The Welsh valleys have some of the highest numbers of people claiming incapacity benefits in the whole of Britain. In Abertillery, Maesteg and Merthyr Tydfil, getting on for a quarter of the working-age population is not employed – in large part due to long-term ill-health. If the government was serious about reducing the growing welfare bill, it would be starting here and in the other parts of the country blighted by deindustrialisation and poverty. It would identify the parts of the country most in need – Wales, Scotland and large swaths of northern England – and love-bomb them.

Yet instead of devoting more money to regional economic development, ministers are doing the opposite. In one of its less-publicised policy moves, Labour has quietly gutted the fund designed to create jobs, a scheme inherited from the Conservatives. The silent demolition job on regional policy is laid bare in a new report by Steve Fothergill, national director of the Industrial Communities Alliance, an umbrella group for the local authorities worst affected by the hollowing out of Britain’s industrial base and the closure of the coalfields.

Fothergill notes that for almost a century, governments of all political stripes have pumped money into the less prosperous parts of the country in attempts to boost local economies and cut unemployment. That support has now been largely removed. “The remarkable thing about the demolition of regional policy is that it has never been a deliberate political decision,” Fothergill says. “Rather, it is an outcome that has developed incrementally over a decade, involving decisions by both Conservative and Labour governments that for reasons at the time probably seemed pragmatic. It’s the cumulative effect of these decisions that’s now so worrying for the less prosperous parts of Britain.”

The problems began when the Conservatives abolished assisted areas – regions of the UK that were eligible for special help because of their needs. The post-Brexit subsidy rules treat all parts of Britain equally. There is therefore no longer any discrimination in favour of business investment in the less prosperous parts of the country, which is why the new Jaguar Land Rover battery factory is being built in Somerset, rather than Wales.

In opposition, Labour opposed the abolition of assisted area status. In government, it has made no move towards restoring it. Even worse, it has cut regional economic spending heavily. The figures are stark. When Britain left the EU, the Conservatives set up a UK shared prosperity fund to ensure that support for hard-pressed areas was maintained. This commitment lasted for three years and ended in 2024-25. In her 2024 budget, Rachel Reeves reduced the UK shared prosperity fund for 2025-26 from £1.5b to £900m – a cut of 40%.

The shared prosperity fund has now been replaced by local growth funds, but these have a much reduced financial firepower. Compared with the scheme for 2024-25, funding for England and Scotland from 2026 is down 76%, while for Wales there is a cut of 50%.

The government may say that its entire economic strategy is driven by the quest for faster growth, and that all regions will benefit. Yet all governments in the past century have wished for faster growth and have still found the need for regional assistance. A rising tide may lift all boats, but some boats are lifted higher than others. Nor, without meaning to sound churlish, is there much evidence that Labour’s growth strategy is delivering. The economy is currently moving sideways, and unemployment is rising.

To be fair, the much-reduced support for the local growth fund is being offset by a more generous settlement for local authorities – not just in England, but in the devolved administrations of Scotland, Wales and Northern Ireland as well. Yet the pressures on councils are so great that the extra money is almost certain to be spent on adult social care and children’s services, rather than on job creation.

Nor are the government’s new neighbourhood initiatives – named Pride in Place – a substitute for regional policy. They are simply not big enough to have a real impact on jobs and growth. Money to spruce up rundown high streets is all very well, but it fails to deal with the issue of why those high streets are rundown in the first place.

The real question is whether there is a point to regional policy at all. If the north-south divide is now wider than it was in the 1930s, isn’t there some rationale for giving up on the idea altogether?

The answer to that is no. Regional policy has boosted output and created jobs in the less prosperous parts of Britain. It has been swimming against the tide of long-term decline in sectors such as textiles, shipbuilding and coalmining, but had governments not discriminated in favour of some areas over others, the damage would have been far worse. The fact that on some measures London is more than two and a half times as prosperous as Wales argues for a more, not less, vigorous regional policy.

Post-Brexit there is nothing to stop a UK government developing a more expansive regional policy – and Labour should take advantage of this freedom to bring back assisted areas status and make it more widely available. As things stand, the aid regime designed to boost struggling regional economies is a lot less generous than it was when Britain was in the EU.

There may be a political price to pay for that. Seats in Britain’s old industrial heartlands were once Labour fiefdoms but are now very much in play, as next year’s elections in Scotland and Wales will show.

• Larry Elliott is a Guardian columnist