The Spring Budget provided some welcome reassurance that the government’s Levelling Up (LU) policy still has political support, with a smorgasbord of announcements covering “trailblazer deeper devolution” deals, Investment Zones, Levelling Up Partnerships and confirmation of a future Levelling Up Fund Round 3. In their latest blog, Colin Warnock, Geoff White and Peter Tyler argue that, while the long-awaited focus on specific places is welcome, the level of funding and ambition remains far too low to make a meaningful difference in tackling long-standing spatial inequalities.
The return of Levelling Up?
After a roller-coaster year when Levelling Up appeared to be forgotten, the 2023 Spring Budget breathed some life back into this once flagship policy to tackle spatial inequalities and unlock growth in “left behind” places. It announced a raft of measures, among them:
- “Trailblazer” deeper devolution deals in two Mayoral Combined Authorities (MCAs), Greater Manchester and West Midlands, with Single Settlements initiated at the next Spending Review;
- An English Devolution Accountability Framework providing for accountability locally as well as to the UK government;
- Fiscal devolution enabling retention of business rates by local authorities in Greater Manchester and West Midlands;
- City Region Sustainable Transport Settlements (CRSTS) with MCAs, with funding for Greater Manchester and the West Midlands being included in their Single Settlements
- 12 Investment Zones (total funding of £960m) in Scotland, Wales and Northern Ireland and eight MCA areas in England, the selection of the latter areas being by a transparent methodology to build on “high-potential innovation and industrial strengths in areas with significant scope for catch up economic growth”;
- 20 Levelling Up Partnerships (£400m over the next two years) in areas selected by a transparent method, to provide place-based regeneration in England;
- Confirmation of a £1 billion Levelling Up Fund Round 3 “later in 2023”;
- A declaration to transfer responsibilities of Local Enterprise Partnerships to local authorities from 2024 with further announcements on process and (hopefully) funding expected later in 2023.
Clearer spatial targeting but still no rationalising into a single funding pot
In the previous two rounds of LU funding proved contentious because the decision-making was so opaque. The Budget included some welcome clarity on the criteria for selecting LU Partnerships and IZs. These trailblazer deals aside, however, this remained Levelling Up by distributing relatively small pots of discretionary funding to cash-starved local authorities, the same piecemeal approach that has been followed for the past 60 years. Regrettably the Budget signalled no intention to rationalise diverse competitive funding pots. We recommend a Single Levelling Up Fund allocated to local areas more fairly, according to need, by transparent criteria similar to those used for selecting LU Partnership and IZ areas. This would increase local flexibility to respond to local needs and opportunities at the required scale and mix of spend and activities.
A Single Levelling Up Fund would also provide a transition for local learning and capacity building until such time as all areas had devolution deals (of whatever type). This Fund should incorporate LU, Shared Prosperity Fund and other so-called LU-related competitive funds in all government departments.
Investment Zones: better specified, but under-powered
The proposals for Investment Zones now appear to be more coherent. As well as the clearer focus on place and on commercial investment, there is clarity on the role of priority sectors in developing knowledge-focused clusters: digital and tech; green industries; life sciences; advanced manufacturing; and creative industries.
Each area will have an allocation of up to £80m, with a capital/revenue split of 60/40, but beyond that MCAs can decide how much (if any) is utilised in the form of expenditure vs tax reliefs on sites up to a maximum of 600ha. This flexible funding model is welcome. It acknowledges that maximising the growth potential of IZs needs to go beyond the land on which IZ tax benefits will be available (“tax sites”) and be integrated within a coherent local strategy for investment in dedicated planning support, local infrastructure, skills, research and innovation and tailored business support.
MCAs can also pick and mix from a wide menu of fiscal incentives to attract businesses to IZ tax sites over a five year period – reliefs in a variety of forms in stamp duty land tax, business rates, capital allowances, enhanced structures and buildings allowance and national insurance.
However, the incentives are underpowered, and are unlikely to cause investment funds to flow. To start, a 100% first year Enhanced Structures And Buildings Allowance would be much more powerful in making the IZs stand out as investment locations, rather than a 10% annual allowance for 10 years.
Second, the IZ fiscal incentives are available for five years only and the 100% first year Enhanced Capital Allowance on plant and machinery is already provided in the Spring Budget through the “fully expensing capital allowance” made available – nationwide – to all businesses. Continuation of the former 130% first-year capital allowance (“super deduction”) for qualifying plant and machinery assets on IZ tax sites over the five year period would have been much more effective in turbocharging IZs. As a result of changes to corporate tax policy, the same challenges will also now apply to Freeports. The competitive advantages of IZs and Freeports – the government’s only two spatial policies – are immediately blunted until at least 2027/8, if not beyond, since the government has indicated its desire to make fully expensing capital allowances permanent if possible.
In other words, just when the government has bitten the bullet on making clear spatial choices, it simultaneously failed to give place-based policies such as IZs truly enhanced fiscal incentives which would stand a real chance of crowding-in much needed private sector investment.
The missing place-based industrial strategy
The IZ prospectus prioritised sectors and identified eight places in England where an IZ will be situated. But a place-based industrial strategy has not yet emerged. National sectoral priorities need to be woven together with sub-regional sectoral priorities based on local need and sectoral opportunities. This would help reduce long-term instability and uncertainty and enable the private sector do what it does best – appraise and manage risks in making long-term investments.
We urge the government to publish a coherent place-based industrial strategy and back this up with stronger investment incentives in particular sub-regions. We would like to see it come forward with an Industrial Investment Act, explicitly setting out those specific areas, sectors and associated supply-chains where post-Brexit subsidy freedoms in the form of grants, loans, guarantees and fiscal incentives would be available to accelerate private sector investment in infrastructure and business in left behind places. In short, it is time to give place-based certainty to businesses and investors on the government’s long-term LU ambitions.
“Deeper devolution”… for 10% of England’s population
The Spring Budget 2023 offered deeper devolution in England through the “trailblazer deeper devolution deals” with Greater Manchester MCA and West Midlands MCA. The landmark component is a commitment to consolidated, long-term funding arrangements in a Single Settlement to be agreed at the next Spending Review.
There is also now welcome clarity that, over time, GMCA and WMCA will have greater power over the levers of economic prosperity through devolution of control and funding relating to transport, skills, employment support, housing and regeneration, research and innovation, business productivity and business support as well as engagement on inward investment and international trade.
But, before anybody gets carried away,it’s worth remembering the limitations:
- it has taken over nine years to get to this point since George Osborne’s launch of devolution in 2014;
- these deals cover only 10% of England’s population;
- the next Spending Review will not take place until 2024/25 and possibly after the next general election;
- Single Settlements will thus be negotiated at a time when the nation’s finances are likely to be at their most stretched;
- the deals offer no clear intention to transfer staff from mainstream government departments and agencies to MCAs;
- the deals make no commitment to review funding formulae which might lead to the step change in mainstream bending which we’ve argued for in previous blogs;
- the deals will essentially treat the MCAs as if they were new government departments.
The changes that can be expected to occur within the current spending review period are limited to stronger partnership working with individual government departments and their agencies. The direction of travel is welcome, but the journey is at a snail’s pace.
In the meantime, there is no commitment to review departmental funding formulae along the lines highlighted by the Institute for Fiscal Studies in its Deaton Review. So, it seems likely that the mainstream expenditure cake will be carved up in spatial terms in roughly the same manner as now. That being the case, the scope for disproportionately more funding for left behind places will depend on rapid deployment of deeper devolution to other MCAs and local government finance reform and greater fiscal devolution. The Budget has kicked these into the long post-election grass; the chances of spatial inequalities being narrowed in the next three to five years remain as slim as ever.
The views and opinions expressed in this post are those of the author(s) and not necessarily those of the Bennett Institute for Public Policy.
