School of Social & Political Sciences

Britain has one of the most regionally unequal economies in the OECD. The roots of this lie in its rentier nature and privileging of short-term over long-term economic goals

Regional economic inequality within the UK has been a source of consternation for decades. Though many developed nations face similiar economic demographic issues, the disparity between UK regions is ranked worse of all OECD countries. The divide between the prosperous south and underperforming north is evident across all major economic metrics, including GDP per capita, productivity, investment and wealth. This deep-rooted structural schism in the UK economy has continued to deteriorate despite policy attempts by consecutive governments to curb this trend. At the heart of the UK's regional inequality lies a problem that is hidden in plain sight: the fact that at its heart, the UK has a rentier political economy. Understanding the historical development of rentierism is crucial if we are to understand the staggering levels of regional inequality in the UK today.

How did the UK get here?

It is widely acknowledged that the acceleration of deindustrialisation policies in the 1970s and 1980s catalysed the worsening regional imbalances today. The UK's northern regions were considered the industrial powerhouse of the British economy, specialising in heavy industries such as mining, manufacturing, steel and ship building. These sectors provided relatively well-paid and stable jobs, which whole communities, towns and cities relied upon. However, the neoliberal economic policies enacted under Margaret Thatcher's government led to the demise of most heavy industry. As a result, millions became unemployed, and whole regions were classified as 'in managed decline'. In contrast, economic policy pivoted towards services, in particular finance, which greatly benefitted London and the southeast. As the structure of the UK economy mutated, the south became wealthier, whilst nothern regions languished.

Ex-industrial regions have come to be defined by a lack of well-paid or secure employment, opportunities and prosperity. Consequently, this has led to worsening social outcomes in education attainment and poor health, placing further drag on economic growth. By comparison, opportunities and lucrative jobs have been concentrated in London and the southeast, and the UK has come to significantly depend on the economic strength of these areas. The resulting brain-drain of skilled workers from ailing UK regions further reinforces the economic divide. The scale of this imbalance has led many economic commentators to liken the UK to a 'hub with no spokes'. 

Since the Great Recession of 2008, economic growth has stagnated and living standards have fallen. Economists point to the flatlining of national productivity which 'in the long run, is everything' when it comes to raising overall living standards. London and the southeast perform well above the national average, but every other in the region in the UK falls short. Consequently, the UK has seen the biggest squeeze in wages since the Napoleonic era, which disproportionally affected people in the north. Productivity is ultimately linked to levels of both public and private investment, which has drastically reduced in ex-industrial regions and are some of the lowest in the OECD. For policy makers, this poses serious problems. Firstly, such high levels of economic inefficiency and underutilisation limit overall economic growth. Worse still, the longer inequality and failing living standards persist, the greater the propensity for political instability and unrest in these economically challenged regions. Brexit, the rise of Reform UK and the summer race riots - that overwhelming occured in impoverished towns and cities - indicate that this phenomenon is already under way.

The political economy of rentier capitalism

The persistence of the North-South divide is often attributed to the over-centralised nature of the British political system and interminable churn in regional development policy spanning decades. Factors such as the UK's stringent austerity measures, withdrawal of EU regional funding after Brexit - which disproptionally affected the north - and globalisation have also been blamed. However, what is often overlooked is the change to the very fabric of UK political economy, which has morphed from capitalism predicated on productive, entrepreneurial investment to an extractive rentier economy. 

But what is meant by rent? In The Rentierization of the United Kingdom Economy, Brett Christopher offers the definition that 'rent as income derived from the ownership, possession or control of scarce assets and under conditions of limited or no competition'. In other words, contrary to the ideas of British entrepreneurial spirit, modern British capitalism is underpinned by 'havers and not doers'. John Stuart Mill marvellously encapsulated this difference between entrepreneurs and rentiers: 'They grow richer, as it were, in their sleep, without working, risking and economising'. In recent years, economists have dubbed the UK as a 'rentier's paradise'.

The 1980s saw the emboldening of rentierisation through market-oriented reforms which shifted the focus from productive, value-added investments to asset-based wealth accumulation. Through policies such as regulation, privatisation, and weakening of labour unions, Thatcher reduced state intervention and opened key sectors including finance, utilities, and housing to private ownership and competition. The deregulation of financial markets has prevailed in this rentier economy, which has encouraged speculative activity and short-term profit-seeking over long-term business investments. For example, only 4% of financial lending goes towards manufacturing, down from 80% a century ago. Additionally, housing speculation represents one of the main pillars of the British rentier economy. High demand for property has pervesely incentivised limiting investment in new houses to raise valuation, making property investment a leading vehicle for wealth accumulation and rent-extraction by investors. The asset-inflation seen in the UK, particularly in real estate and financial assets, demonstrates that the rentier economy is detached from the investment-starved real economy. Furthermore, contrary to free-market ideals, privatisation of utilities created monopolistic competition, enabling private firms to extract rents by raising prices well above marginal costs due to a lack of competitive pressure. Resultantly, UK consumers pay higher prices for essentials, lowering aggregate demand in the economy. With limited competition, these firms have little incentive to reinvest or innovate and prioritise paying out high returns to shareholders or buying back their own stocks.

Efforts to stimulate economic growth through quantitative easing only entrenched this issue. As Varoufakis argues in Technofeudalism, the Bank of England injected money into the economy after the 2008 financial crisis with the hope it would stimulate investment and economic growth. However, despite historically low interest rates, this newly minted money was rewired into financial speculation by big business, as aggregate demand was too badly weekend by lower wages and monopoly rents. Effectively, this meant there was no incentive for productive investments, as few consumers could buy expensive consumer products. The rentier capitalist economy effectively creates a self-perpuating cycle of minimal investment leading to lack of incentives to invest in productive capacity. The profit motive is instead skewed towards short-term, rentier activities that provide higher returns. With this in mind, the UK's private sector fundamentally cannot be relied upon to increase investment in underperforming regions, even when the cost of borrowing is practically nil. In total it represents the outright failure of laissez-faire and trickle-down economics to supply balanced economic growth. 

With the rentierisation effectively the de facto model for British capitalism, it is no surpise it has enjoyed astounding protection from policymakers. Fiscal rules have meant that profits derived from rent-seeking activities have not been as heavily taxed as income from employment. Low capital gains taxes further incentivise wealth accumulation through asset ownership over work. Financial deregulation has allowed speculation to persist and evolve, allowing for trillions of pounds in fictitious capital to be tied up in ever more complex financial instruments. In addition, lax anti-trust law have meant mergers and acquisitions continue space, further concentrating markets. 

What should be done?

The UK should wrest investment back into ex-industrial heartlands - often the areas most starkly affected by regional inequality and the UK's rentier model of capitalism - by pursuing a bold green industrial policy. By focusing on sectors such as renewable energy, green manufacturing and green technology, the UK can bring down regional inequality and stabilise energy prices, whilst upholding its climate change commitments. Additionally, further investment towards infrastructure such as transport systems, railways and insulating homes will help the UK meets its carbon emissions targets, whilst attracting more investment to the area and reversing the brain-drain. Importantly, re-industrialisation would bring back skilled and well-paid jobs to these regions, which may be further funded by government training initiatives in renewable energy, engineering and construction. The Inflation Reduction Act in the United States stands as an example of direct government intervention to stimulate green economic growth. The IRA has invested hundreds of billions of dollars directly into subsidies for the private sector and green government programmes, subsequently creating hundreds of thousands of jobs whilst accelerating the US transition to a carbon-neutral economy. The American economy has since bounced back quicker than most other countries from the inflation crisis, showing Keynesian ideas and industrial policies are far from dead and buried.

For the UK to finance such a massive industrial undertaking, it will have to target profits made by rent-seeking and monopolistic activities. Any government serious about rebalancing the economy should start by changing the fiscal rules on unearned income: namely, increase capital gains tax and windfall taxes on monopolistic profits raise inheritance tax, and even create some form of wealth tax. De-incentivising rentier activity will subsequently incentivise private investment into green industrial strategy.

What has Labour got to say?

The recent government budget unveiled by Rachel Reeves has shown limited promise in catalysing this green industrial revolution. The chancellor's attitude going forward has been 'invest, invest, invest' but this appears largely focused on fixing public services - nevertheless, a welcome sign. Changes to fiscal rules to increase capital gains tax and windfall taxes on North Sea oil and gas producers is also encouraging; however, this new tax revenue seems more likely earmarked for reducing national debt. Reeves stopped short of introducing any form of wealth tax, despite significant popular pressure to do so. The Labour government has pledged £7billion for a national wealth fund that will directly help finance green projects. Unfortunately, this is a watered-down version of the initial £28billion pledged for stimulating green growth. Instead, Labour says this shortfall will be made up through private investment, but details on this are vague. 

However, somewhat encouragingly, Reeves has vowed that recent pledge to increase defence spending to 2.5% of GDP will support the UK's economically left-behind towns by boosting arms manufacturing industries in these regions. Nevertheless, if the UK government is serious about reducing regional inequality, it should diversify away from the extractive model of capitalism that now characterises the UK political economy. By emulating aspects of the IRA, whilst taking a bolder stance against rent-seeking through punitive fiscal changes, Labour could simultaneously improve living standards across the UK and strengthen the overall economy for the future.

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This blog is part of the SPS Student Academic Blog series. You can read more contributions from the series here.

First published: 29 April 2025