There is no one-size-fits-all approach to reinvigorate the moribund UK economy, says Dan Corry

Oh dear [chancellor] Mr George Osborne. Those GDP figures were not what you were looking for. And nor were your party troops – let alone the coalitionist Liberal Democrats.

The whole of the Government’s strategy on the economy rests on the idea that if you cut public spending and the deficit, private sector activity will fill the gap.

That is a theory ardently believed in by many Tories, who look back fondly to the harsh 1981 Budget which they think set the scene for the growth later in that decade, despite being denounced at the time by 364 of Britain’s academic economic establishment.

But what Mr Osborne probably knows, but many of his followers do not, is that it is never that straightforward.

In the end, the economy will bounce back. There will be growth and jobs created.

But even with a fair wind, that can take a long time. And although we have bits of a fair breeze – with the weak pound making manufacturing more competitive and the sheer depth of the recession meaning firms have had to start replacing stocks and buildings have to be maintained – we also have elements of a storm brewing in the shape of the 2.5% hike in VAT, rising fuel and other prices, and the falling real worth of people’s take-home pay. And that is not to mention something bordering on carnage in public sector jobs, with an extraordinary number of public sector workers currently on notice.

Mr Osborne and business secretary, Vince Cable, say, hold your nerve. And justice secretary, Ken Clarke, says it will take at least three years for the economy to return to real recovery. We will see if, in particular, the Liberal Democrats are prepared to wait that long.

But, say that Mr Osborne is right, and by 2013 or 2014, we have weathered the worst, output is rising fast and overall jobs in the economy are rising, not falling. Will that be enough for the electorate? Will that prove the Tory-led Government was right?

vWell maybe. It is hard to see private sector activity surging back in all our urban areas, not least because we know just how dependent they have been on the public sector and on public sector jobs.

In the long run, the laissez faire/Orange Book free market strategy may work to boost the Hulls and Burnleys, the Stokes and Middlesbroughs. Cut the size of the public sector, cut wage levels in the public sector, see private sector wages in the area fall as a consequence and then, at last, businesses will want to locate there, previously non-profitable activities will become profitable, and we have a new model of growth.

But even if it works, in the longer run, such a strategy on its own is unlikely to deliver enough private sector jobs in these areas on the required electoral timetable. So, the only real way to get growth going here is via targeted action to promote growth in our great urban areas.

That will not be easy. One of the drivers for private sector growth in previously-lagging towns and cities was regeneration. But regeneration funding from the centre has largely gone, and now that the bubble is over, the private sector is reluctant to invest in many of the more ‘difficult’ areas.

Clearly, areas are going to have different problems – and opportunities – depending on their industrial structure and their infrastructure, their innovation capacity – often linked to having a high-class university – and the scale of their small businesses sector. Other factors which affect local demand matter too, such as the number on benefits, not least since benefit levels are going to be cut.

All this means that one-size-fits-all approaches will not be the best. If recent Downing Street spin is correct, we may be about to see a replay of old Heseltinian approaches such as ‘Enterprise zones’ and maybe some city challenge-style initiatives.

But the Government’s main and perhaps only hope is to empower local centres of economic strength – cities and city-regions – and to leave it to them to try to get growth going. The Government is going to have to trust the cities.

But are cities up to it? and can they move fast enough? Again, the answer varies. Greater Manchester is a past master at controlling its own destiny and delivering well. The best thing the Government can do here is give them the powers over economic development that they need, including tax increment funding-type fiscal powers, and then leave well alone. The same will be true in some other areas.

But many cities will find it tough, especially without the guidance, the power, the muscle and the money that regional development agencies brought. Local enterprise partnerships may turn out to be a success, but it will take a while. The regional growth fund will help – but it is less money than before.

Ironically then, and especially post the May local elections, a Conservative–Liberal Democrat Government will have to rely on – mainly – Labour councils to prove that all the sacrifice has been worth it. What a delicious irony.

Dan Corry works at FTI Consulting and is a former Treasury and Downing Street adviser