innovation. OECD research shows that countries with dense and well-integrated regional transport networks, such as for example Germany and the Netherlands, support stronger inter-city connectivity and more integrated labour markets, which is associated with more balanced productivity performance across regions. By contrast, commuting flows between UK cities outside London are weaker, and inter-city connections limit what should be common labour-market interactions. This contributes to the underperformance of core cities in the United Kingdom compared to international peers (OECD, 2020[6]; OECD, 2015[40]).
Improving connectivity between and within cities remains key to enhance agglomeration benefits and narrow regional productivity gaps. Past UK transport initiatives such as the Transport Decarbonisation Plan (2021[41]), the Integrated Rail Plan for the North and Midlands (2021[42]), and the strengthening of subnational transport bodies, have moved in the right direction, but have often lacked continuity and coherence and do not yet amount to a strategy able to reverse entrenched regional disparities. The cancellation of HS2 Phase 2 in 2023 eroded confidence in the long-term network strategy, particularly for cities such as Birmingham, Manchester, and Leeds (House of Commons Library (2024[43]; 2025[44])). These cities have the scale to be globally competitive but lack the connectivity needed to internalise agglomeration benefits (OECD, 2020[6]). The 2024 Growth Mission seek to address this gap, reaffirming the Northern Growth Corridor through Northern Powerhouse Rail and expanding devolved capital budgets, while the publication of the 10-year infrastructure plan, backed by at least GBP 725 billion in planned investment, and accompanied by multi-year capital budgets reviewed every two years, is a significant development to reduce policy volatility (HM Government, 2025[45]). Long-term investment horizons are consistent with international best practice e.g. in Germany and the Nordics, where infrastructure planning over 15–20 years supports supply-chain developments, skills capacity planning, and private investment. However, despite the 10-year horizon and budget envelope, funding after 2030 remains contingent on future fiscal policy. The implementation of the plan’s projects should be regularly assessed to identify potential bottlenecks in delivery capacity and potential shortcomings in institutional co‑ordination.
The Planning and Infrastructure Act 2025 further seeks to address long-standing fragmentation in the UK’s planning and land-use system (HM Government, 2025[46]), which has contributed to delays, cost escalation and uncertainty in infrastructure delivery. By streamlining consenting procedures for nationally significant infrastructure projects, clarifying national policy statements and accelerating approval timelines, the Act aims to reduce procedural bottlenecks that have historically constrained transport and energy investment. These reforms could improve predictability and delivery speed, particularly in regions where infrastructure gaps weigh on productivity. However, the centralisation and acceleration of planning decisions also come with some risks. If national prioritisation is not carefully aligned with regional and local economic strategies, faster approvals may improve delivery speed but without necessarily strengthening agglomeration dynamics in second-tier cities. It is therefore important that capital investments are guided by rigorous cost-benefit analysis, including independent scrutiny where appropriate, and target long-standing transport connectivity gaps in lagging areas. Aligning infrastructure investment with regional and local economic strategies, housing supply, local transport and labour market integration objectives will be essential to translate planning reform into regional productivity gains.
The creation of the National Infrastructure and Service Transformation Authority (NISTA) in 2025 aims to reduce institutional fragmentation and strengthen delivery by consolidating strategic oversight and implementation functions (HM Government, 2025[47]). While this may improve co-ordination across departments, the merger of strategic oversight and delivery functions raises concerns about transparency and accountability. In countries such as Germany and the Netherlands, strategic planning bodies maintain separation from delivery agencies, enabling clearer prioritisation and continuous technical evaluation. The government should therefore ensure that a clear separation between strategic appraisal and delivery oversight is maintained to ensure transparency and accountability.
Completing the rollout of high-quality digital infrastructure
Digital infrastructure is increasingly central to regional economic performance. High-capacity broadband networks, and reliable fixed and mobile internet enables firms to communicate, innovate and adopt new technologies. It also supports remote working, knowledge exchange and digital entrepreneurship, as well as allows more remote or peripheral regions to participate in national and global value chains. Digital networks therefore complement physical transport infrastructure by extending connectivity beyond geographic distance and providing a foundational input for productivity-enhancing activity.
The United Kingdom has made substantial progress in expanding high-capacity broadband coverage. Project Gigabit has been central to subsidising network expansion in underserved areas, with UK government‑funded contracts covering around 1 million hard‑to‑reach premises of which more than 180 000 of these already built by late 2025 (HM Government, 2025[48]). By mid-2025, about 86% of UK residential premises had access to a gigabit-capable connection (Figure 4.10, Panel A), and full-fibre availability has reached 78% up from 47% in early 2023. At the same time, take-up of full-fibre services among the properties where it is available, increased to 41%, up from 33% just one year earlier (HM Government, 2025[49]).
Source: Ofcom Connected Nations UK report 2025.
Despite this strong national progress, geographic disparities remain. The South West, the Midlands and the East of England continue to lag in gigabit-capable coverage and have a higher share of premises with speeds below 30 Mbps (Figure 4.10, Panel B). This regional divide largely reflects urban-rural differences, with urban areas in general having better gigabit capable coverage (about 92% of premises) than rural areas (about 61%) in mid-2025 (Ofcom, 2025[50]). As a result, rural, coastal, and former industrial or peripheral regions may remain structurally disadvantaged. Given these patterns, policy initiatives such as the Shared Rural Network to improve mobile coverage in rural communities, enhancing regional inclusion is welcome, not only to reduce regional gaps in availability but to enable lagging regions to benefit from national growth ambitions. The government should continue to prioritise ongoing investment in network resilience, expanding high-speed connectivity to underserved areas, and ensuring infrastructure supports emerging technologies.
Digital infrastructure is also a necessary precondition for the adoption of advanced digital technologies, including artificial intelligence (AI), whose productivity potential depends critically on fast, reliable networks. As with transport connectivity, however, infrastructure availability alone does not guarantee productivity gains. Regions’ productivity benefits depend on firms’ capacity to adopt and effectively use digital technologies, and on complementary needs, like rising electricity demand are planned for, otherwise lagging regions risk falling further behind despite digital infrastructure investment (see below). The government should further strengthen cross departmental co-ordination on complementary needs, such as a modern and stable electricity grid (see Chapter 3).
4.2.3. Broadening regional innovation and accelerating diffusion of new technologies
A key structural constraint to productivity is the limited diffusion of innovation, both across firms within regions and across regions themselves. Despite strong national research capabilities and a dynamic innovation frontier, productivity-enhancing technologies, practices and business models are slow to spread beyond leading firms and places. This weak transmission dampens spillovers, slows firm upgrading and scaling, and reinforces spatial concentration of economic activity. Addressing barriers, such as uneven digital adoption, concentrated R&D, weak business dynamism and constrained access to finance, is therefore central to strengthen diffusion and reduce regional productivity disparities.
Improving digital adoption among SMEs
Digital adoption is a primary channel through which connectivity and skills translate into productivity gains. Yet in the United Kingdom, diffusion of digital technologies among small and medium-sized enterprises remains uneven across regions and sectors, limiting within-region productivity growth and slowing the spread of best practices beyond frontier firms. Firms in London and the South East consistently report higher adoption rates across a wide range of tools than firms elsewhere (Figure 4.11). Adoption patterns appear more closely linked to sectoral composition and managerial capability than to broadband availability alone. London-based SMEs show particularly high usage of enterprise resource planning (ERP) software (15.4%) and virtual reality/augmented reality technologies (17.9%), whereas SMEs in the South East show comparatively high adoption rates for HR Management Software (16.4%) and ERP software (17.3%), suggesting the region's focus on optimising business processes and resource management. By contrast, SMEs in the North East, Wales and Northern Ireland report lower adoption rates across all technologies, pointing towards scope for productivity-enhancing, targeted digital growth initiatives (Mahmood, Asghar and Kousha, 2024[51]).
SMEs digital adoption rates across UK regions, %, 2018-2022 average
Source: Mahmood, Asghar and Kousha (2024[51]).
These gaps in adoption reflect persistent barriers faced by many smaller firms. Across regions, SMEs frequently report skills-shortages, high upfront costs, uncertainty about returns and limited access to trusted advice as key obstacles to adoption (HM Government, 2025[52]). Management capability also plays an important role, as firms with weaker managerial capacity are less able to identify relevant technologies, integrate them into existing workflows, or reorganise production processes to realise productivity gains. As a result, even where basic digital infrastructure is available, diffusion remains slow, and productivity-enhancing practices fail to spread widely within local economies.
The United Kingdom is among the world’s leading countries in artificial intelligence, combining a strong research base, an active private‑sector ecosystem and international engagement on AI governance and safety (Department for Science, Innovation and Technology (DSIT), 2026[53]; International AI Safety Report, 2026[54]). Building on this strength, the government aims to use AI to boost productivity and public services, while widening benefits across regions and groups. Its strategy combines national investment with a strong place-based focus on diffusion, skills and local ecosystems.
The 2025 AI Opportunities Action Plan provides the overarching framework, structured around three pillars: strengthening foundations (compute, data and skills), driving adoption through a “scan, pilot, scale” approach, particularly in public services, and removing barriers via finance, skills and regulatory support. Public sector deployment mainly serves as a lead market and demonstration channel (DSIT, 2025[55]). Progress is monitored through a public online dashboard covering public‑sector delivery, business support, skills and wider adoption enablers (DSIT, 2026[56]; DSIT and Number 10 Data Science, 2026[57])
A central feature of the strategy is the use of place‑based instruments to broaden adoption beyond established tech hubs:
AI Growth Zones across all four UK nations aim to attract private investment and support regional job creation through streamlined planning and improved access to energy (DSIT, 2025[55]; 2025[58]).
the Lanarkshire AI Growth Zone illustrates this model: expected to support more than 3 400 jobs and attract GBP 8.2 billion in private investment, complemented by public funding for apprenticeships, skills and community initiatives. The project links compute investment with local workforce capacity, recognising that infrastructure alone is insufficient for regional productivity gains (DSIT, 2026[59]).
Tech Towns (piloted in Barnsley), focus on stimulating AI adoption at the local level. Barnsley serves as a national testbed for AI use across public services, education, healthcare and small businesses, combining local partnerships, targeted skills provision and practical demonstrations of AI tools to generate lessons that can be replicated elsewhere (DSIT, 2026[60]).
National policies reinforce these regional efforts. Targeted support for high‑potential AI firms is provided through the Sovereign AI Unit, helping startups and scale‑ups overcome financing and scaling constraints while retaining capabilities domestically. A nationwide AI skills initiative aims to train 10 million people by 2030, with a focus on SMEs and lagging regions, alongside analysis of labour‑market impacts to guide training policy.
Finally, a regulator‑led governance framework and investment in AI assurance seek to build trust, particularly among SMEs and public sector users, supporting broader adoption. Together, these elements link national strategy with local delivery to promote more geographically inclusive AI‑driven growth.
Sources: Department for Science, Innovation and Technology (DSIT) (2025[55]; 2025[58]; 2026[53]; 2026[60]; 2026[61]; 2026[59]; 2026[56]), DSIT and Number 10 Data Science (2026[57]); International AI Safety Report (2026[54]).
Artificial intelligence represents a further stage in this diffusion challenge. Recent national commitments to expand investment in advanced computing, artificial intelligence and quantum technologies (HM Government, 2026[61]) have the potential to lift productivity through automation, data‑driven decision‑making and new business models. However, adoption of these technologies is likely to be uneven. According to OECD work, AI’s estimated contribution to aggregate annual labour productivity growth over the next decade could range between 0.4-1.3 percentage points in the United Kingdom depending on the assumed degree for AI adoption, a similar range as estimated for the United States and Germany (Filippucci et al., 2025[62]). The UK government’s AI strategy aims to make the United Kingdom a global leader in AI research, innovation and adoption, with a focus on helping industries and regions to adopt AI. As AI systems require complementary investments in skills, data infrastructure, organisational change and finance, the government should ensure that early adoption is not concentrated among larger firms and already-productive regions to avoid widening regional productivity gaps. Without targeted support, AI could therefore widen existing productivity gaps by reinforcing the advantages of leading firms and places rather than diffusing across regional economies. To address this, the government has begun shifting from a purely national innovation strategy towards place‑based AI uptake models, including AI Growth Zones, local Tech Town pilots and large‑scale skills initiatives aimed at SMEs (Box 4.2).
Recent policy initiatives recognise the need to strengthen digital diffusion more broadly. National reviews, such as the UK government’s 2025 Technology Adoption Review (HM Government, 2025[52]) and the SME Digital Adoption Taskforce (HM Government, 2025[63]), highlight the importance of co-ordinated support for basic, productivity‑enhancing digital tools alongside emerging technologies (HM Government, 2025[64]). Past national schemes, such as the “Help to Grow: Digital” programme, offered grants and guidance to support adoption of business software by SMEs, but limited uptake and early closure, partly reflecting restrictive eligibility criteria, limited flexibility and the programme’s short duration, highlight the importance of better-designed, better-signposted and more trusted delivery mechanisms. The government could develop an integrated, staged digital adoption support framework for SMEs that systematically guides firms through incremental levels of digital maturity, combining tailored advisory services, targeted financial incentives, and sector-specific resources, drawing on international examples such as Singapore’s SME Go Digital programme, which has improved productivity across a broad range of firms, and Germany’s Mittelstand Digital Initiative, which combined regional centres with advisory support to target SMEs according to local economic profiles and need (Box 4.3).
Germany - Mittelstand-Digital Initiative
Launched by the Federal Ministry for Economic Affairs and Energy, the Mittelstand-Digital Initiative supports SME digitalisation through:
Centres of Excellence: Regional centres provide advisory services, workshops, and diagnostic tools that allow firms to assess digital capabilities and progress from basic to advanced digital adoption.
IT Security Initiative: Offers targeted guidance, training, and resources to ensure secure implementation of digital solutions.
The initiative combines tailored advisory support, practical implementation guidance, and access to sector-specific resources, providing a staged pathway for SMEs to develop digital maturity.
Singapore - SMEs Go Digital (SMEGD) programme
Singapore’s SMEs Singapore’s SMEs Go Digital (SMEGD) programme guides firms through incremental levels of digital adoption across four different offers:
Start Digital (SD) (2018): Provides new firms or those yet to digitalise with foundational and easy-to-deploy digital solutions (e.g., digital marketing, digital transactions, accounting, HRM, cybersecurity, etc.).
Productivity Solutions Grant (PSG) (2018): Supports the adoption of curated digital solutions that improve productivity (e.g. ERP, retail management systems, etc.)
Grow Digital (2019): Help firms’ participation in business-to-business (B2B) and business to consumer (B2C) e-commerce platforms to sell overseas.
Advanced Digital Solutions (ADS) (2020): Support firms’ adoption of advanced or integrated digital solutions to deepen their capabilities, strengthen business continuity measures and build longer-term resilience, including in areas such as sustainability.
Between 2017 and 2024, the SMEGD programme supported over 88 000 SMEs (around 29% of Singapore’s SMEs population in 2024). Impact evaluations found measurable improvements in firm performance: PSG recipients increased value-added per worker by 3% and revenue by 2.2%, while SD recipients saw increases of 1.8% and 1.6%, respectively. Micro firms benefited the most, with up to 6.4% productivity gains under PSG and 4.4% under SD. Sector-specific PSG solutions were almost twice as effective as generic solutions.
Source: OECD (CFE/SME) forthcoming: SME Technology Adoption and Diffusion in the United Kingdom: Issues and policies; OECD, https://depp.oecd.org/policies/DEU945; https://digital-strategy.ec.europa.eu/en/policies/edihs
Regional initiatives are important complements to national strategies. Local schemes, such as the North of Tyne’s Digital Growth Programme and Greater Manchester’s Digital Blueprint offer localised training, digital‑skills support, and SME‑focused advisory services that are tailored to local business needs (HM Government, 2025[52]; 2025[64]). These place-based approaches are particularly effective where they are embedded in wider local ecosystems, linking digital adoption support with skills provision, innovation assets and access to finance. The government should ensure a coherent policy mix that combines infrastructure rollout with skills development, management support, trusted advisory services and appropriate financing instruments to strengthen digital diffusion among SMEs. By supporting SMEs to adopt and effectively use digital and AI-enabled technologies, policy can accelerate within-region productivity gains, support firm scaling and reinforce business dynamism. Failure to do so risks leaving large parts of the economy disconnected even as national digital infrastructure continues to improve.
Rebalancing R&D investment to support regional ecosystems
Innovation is a central driver of productivity growth, yet its contribution to reducing regional productivity gaps depends critically on the extent to which new knowledge diffuses across firms and places. In the United Kingdom, innovation activity and R&D investment remain highly spatially concentrated, limiting the strength of cross-regional spillovers and reinforcing existing productivity divides.
Patent activity highlights the geographic imbalance in innovation outputs. While the United Kingdom performs strongly on aggregate innovation indicators (OECD, forthcoming[65]), patenting is disproportionately clustered in London, the South East and parts of the East of England, even after adjusting for population. In 2022, the South East, Greater London and the East of England alone generated around 46% of total UK Patent Co‑operation Treaty applications, or around 100 patents per million inhabitants. By contrast, many regions with lower productivity levels exhibit markedly lower patenting intensity, reflecting weaker local innovation ecosystems and more limited exposure to frontier technologies. This spatial imbalance suggests that national innovation strength does not automatically translate into broad-based productivity gains.
The patent concentration is closely linked to the structure of Research and Development (R&D) investment in the United Kingdom. Gross domestic R&D expenditure at around 2.7% of GDP in 2023 is at the OECD average (Figure 4.12, Panel A) but remains lower than in peer economies such as Germany (3.1%), Japan (3.4%) and the United States (3.5%). Compared to international peers, UK businesses spend less on R&D as discussed in detail in the last Economic Survey (OECD, 2024[1]). A distinctive feature of the UK system is the role of higher education, with universities accounting for a larger share of R&D performance than in most G7 economies, reflecting excellence-based public funding and strong research institutions, but also limiting the diffusion of innovation where links between universities to industry are weaker (OECD, forthcoming[65]).
Business R&D is particularly geographically concentrated. London, the South East and East of England together account for close to 60% of UK business R&D expenditure, reflecting the cumulative advantages of dense research assets, skilled labour markets and access to finance (Figure 4.12, Panel B). By contrast, large parts of the Midlands, North, Wales and Northern Ireland are lagging in both R&D capacity and innovation output (ONS, 2025[66]). Public R&D funding patterns reinforce these dynamics. Competitive allocation mechanisms, while effective at supporting research excellence, have tended to channel funding towards institutions and regions with established research capacity, primarily in the Greater South East. As a result, public support has often amplified existing spatial concentrations rather than strengthening innovation diffusion into weaker regions. This has limited the role of public R&D as a lever for place-based productivity convergence. Internationally, models such as Germany’s Fraunhofer institutes, which actively engage with regional innovation ecosystems to support local knowledge transfer and technology adoption, and the Netherlands’ TNO network, which works with regional partners and SMEs to translate research into practical innovation outcomes. These models illustrate complementary mechanism to UK approaches, combining excellence-based funding with regionally embedded diffusion institutions (OECD, 2022[67]; OECD, 2025[68]; TNO, 2025[69]).
Note: In Panel B, Public R&D refers to the fiscal year 2021/2022; Business R&D to year 2022.
Source: OECD MSTI, ONS Local Database.
Recent policy initiatives indicate a shift towards a more place-based innovation model. The UK Innovation Strategy (HM Government, 2023[70]) explicitly emphasises boosting innovation across all parts of the country and strengthening local innovation systems as a driver of inclusive growth. This agenda has been operationalised through the Innovation Accelerator Pilot Programme, a centrally funded initiative that supports 26 high-potential R&D projects with GBP 130 million across Greater Manchester, Glasgow City Region and the West Midlands (UK Research and Innovation, 2025[71]). Building on this pilot, the Local Innovation Partnerships Fund (LIPF) commits GBP 500 million to foster local “triple helix” partnerships between civic institutions, business and universities to deliver large-scale, region-specific R&D and innovation capabilities, with at least GBP 30 million earmarked for multiple UK regions and city-regions including Greater Manchester, West Midlands, West Yorkshire, Glasgow and Cardiff Capital Region (UK Innovation and Research, 2025[72]). These programmes align closely with the Industrial Strategy’s aims, particularly those related to productivity, net zero and technological diffusion, and it is welcome that they build on regional strengths and aim to foster collaboration between firms, universities and institutions. Broadening the regional coverage and embedding Innovation Accelerator type approaches within long-term regional growth plans could further strengthen alignment with the Industrial Strategy and provide greater certainty for local actors and investors.
Fostering business dynamism and firm growth across regions
Business dynamism plays a central role in translating innovation into productivity gains, by supporting the diffusion of new technologies and the reallocation of capital and labour towards more productive firms. Where firm entry, exit and scaling are weak, new technologies and business practices diffuse more slowly, limiting productivity spillovers within and across regions. In the United Kingdom, subdued business dynamism has increasingly constrained this reallocation process, reinforcing regional productivity disparities.
With relatively competition-friendly product market regulation, as reflected in OECD Product Market Regulation (PMR) indicators, the United Kingdom continues to exhibit a more open and contestable business environment than many EU peers (Figure 4.13, Panel A). However, over the past two decades reallocation dynamics have weakened. Thus, measures of job reallocation and employment churn remain well below early-2000s levels and have not recovered to their pre-financial-crisis intensity, indicating a reduced pace at which resources move across firms and sectors (ONS, 2025[3]). This decline has occurred alongside rising productivity dispersion, with frontier firms pulling further ahead of the rest, suggesting that innovation is increasingly concentrated rather than diffused across the wider firm population (ONS, 2025[3]).
% of active enterprises
Note: In Panel A, OECD refers a simple average of 25 OECD member countries that are also part of the EU.
Source: Eurostat (database); and ONS Business Demography (database).
Firm entry and exit remain important channels for experimentation and the adoption of new technologies, but recent trends suggest that their contribution to aggregate job reallocation has decreased. Net job creation is increasingly driven by incumbent firms rather than by young, fast-growing entrants, reducing the role of high-growth firms as drivers for diffusion (ONS, 2025[3]). This shift seems to be more relevant for regions outside Greater London, where firm turnover is lower (Figure 4.13, Panel B). London’s higher levels of firm churn facilitate faster recycling of resources and greater scope for the spread of new technologies and practices. In contrast, many other regions exhibit persistently lower churn and weaker firm growth, even where innovation activity is present. As a result, local innovation may fail to translate into broader productivity gains, reinforcing spatial divides rather than narrowing them. Even relatively small differences in firm churn matter for regional productivity, as lower entry, exit and scaling reduce the scope for local diffusion of new technologies and managerial practices.
Recent policy initiatives acknowledge the importance of firm dynamics in sustaining productivity growth. The 2024 Growth Mission and the 2025 Industrial Strategy highlight the role of competition, firm growth and place-based ecosystems in supporting innovation diffusion. The Competition and Markets Authority has been tasked with a targeted programme to identify and remove barriers to entry, scaling and technology adoption, which is a welcome step towards strengthening reallocation dynamics. There should also be a strong focus on reducing administrative burden for start-ups, a category where the United Kingdom only scores around the OECD average in the latest PMR indicators (OECD, 2026[73]). Complementary initiatives focus on expanding support for regional growth ecosystems, regulatory reforms to ease scaling constraints, and efforts to improve access to growth finance through institutions such as the British Business Bank. These policies aim to strengthen the channels through which innovation spreads and productive firms expand, addressing the structural challenges highlighted by subdued business dynamism.
Expanding access to finance to support regional investment ecosystems
Access to finance is a critical channel through which innovation diffuses and scales, translating research, adoption and firm growth into sustained productivity. Although the United Kingdom benefits from well-developed capital markets as highlighted in the previous Economic Survey (OECD, 2024[1]), risk finance is geographically concentrated acting as a constraint on diffusion. Thus, even where regions possess innovation capacity, skilled labour and public R&D investment, thin and fragmented local finance ecosystems limit the ability of firms to commercialise innovation, scale operations and anchor productivity gains locally. London and the Greater South East dominate venture capital, equity investment and investor networks, accounting for the majority of deal flow and capital deployment (Figure 4.14). While London’s prominence partly reflects its role as a globally competitive financial centre with deep, internationally connected capital markets, the extent of concentration still implies limited availability of risk finance for firms in other regions, particularly at early and scale‑up stages. (British Business Bank, 2025[74]). As a result, firms located outside the capital often face higher transaction costs, weaker investor networks and more limited access to follow‑on finance, constraining their ability to scale and anchor productivity gains locally.
Source: British Business Bank (2025), Nations and Regions Tracker 2025.
These spatial disparities are amplified through several reinforcing mechanisms, such as geographic concentration of investors, professional services and informal networks that shape deal flow, information and risk assessment. Firms outside London are more likely to rely on distant investors, weakening repeated funding relationships, reducing the availability of hands-on support, networks and strategic guidance. This increases the likelihood that successful firms relocate to financial centres as they scale, rather than expanding in place and lowering the local productivity impact of innovation (British Business Bank, 2025[74]). Thin local markets also limit information flows and risk-sharing, raising the cost of capital and discouraging experimentation, particularly for innovation-intensive SMEs.
Financing gaps are most pronounced at the pre-seed, seed and scale-up stages, where uncertainty is high and tangible collateral is limited. While recent data suggest some improvement in seed-stage investment outside London, later-stage growth finance remains heavily skewed towards the capital, constraining firms in other regions to commercialise their research (British Business Bank, 2025[74]). These stage-specific gaps weaken the diffusion of innovation by interrupting firm growth trajectories, even in regions with strong public research bases and improving digital adoption.
The concentration of finance also limits the effectiveness of national institutions and networks that help turn research into commercial applications. Mechanisms like the Catapult Network (Box 4.4) play an important role in this process, but their impact depends on firms’ ability to access follow-on finance locally. Where regional capital markets are thin, public translational support struggles to convert R&D investment into sustained local scaling and productivity gains, weakening place-based innovation outcomes despite national excellence of national translational mechanisms such as the Catapult Network (Box 4.4, (OECD, forthcoming[65])).
The UK Catapult Network is a system of applied research and innovation centres established from 2011 onwards and overseen by Innovate UK. Catapults operate in strategically important technology and sector areas, providing shared facilities, technical expertise and test-and-demonstration capabilities that support firms, particularly SMEs, in late‑stage applied research, technology validation and pre‑commercial deployment. While several Catapults are headquartered in London, the Network operates through a geographically dispersed set of centres across the United Kingdom, with substantial activity embedded in regional manufacturing, energy, digital and applied research clusters.
Internationally, Catapults are comparable to applied research institutions found across the OECD. Germany’s Fraunhofer-Gesellschaft operates a large, regionally embedded network of industry-oriented research institutes. Finland’s VTT Technical Research Centre performs a similar translational role, linking national innovation priorities to firm-level deployment. In the Netherlands, TNO and Top Sector innovation consortia (TKIs) support collaborative applied R&D aligned with national and regional strengths, while in France, comparable functions are performed by the Instituts Carnot and regional competitiveness clusters (pôles de compétitivité). Outside Europe, the United States’ Manufacturing USA institutes provide shared applied R&D infrastructure focused on advanced manufacturing and strategic technologies.
As with these international models, the effectiveness of the Catapult Network depends on stable long-term funding, strong industry engagement, and close integration with regional and local growth strategies, skills systems and investment frameworks.
Sources: Innovate UK: https://catapult.org.uk/; https://iuk-business-connect.org.uk/about/innovate-uk-system/catapult-network/; Fraunhofer-Gesellschaft: https://www.fraunhofer.de/en/about-fraunhofer/profile-structure.html; VTT Technical Research Centre: https://www.vttresearch.com/en; TNO: https://www.tno.nl/en; https://www.topsectoren.nl/; Instituts Carnot: https://www.instituts-carnot.eu/en; https://www.economie.gouv.fr/entreprises/developper-son-entreprise/innover-et-numeriser-son-entreprise/tout-savoir-sur-les-poles U.S. Department of Commerce – Manufacturing USA: https://www.manufacturingusa.com/.
Public initiatives aim to address these imbalances through more place-based and mission-oriented finance. The British Business Bank operates a range of regional programmes targeting SME finance gaps, while devolved institutions like the Scottish National Investment Bank provide patient capital, meaning long-term funding without demanding short-term returns, aligned with respective regional priorities. However, in England, there is no equivalent devolved national investment bank, and regional SME finance is instead supported through UK‑wide institutions, notably the British Business Bank’s place‑based programmes. Commitments under the 2025 Industrial Strategy, in combination with the 2024 Growth Mission and England’s Governance Devolution plans (see below), signal efforts to better align national investment frameworks with local economic development objectives, which is welcome. However, the current landscape remains fragmented, with multiple finance instruments operating in parallel and often weakly co-ordinated with regional innovation, skills and growth strategies. To enhance effectiveness, regions should address financing risks as a binding constraint on firms, and better integrate finance instruments with innovation, skills and scale-up support to ensure that public and private investment translates into locally anchored firm growth (OECD, forthcoming[65]). Building on the BBB’s role, efforts should focus on scaling targeted loan guarantees and co-investment funds, strengthening local financial intermediaries, and enhancing co-ordination with local governments to reduce spatial disparities in SME finance. Additionally, enhancing SME financial literacy through local business support networks is a crucial step. The BBB’s 5-year strategy includes increasing regional investment, supporting innovation clusters and angel networks, and establishing new regional investment funds in the East and South-East of England (British Business Bank, 2025[75]). The success of these initiatives should be evaluated and if effective, adopted in more underserved areas.
Strengthening the institutional foundations of multi-level governance is essential for productivity across regions in the United Kingdom. The key challenge is not the existence of multiple tiers of government, but limited co-ordination between central and subnational governments, and across central government bodies. Subnational governments play a central role in delivering infrastructure, co-ordinating skills provision, shaping local labour markets, and steering economic development, including the diffusion of innovation across firms and places. However, in England, their effectiveness is constrained by three systemic weaknesses: horizontal fragmentation within central government, vertical fragmentation between central and subnational tiers, and a subnational fiscal framework characterised by limited subnational revenue-raising powers and a high dependence on central transfers, which undermines long-term planning. These co-ordination and capacity constraints weaken the translation of national strategies into place-based outcomes and contribute to persistent regional productivity gaps. Addressing these constraints has become a key national policy focus and important steps have been undertaken to increase local decision-making powers which are crucial for making national ambitions on regional growth deliverable in practice.
4.3.1. Strengthening institutional co-ordination and strategic coherence
Regional productivity is influenced not only by explicitly place-based policies but also by national sectoral policies that have significant regional spillovers. In the United Kingdom, transport, education, innovation, environmental regulations, and housing policies are designed at the national level but are implemented at the subnational level and can greatly affect regional outcomes. However, a recurring challenge in the United Kingdom’s governance landscape is the limited co-ordination between place-based policies and broader sectoral policies, which risks fragmented efforts and suboptimal outcomes.
The UK central government architecture remains highly fragmented, with responsibilities affecting regional productivity divided across numerous departments, agencies, and non-departmental public bodies. For example, policies affecting skills and labour productivity are split across the Department for Work and Pensions (e.g., apprenticeships, skills, training and career, Skills England, and labour market participation), and the Department for Business and Trade (firm-level productivity), with sub-national authorities playing a delivery role within nationally defined frameworks. This sectoral siloed governance system, where departments operate through separate funding streams, overlapping programmes, and divergent accountability frameworks, can both limit policy coherence and slow down project delivery (OECD, 2024[76]; 2020[6]; HM Government, 2025[77]). It can also act as a key barrier to place-based productivity improvements. Thus, weak strategic alignment at the centre makes it difficult for subnational bodies to work effectively with the central government and creates mismatches between centrally designed programmes and regional and local priorities. Past growth programmes ranging from Local Growth Deals to the Towns Fund and the Levelling Up Fund often required local authorities to engage with multiple departmental processes and short-term competitive bidding, even when tackling overlapping priorities such as transport, regeneration, skills, and innovation. This setting of fragmented national funding streams increased administrative burden, reduced value for money, and weakened strategic coherence (National Audit Office, 2025[78]; OECD, 2022[18]). Evaluation of policy impacts on regional performance has been inconsistent, limiting learning from past programmes. The government should create a centralised framework for monitoring and evaluation of policy outcomes, building on existing audit and evaluation functions, and encourage shared learning across departments and among levels of government.
Recent policy reforms explicitly aim to address these co-ordination failures by moving towards mission-oriented, cross-departmental governance. The 2024 Growth Mission sets out shared economic objectives that require joint delivery across the Treasury, Department for Business and Trade, Ministry of Housing, Communities and Local Government, Department for Energy Security and Net Zero, and Department for Education. Similarly, the 2025 Industrial Strategy adopts a mission-based approach to innovation, clean energy, and the digital transition, emphasising cross-departmental decision-making and long-term investment pathways. These are positive steps, as strengthening cross-government coherence is necessary for deeper, clearer devolution, and for building subnational institutions with the authority, autonomy, and predictability required to drive long-term regional productivity gains. Co-ordination across central government bodies has however historically been difficult to sustain, particularly when missions cut across strong departmental boundaries (House of Commons Committee of Public Accounts, 2024[79]; Coyle, Richards and Smith, 2025[80]). The government should minimise risks related to unclear accountability lines, and inconsistent appraisal approaches. For example, investment decisions in transport and in economic regeneration should be based on comparable frameworks, assumptions, and metrics, rather than separate, siloed approaches. Persistent fiscal pressure (Chapter 1) also creates uncertainty over how departments will prioritise joint missions when faced with their own internal pressures. To secure political commitment beyond electoral cycles, the government should adopt multi-year strategies and parliamentary oversight to maintain continuity and focus. Mission frameworks should also incorporate adaptive governance practices that enable flexibility and learning, such as regular cross-departmental reviews of progress, shared performance indicators, and mechanisms to adjust priorities and resource allocation in response to new evidence or changing economic conditions. A comparable approach would be Finland’s phenomenon-based approach to policy making, where cross-cutting societal challenges are jointly addressed by multiple ministries and monitored with shared indicators allowing government to adapt strategies and align resources across traditional departmental boundaries (OECD, 2022[81]), while maintaining clear and consistent core objectives (OECD, 2024[82]).
4.3.2. Deepening devolution and building local capacity
Devolution and decentralisation are central to the UK regional productivity agenda, aiming to shift power closer to communities and enable locally tailored decision-making. In Scotland, Wales, and Northern Ireland, devolved governments have broader legislative and fiscal powers enshrined in law, allowing them significant autonomy over key policy areas such as health, education, and economic development, relative to England’s subnational arrangements. These nations set their own budgets and have durable frameworks for fiscal and policy responsibility, contrasting with a historically more limited approach to devolution in England (Box 4.5).
Administrative devolution in the United Kingdom is highly asymmetric, reflecting distinct historical, political and constitutional trajectories in Scotland, Wales and Northern Ireland. Each devolution act was negotiated independently; therefore, the powers of the three devolved nations vary in nature and scope and have continued to evolve over time.
A core distinction is between reserved and devolved (or transferred) powers:
Reserved powers remain with the UK Parliament and include the constitution, defence and national security, foreign affairs, immigration and nationality, and most macro-tax policy.
Devolved powers are exercised by devolved legislatures. In Northern Ireland these are termed “transferred” matters. Northern Ireland also distinguishes reserved matters (can potentially be devolved with consent) and excepted matters (permanently retained by Westminster).
Across the devolved nations, policy areas that are fully or largely devolved include education, health and social care, housing, local government, environment, culture and sport, and (except in Wales) justice and policing. Partial devolution applies to transport, aspects of energy (notably in Northern Ireland), and elements of social security and employment (notably in Scotland). Fiscal devolution also varies: local property taxes are largely devolved, while income tax powers are partially devolved in Scotland and Wales. Some functions are devolved in one nation but reserved elsewhere, reinforcing asymmetry.
Devolution has deepened over time in Scotland and Wales, while Northern Ireland’s institutions have been periodically suspended as part of the peace process.
Scotland operates under a reserved-powers model: the Scottish Parliament legislates on all matters not explicitly reserved. The Scotland Acts of 2012 and 2016 set out amendments to the Scotland Act 1998 and expanded tax, borrowing, welfare and electoral powers.
Wales gained primary legislative powers following a 2010 referendum and moved to a reserved-powers model under the Wales Act 2017. The Senedd (renamed in 2020) now holds a broader but still more limited competence than Scotland.
Northern Ireland has a distinct settlement, with most domestic policy devolved to the Assembly and Executive, led jointly by a First Minister and deputy First Minister.
Local government structures in the four nations
Local governments are governed by the three devolved nations and by the UK government in the case of England. The system of local government is therefore also asymmetric: the organisation, responsibilities and finances, as well as territorial and decentralisation reforms, differ from one nation to another.
Across England, Scotland and Wales, local authorities are generally responsible for social care and deliver aspects of transport, housing and education, alongside neighbourhood services such as planning, waste management, environmental health and leisure. In Northern Ireland, councils provide mainly neighbourhood services; education, libraries and social care remain centralised at devolved level.
At the principal local authority level, the United Kingdom currently has:
England: 317 principal local authorities, comprising a mix of unitary authorities and two-tier county/district systems, alongside the Greater London Authority, 32 London boroughs, the City of London Corporation and the Isles of Scilly.
Scotland: 32 unitary council areas.
Wales: 22 unitary (“principal”) local authorities.
Northern Ireland: 11 district councils (following the 2015 reform).
England
England has the most fragmented system of subnational governance. In the absence of an English parliament, powers are exercised through overlapping local and sub-regional institutions whose coverage and capacity vary widely.
Two local models coexist:
Unitary authorities, responsible for the full range of local government functions.
Two-tier systems, where county councils provide upper-tier services and district or borough councils provide lower-tier services.
Above local authorities, an incomplete sub-regional tier has emerged through combined authorities, many led by directly elected mayors. These bodies typically hold powers over transport, housing, skills and economic development, but large parts of England remain outside any combined authority.
Below principal authorities are town and parish councils (around 10 000), the most localised tier of governance. They are common in rural areas and small towns but rare in major cities, with limited statutory powers and small budgets.
Scotland
Scotland’s 32 councils are complemented by around 1 200 community councils, which are voluntary statutory bodies representing local areas. Community Planning Partnerships co-ordinate local public services, with a statutory focus on reducing inequalities. More recently, regional economic partnerships, building on City Deals, have emerged to support regional growth and inclusive development.
Wales
Wales’ 22 principal (unitary) local authorities are subdivided into over 800 communities, most of which have community or town councils. The Well-being of Future Generations (Wales) Act 2015 established statutory Public Services Boards in each area. Since 2021, Corporate Joint Committees (CJCs) have created an emerging regional tier responsible for strategic planning, transport, economic development and, in some cases, education improvement services across groups of local authorities.
Northern Ireland
Local government in Northern Ireland is more limited compared with local government elsewhere in the United Kingdom. Northern Ireland carried out an important local government reform that reduced the number of district councils from 26 to 11, effective as of April 2015. Councils provide some neighbourhood services such as waste collection and street cleaning. However, they are not responsible for education, libraries or social care.
Source: OECD (2020[6]; 2022[83]), World Observatory on Subnational Government Finance and Investment (2022[84]).
In England, a central challenge for improving regional productivity is the weakness and complexity of its subnational governance structures, which limit strategic planning and undermine the capacity of local institutions to shape long-term growth. In some areas, local authorities are structured around a two-tier system (county council and district), in others, the local authority is a single-tier “unitary” authority. Some local authorities are covered by Combined Authorities, Mayoral Combined Authorities and Combined County Authorities, which have been granted varying degrees of responsibility mostly over economic growth, transport, housing, and skills, but with public service boundaries (such as police, fire, probation, and health) not always well aligned (Parliamentary Office of Science and Technology, 2025[85]). Below the tier of local authorities, there are town and parish councils. The result is a patchwork system where responsibilities are divided vertically between central and local government and horizontally among councils with overlapping or misaligned mandates.
Deeper devolution is an essential step towards giving local institutions the powers and certainty that is needed to drive regional productivity. The 2024 English Devolution White Paper and the English Devolution and Community Empowerment Bill (2025) further consolidate the principle that devolution should be extended across England on a consistent footing, with Strategic Authorities operating across functional economic geographies and equipped with clearer responsibilities for transport, skills, planning, innovation and housing (Figure 4.15). This is a welcome step, as the envisioned structure aligns with OECD good practice on decentralisation (Box 4.6). The introduction of the integrated settlement as a funding mechanism for established Mayoral Strategic Authorities, which consolidates multiple existing funding streams into a single, more flexible settlement, can support more strategic spending across policy areas and reduce fragmentation. By providing greater flexibility over funding lines within an agreed outcomes framework, the integrated settlement can facilitate horizontal co-ordination across transport, regeneration, and skills, while preserving national accountability arrangements. Strategic Authorities will also oversee spatial development strategies across functional economic areas, further binding local authorities into co-operative frameworks.
Source: HM Government (2024[9]).
While the government has committed to universal coverage of Strategic Authorities through the 2024 English Devolution Whitepaper, at present, gaps remain. In many non-metropolitan areas, no strategic tier exists to co-ordinate local authorities, and institutional capacity varies widely. Established Combined Authorities/Strategic Authorities, such as Greater Manchester and the West Midlands, have developed sophisticated analytical, policy, and delivery teams, enabling them to make better use of devolved powers. Conversely, smaller or newer authorities often face resource constraints and limited technical expertise (HM Government, 2025[86]), and without clear incentives and resources, they may struggle to collaborate effectively or to engage with complex mission-based investment programmes. Recent funding arrangements acknowledge these differences to some extent, with the Mayoral Capacity Fund (approximately GBP 45.1 million in 2026–27) supporting staffing, administrative functions, and core capacity across Strategic Authorities, with a baseline allocation and a time-limited uplift for newer institutions reflecting additional set-up requirements (HM Government, 2026[87]). However, given the breadth of devolved responsibilities, the sufficiency of this level of support will need to be monitored and evaluated over time. Where necessary, additional, continued and targeted support may be required, particularly for areas at an earlier stage of establishing Strategic Authorities, to help mitigate the risk of widening regional disparities. OECD work on devolution highlights the necessity of local capacity for devolution to translate into improved productivity growth (OECD, 2019[88]). To maximise the benefits of devolution, sustained investment in administrative capacity and technical skills is needed. The government should therefore prioritise training and staffing support to enable better policy planning, evaluation, and local delivery, particularly in lagging areas.
Robust policy evaluation is essential if deeper devolution is to translate into improved regional productivity. This requires enhanced data collection and strengthened performance monitoring to support effective decision making, accountability and peer learning across places. For example, since 2009, Manchester has used independent economic reviews to systematically evaluate its economy, generate evidence-based recommendations and guide local policy and investment decisions (Institute for Government, 2025[89]). The introduction of the Local Outcomes Framework (HM Government, 2026[90]) should help improve the consistency of outcome measurement at the local level for local authorities. For Mayoral Strategic Authorities, outcomes are instead primarily set through central government frameworks, often linked to integrated settlements. This in turn relies on stable institutional arrangements that can sustain evaluation capacity over time. The Devolution and Community Empowerment Act strengthens the institutional foundations for such practices by establishing Strategic Authorities as a statutory tier of governance and setting out the routes and conditions under which they are formed, moving beyond reliance on purely voluntary inter‑authority co-operation. By improving role clarity, accountability and durability beyond a single government cycle, statutory Strategic Authorities anchored in clearly defined functional responsibilities can better sustain horizontal collaboration and consistent performance monitoring, supporting long‑term productivity gains.
Based on OECD work, ten guiding principles, which apply to all types of countries, have been identified. They are set out below:
1. Clarify the policy areas assigned to different government levels to avoid duplication, waste and loss of accountability.
2. Clarify the functions assigned to different government levels such as financing, regulating, strategic planning, implementing, or monitoring.
3. Ensure balance in the way different policy areas and functions are decentralised. This allows for complementarity and integrated policy packages for territorial development.
4. Align responsibilities and revenues while enhancing the capacity of subnational governments to manage their own resources.
5. Actively support subnational capacity building. More responsibilities at the subnational level need to be complemented with the human resources to manage them.
6. Build adequate co-ordination mechanisms across levels of government to manage shared responsibilities
7. Support cross-jurisdictional co-operation through specific organisational arrangements or financial incentives to increase efficiency through economies of scale.
8. Allow for asymmetric arrangements and pilot experiences to ensure flexibility in implementation.
9. Effective decentralisation requires complementary reforms in land-use governance, citizen participation and public service delivery.
10. Enhance data collection and strengthen performance monitoring to provide useful data for decision making and peer learning.
Source: OECD (2019[88]; 2021[91]).
4.3.3. Reforming fiscal frameworks to support sustainable local growth
Effective devolution of powers must be accompanied by adequate and predictable financial resources. In the United Kingdom, local authorities are legally responsible for delivering a wide range of essential public services, including adult and children’s social care, education and special educational needs provision, housing and homelessness services, waste management, local transport infrastructure, and public health. These responsibilities place substantial demands on both financial and administrative capacity and are largely statutory in nature, limiting councils’ ability to adjust spending in response to fiscal pressures.
Over recent years, these pressures have intensified markedly. Demographic change, particularly population ageing, has driven sustained growth in adult social care demand, while a rising share of children requiring Education, Health and Care Plans (EHCPs) has increased spending on special educational needs and disabilities (SEND). At the same time, inflation has raised operating costs across local services, from staffing to energy and construction, further straining budgets (Figure 4.16). As a result, local authorities have increasingly prioritised demand-led and legally mandated expenditure, including social care, homelessness support, waste disposal and debt servicing, often at the expense of preventive services and growth-enhancing investment (National Audit Office, 2025[78]).
Real-terms change in local authority spending power, total and per-person
Note: This excludes 'Other' local authorities - for example, fire authorities, mayoral combined authorities - and shows England only. Available funding refers to the amount of money authorities have to spend from government grants, council tax and business rates outlined in spending plans. Available funding before 2015/16 is an estimate using changes in revenue spending power.
Source: Institute for Government analysis of MHCLG, 'Core Spending Power table: final local government finance settlement 2025 to 2026', HMT, 'Spending review document', 2025, and ONS, 'Mid-year population estimates', 2024 and ONS, 'Population projections', 2025.
Recognising the scale of these pressures, the government announced in the 2025 Budget that it will fully fund spending on special educational needs and disabilities provision from 2028–29 onwards. Until that point, councils remain responsible for its delivery and costs, but benefit from transitional measures, including continued accounting relief through the Dedicated Schools Grant statutory override and some additional funding (HM Government, 2024[92]). While this reform should significantly reduce fiscal risk over the medium term, it highlights the risk of undermining both service delivery and local growth objectives if further devolution of responsibilities is not accompanied with corresponding adjustments to local financial resources.
The United Kingdom remains one of the most centralised countries in the OECD in fiscal terms. Local governments rely heavily on transfers from central and devolved administrations and raise comparatively little revenue from their own tax and non-tax sources, such as user fees, charges or property income taxes (Figure 4.17). Locally raised revenues from council tax and business rates account for around 18.7% of subnational government revenues, well below the OECD average of 34%. By contrast, grants and subsidies make up approximately 63% of UK subnational revenues, compared with around 40% across the OECD. Similarly, subnational tax revenues represent just 1.7% of GDP and 5.8% of total tax revenues in the United Kingdom, far below OECD averages of 6.9% and 30.9% respectively.
As the support through grants declined since 2010, local authorities’ spending power has increasingly come to depend on own-source revenues, which are concentrated on a limited number of taxes (Institute for Government, 2026[93]). In England, Scotland and Wales, local governments are funded primarily through two property taxes: i) a council tax on households and ii) business rates on non-domestic property. In Northern Ireland, these take the form of domestic and non-domestic district rates. In England, councils set council tax rates, but increases are tightly constrained by nationally determined caps and referendum requirements, which in practice limit local discretion. For the purposes of fiscal equalisation and grant allocation, the central government assesses councils’ revenue‑raising capacity using a notional council tax level set at the national average, rather than actual locally set rates, ensuring full equalisation across authorities. Council tax, however, remains based on property valuations dating back to the early 1990s, and has therefore become increasingly misaligned with current property values and local fiscal capacity, weakening its role as a buoyant and equitable local revenue source; updating property valuations would strengthen the effectiveness of council tax as a local revenue instrument (Chapter 1).
Note: OECD refers to unitary OECD countries. Cross-country comparisons must be interpreted with care, as OECD figures include both own-source taxes and shared taxes. In OECD fiscal statistics, UK devolved governments are treated as part of the central government sector; subnational aggregates therefore largely reflect local authorities. In many countries, subnational governments receive fixed shares of national taxes such as personal income tax or VAT but have limited influence over rates or bases (OECD, 2020[4]). Nevertheless, even accounting for these differences, UK local authorities stand out for their narrow tax base and limited fiscal autonomy.
Source: OECD Subnational Government Structure and Finance Dashboard (database).
Business rates, by contrast, are set nationally and are subject to a system of tariffs and top‑ups that equalises resources at the outset and is periodically adjusted through resets and related grant mechanisms, while allowing authorities to retain a share of subsequent growth in receipts. In some areas with devolution deals, “increased business rates retention” arrangements mean that local authorities or combined authorities keep a higher‑than‑standard share of business rates. In the West of England, for example, the combined authority receives a small share of locally retained growth, whereas in Cornwall and the Liverpool City Region these arrangements sit wholly with the constituent local authorities. Thus, enhanced business rates retention sits mainly at local authority level, with the combined authority tier also receiving a modest share in some areas. As a result, local revenue‑raising capacity, which is increasingly important for local finances, varies significantly across places. Announced government plans for increased retention of future business‑rates growth in Mayoral Strategic Authorities (HM Government, 2026[61]) could strengthen their local resource base and support the financing of long‑term local investment.
In this context, the government has signalled its intention to develop a roadmap for fiscal devolution for Mayoral Strategic Authorities in England (HM Government, 2026[61]), while remaining fiscally neutral at the outset. The government has already taken steps in this direction, including through consulting on providing mayors with the power to introduce an Overnight Visitor Levy and extending the power to introduce a Mayoral Community Infrastructure Levy to all mayors. Successful implementation would represent a meaningful step towards better aligning local responsibilities with local resources and gradually reducing the high dependence on central transfers. As outlined by the Treasury, the roadmap would explore options over time for assigning a defined share of national tax revenues to Mayoral Strategic Authorities, initially focussing on areas with stronger administrative and delivery capacity. This approach is consistent with OECD guidance, which emphasises the importance of stable, growth‑linked local tax bases, such as recurrent property taxes and sub‑national income taxes, to support effective fiscal decentralisation (OECD, 2021[91]). As local governance structures are streamlined, the government should ensure that revenue‑raising powers across different tiers of local and regional government are progressively strengthened and better aligned, while maintaining national fiscal discipline.
Many OECD countries face challenges when it comes to aligning responsibilities and revenues, as subnational expenditure generally exceeds subnational own-source revenues (tax and non-tax revenues such as user charges, fees and revenues from assets), resulting in a vertical fiscal gap that is filled by transfers and subsidies. Comparing the share of subnational expenditure in total public spending with the share of subnational tax revenues in total tax revenues allows to assess the level of vertical fiscal imbalances (OECD, 2019[88]). In the United Kingdom, this gap is particularly pronounced, reflecting both extensive service responsibilities at the local level combined with limited fiscal autonomy (Figure 4.18).
The UK government has taken important steps in modernising the local government finance system in England. Funding formulas were not fully updated for over a decade, and underlying data and assumptions failed to keep pace with demographic and social change resulting in an increasingly misaligned system. The government updated in 2025 its assessments of councils’ spending needs and their revenue-raising capacity through the “Fair Funding Review 2.0” and “Provisional Settlement” aiming to more closely align allocations with demographic pressures, deprivation and service cost drivers (Box 4.7) (HM Government, 2025[94]). The reforms consolidate many smaller grants into larger formula-based allocations, reset the business rates retention system allowing councils to keep a recalculated share of local business taxes based on updated assessments of their capacity and needs, and introduce three-year funding certainty, which is welcome as it improves councils’ ability to plan.
Note: OECD9 refers to federal and quasi-federal OECD countries: Australia, Austria, Belgium, Canada, Germany, Mexico, Spain, Switzerland and United States. OECD29 refers to unitary countries and includes the remaining OECD countries who are not considered federal and quasi-federal.
Source: OECD Subnational Government Structure and Finance Dashboard (database).
While these reforms represent an important step forward, they are unlikely to resolve all underlying vulnerabilities. Even after redistribution, allocations may still deviate from assessed needs because of outdated data, formula design choices and transitional protections, suggesting that some councils may continue to struggle. Analysis by the Institute for Fiscal Studies suggests that, even under the new system, allocations could still deviate by 10–15% from assessed needs due to data limitations and constrained redistribution, potentially leaving some high-need urban authorities worse off while more affluent areas gain (IFS, 2025[95]; IFS, 2025[96]). Furthermore, core funding increases still depend heavily on assumed council tax increases, which may not be feasible or equitable in all areas leading to larger gaps between revenues and expenditure. Continuous monitoring, ongoing recalibration of funding formulas to incorporate updated data are needed to ease adjustments and ensure all councils maintain core service capacity.
In complement to the update of central transfers, the system of grants accessible for English local governments is being reformed. Over the past decade, the grant system has not only been complex and fragmented, with a large share of funding having been delivered through short-term, ring-fenced and silo-based grants, but also declined in terms of allocated amounts. This has limited local discretion, weakened accountability, and undermined long-term financial planning (OECD, 2020[6]). It is therefore welcome that this fragmented grant system is being streamlined, partially by merging grants within the new transfer formula, as well as in new and a reduced number of grants. For example, the integrated settlement provides a funding mechanism that brings together multiple existing funding streams into a single, more flexible settlement for established Mayoral Strategic Authorities, supporting more strategic and co-ordinated use of resources. The government has also announced GBP 2.3 billion in City Investment Funds for mayoral authorities, which provide a more predictable multiyear capital envelope for infrastructure and regeneration projects, helping to reduce reliance on fragmented competitive bidding (HM Government, 2026[61]). Complementing these efforts, the 2025 Pride in Place programme was launched as a community-driven urban regeneration and renewal initiative, aiming to channel up to GBP 5.8 billion over ten years into community high streets, public spaces, and neighbourhood improvements across hundreds of communities (HM Government, 2025[97]). The programme demonstrates a shift towards place-based funding and a recognition of the need to empower local communities and neighbourhoods to invest in long-term regeneration. Streamlining the system of grants available for local authorities in England is welcome and has been recommended in previous Economic Surveys (OECD, 2022[18]). The government should however ensure that the streamlining of grants remains broadly neutral, both in terms of funding available for local authorities, while also monitoring potential effects on grants available for local and subnational government in devolved nations.
Going forward, the government should ensure that increasing devolution and governance reforms are met with sufficient funding. Gradually increasing local fiscal flexibility within a fiscally neutral framework, while maintaining robust equalisation across regions, could help reduce local authorities’ dependence on central transfers without increasing overall tax burdens. At the same time, equalisation systems should encourage local growth efforts while protecting lower-income areas from being unfairly penalised. Capacity building, especially in financial management, project appraisal, and long-term planning should complement ongoing devolution to ensure that devolved institutions can use any new resources effectively.
Following the Fair Funding Review 2.0 in 2025, the government is introducing a new framework for allocating core funding across English councils, with the aim of better aligning resources with local needs and revenue-raising capacity while managing large distributional changes.
Key elements of the reform are:
Updated assessment of spending needs: Each council’s relative spending needs will be recalculated using new formulas that reflect differences in demand for services and the cost of delivery.
Revised assessment of local revenue capacity: Councils’ ability to raise council tax will be measured using modelled revenues, assuming all councils set tax rates at the national average.
Full equalisation of funding: Most central government grant funding will be allocated so that, at average council tax rates, each council receives a share of total funding consistent with its assessed needs, based on demographic and service‑cost indicators, regardless of local tax base.
Redistribution of business rates growth: Business rates growth accumulated since 2013–14 will be fully redistributed based on updated needs assessments. Councils will then retain future growth from 2026–27 until the next system reset.
Phased implementation and protections: Changes will be phased in over three years from 2026–27, with funding floors to limit losses for councils facing reductions under the new system.
Source: Institute for fiscal studies (IFS, 2025[98]); (HM Government, 2025[97]).
4.3.4. Strengthening governance quality, trust and integrity to improve local delivery
Greater fiscal and administrative devolution offers the potential to strengthen community engagement in shaping places, an important component of creating attractive, productive local and regional environments. Fostering liveable spaces is central to attracting and retaining talent and businesses. The government has signalled an intention to enhance public engagement and community voice as part of governance reforms. However, public trust in, and understanding of, local government remains comparatively low (Parliamentary Office of Science and Technology, 2025[85]). Only around 35% of respondents report high or moderately high trust in local government, and while higher than trust in national government, it is still significantly below the OECD average of approximately 45% (Figure 4.19, Panel A). Low trust can weaken civic participation and reduce the legitimacy of local decision-making, potentially undermining efforts to develop place-based strategies for growth.
Source: OECD Government at a Glance (database); and OECD Subnational Government Structure and Finance Dashboard (database).
The move towards larger Strategic Authorities and consolidated unitary structures as detailed in the 2024 English Devolution White Paper may improve administrative efficiency but also risks distancing local government from communities. Already, local authorities in the United Kingdom are larger in terms of population than international peers (Figure 4.19, Panel B), and new unitary councils are planned to generally cover a population of 500 000 or more. Larger authorities typically have fewer councillors per capita and fewer tiers of democratic representation, which could weaken channels for citizen voice. While proposals to retain and strengthen town and parish councils aim to preserve local fora for engagement, it remains unclear how public trust and accountability will be maintained under broader governance consolidation. The government should support local-level integrity through strengthened monitoring of relevant commitments in the National Anti-Corruption Strategy and extend anti-fraud measures across all levels of government to accompany governance consolidation.
Local governance quality is also tightly linked to the integrity of public institutions, which in turn affects business dynamism and productivity. Because governance frameworks and standards are set and enforced across all levels of government, weaknesses at the national level can generate important spillovers for subnational and local delivery. Strong institutional integrity reduces uncertainty, supports fair competition, and encourages investment and innovation, which are all essential for productivity growth. On international governance indicators, the United Kingdom continues to rank relatively well on measures of control of corruption, but recent trends in perception-based indexes show some deterioration (Figure 4.20).
The UK Anti-Corruption Strategy 2025 builds on the 2017–2022 strategy and sets out the government’s latest comprehensive approach to tackling corruption domestically and internationally over the coming years (HM Government, 2025[99]). Although the strategy was not subject to a formal public consultation, it sets out a wide range of strategic objectives. It recognises that corruption risks extend beyond central government, highlighting vulnerabilities in public procurement, political finance and public sector integrity at local level. To address these risks the strategy commits to strengthening prevention, detection and enforcement among all tiers of government through measures, such as expanding specialist policing capacity, improving standards and training, and tightening safeguards around public spending and procurement. These measures are directly relevant to local authorities as their responsibilities expand, and funding arrangements become more complex. The strategy also commits to provide funding to civil society and investigative journalists, with a particular focus on the local level, to strengthen their ability to expose corruption and illicit finance risks. Such measures to enhance public oversight are important as the potential for reduced engagement and visibility between citizens and larger Strategic Authorities can increase exposure to governance and corruption risks, especially in areas such as procurement, planning, and discretionary grant allocation. The UK Government intends to develop its monitoring and evaluation framework to ensure that the strategy’s initiatives achieve their objectives. This framework should include clear outcome-level indicators to assess implementation, which at present are missing. Outlined plans for a mandatory local government code of conduct, and a new Local Audit Office should be swiftly assessed and implemented to enhance oversight of subnational public finances.
The United Kingdom has also introduced initiatives to reduce fraud and waste across the public sector, including at the subnational level. A new “failure to prevent fraud offence” came into force in September 2025, designed to encourage organisations to build an anti-fraud culture and move towards implementing prevention procedures. Under this offence, specified organisations may be held criminally liable if an employee, agent, subsidiary, or other “associated person” commits a fraud intended to benefit the organisation or its clients, and the organisation lacked reasonable fraud prevention procedures. The UK Public Sector Fraud Authority (PSFA) is leading the implementation of these anti-fraud efforts. It has developed an AI powered tool that enables public officials to generate draft Fraud Risk Assessments using Large Language Models. Based on uploaded material, such as guidance documents or government grant scheme briefs, the tool identifies fraud risks by actor, action, and outcome, allowing qualified fraud risk assessors to develop more effective assessments. The UK government should continue to prioritise such measures and to extend implementation across the public sector, including at the subnational level.
The United Kingdom shows relatively strong institutional engagement in integrity and anti‑corruption frameworks compared with many OECD countries, but has acknowledged there is still scope to reinforce conflict‑of‑interest and lobbying rules and their enforcement (Ethics and Integrity Commission, 2026[100]). For example, the OECD Anti-Corruption and Integrity Outlook 2026 highlighted that the UK fulfils 56% of OECD criteria on the strength of conflict-of-interest regulations, and 22% on practice compared to the OECD average of 80% and 45%, respectively (OECD, 2026[101]). Strengthening these safeguards could bolster confidence in governance at all levels, including local government, and contribute to a more predictable and fair business environment. Making elements of the Ministerial Code legally enforceable through instruments like a deed of undertaking to also cover conflicts of interest during the term of appointment as outlined in the previous Economic Survey (OECD, 2024[1]) are not yet formalised within the 2025 anti-corruption strategy. It should be considered to introduce liability for conflict-of-interest violations more broadly as recommended in the previous survey.
Note: Panel A shows the share of respondents answering 8-10 to the following survey question: "Now I'd like you to tell me your views on corruption – when people pay a bribe, give a gift or do a favour to other people in order to get the things they need done or the services they need. How would you place your views on corruption in your country on a 10-point scale where '1' means 'there is no corruption in my country' and '10' means 'there is abundant corruption in my country'?". Panel C: Data for the United Kingdom was not available for the categories of judicial integrity, prosecutorial integrity and disciplinary system. Panels B, D & E: G7* is a simple average of G7 countries excluding the United Kingdom. Panel E shows ratings from the FATF peer reviews of each member to assess levels of implementation of the FATF Recommendations. The ratings reflect the extent to which a country's measures are effective against 11 immediate outcomes. "Investigation and prosecution¹" refers to money laundering. "Investigation and prosecution²" refers to terrorist financing.
Source: Panel A: World Values Survey (database); Panel B: World Bank Worldwide Governance Indicators (database); Panels C & D: OECD Public Integrity indicators (database); and OECD, Financial Action Task Force (FATF).
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