If Levelling Up is to work we need to bend the spend

In the first blog of a two-part series, Geoff White, Peter Tyler and Colin Warnock explain where the Truss Government needs to do more if they are to make headway in levelling up.

The Levelling Up (LU) White Paper gives us chapter and verse on how persistent spatial inequalities damage the growth potential of the UK as a whole as well as the places and people left behind. It highlights the need for action in a root and branch systemic way. But there is limited evidence of a coherent plan for change on the scale needed. Further rounds of Levelling Up Funds and regular reports to Parliament will help but not be sufficient to bring about the change at the scale required.

And, rather worryingly, the Truss government may not be wedded to the ambitions of the White Paper if we take the Prime Minister’s words at face value when she said, ‘to look at everything through the lens of redistribution, I believe, is wrong. Because what I’m about is growing the economy. And growing the economy benefits everybody’. But to see levelling up as just about redistribution would be to miss the point so powerfully made in the White Paper that effective levelling up would add significantly and sustainably to the growth and productive capacity of the nation’s economy as a whole.

Making it happen where it matters – why mainstream bending is critical

Some of the White Paper intentions are being pursued with relatively modest discretionary funding like the LU Fund and the Levelling Up and Regeneration Bill. But these are low hanging fruits, capable of delivery relatively quickly and easily, especially when the jam is spread thinly. The experience of past interventions of this kind, even when well targeted, is that they can only do so much on their own. They need to prompt, and be supplemented by, increased and reshaped mainstream services and public investment, procurement and relocation decisions if they are to have deep, sustained impacts. The ambitions of the White Paper missions will require increasing and tilting the mainstream into sub-regions at significant scale.

The White Paper recognises the need to tilt mainstream spending and investments to the LU missions and that this means the business as usual model will need to change. “System change is not about a string of shiny, but ultimately short-lived, new policy initiatives. It is about root and branch reform of government and governance of the UK”.

This needs to happen in three ways that should be pursued relentlessly in mutually supportive ways.

First, local initiatives – such as the Levelling Up Fund – must have significant and long-term commitments with continued funding being conditional on complementary funding from mainstream providers. This will be even more effective if multiple discretionary funding streams are combined into a single LU fund.

Second, progress made in devolving allocation priorities from the centre to the local level must be continued especially in crucial areas such as transport, education and skills, so that aspects of mainstream funding critical to the renewal of left behind areas can be controlled and managed by local stakeholders.

Third, the criteria and rules by which mainstream funding, procurement and investment are allocated spatially, and the ways in which business taxation and regulation are reshaped, should be designed to better reflect the opportunities for, and the needs of, left behind localities.

Devolution of funding and the provision of discretionary funding to local level are essential as that is where real appreciation of the problems and solutions can be found. However, with the Treasury constraining devolved budgets and a weak local tax base, the speed and degree to which combined authorities can bring about change will be limited. This is why the third element is essential: decisions on mainstream funding and investment priorities must recognise spatial need if the grand LU ambitions are to be met.

Yet the White Paper doesn’t explicitly recognise the spatial trade-offs required. This is most evident in its Living Standards mission – “by 2030, pay, employment and productivity will have risen in every area of the UK, with each containing a globally competitive city, and the gap between the top performing and other areas closing”. This ambitious challenge cannot realistically be met, given limited resources, without a clear ‘theory of change’ and nationally determined spatial priorities.

A recent analysis by Overman and Xu suggests the critical ingredient in such a theory of change to be the supply of and demand for high skilled workers in specific places. Essentially, they suggest that virtuous and vicious circles are set up because of the flow of high skilled workers out of left behind areas and the location of growth firms in areas with a high supply of such workers. A further twist is given to the virtuous (or vicious) cycle by high (low) quality amenities being associated with increases in and the presence of high (low) skilled workers/residents.

On the narrative suggested by this analysis, a spatial strategy that bends mainstream funding to improve the amenities for, and the skills of, residents in left behind areas is unlikely to be sufficient to jolt the areas out of the vicious circle in which they’re trapped. For that to happen, an increase in the supply of skilled workers resident in the areas will need an accompanying increase in demand for them either from within the areas or in locations easily accessible from them or that could be made more easily accessible. This means that bending to meet spatial needs is required in public infrastructure and technological investments, public procurement and government relocation. This would have to be complemented in a coordinated way with mainstream and devolved service providers to ensure relevant skills and transport connectivity are or became available in the areas.^[i]

Is mainstream bending happening?

Current spending allocations and methods

According to a number of commentators, past and allocated public spending has not been aligned with the LU agenda. Work by the Institute for Government has shown how local authority revenues shrank overall by 16% between 2009/2010 and 2020/21, with more deprived authorities hit disproportionately. Analysis by IPPR North of 2021 spend data showed that the overall spending gap between the North and London doubled between 2019 and 2021 – growing from a difference of £1,513 per person to £3,008 per person.

Various analyses provide further detail with the same exhortation to improve the alignment, including the IFS on schools^[ii], the Kings Fund on health spending and Homes for the North on housing. The need for “re-wiring” of expenditure patterns seems clear but as yet there is no evidence of meaningful follow-through from the White Paper.

Capital spending and its appraisal

HM Treasury’s investment appraisal guidance now gives greater emphasis to the role of transformational change and place-based analysis as does the new Levelling Up Toolkit for transport investment business cases. These changes are a welcome response to criticisms that official investment appraisal guidance may have reinforced spatial inequalities^[iii]. But, it seems unlikely that they will enable meaningful change in the spatial allocation of investment for as long as the government has no LU theory of change or spatial prioritisation framework.

Departmental priority outcomes and the Spending Review

If there is serious intent to deliver the missions of the White Paper, we would expect that LU bending would be given significant, early attention in departmental plans. Our review of the departments’ 2022 outcome delivery plans – briefly published before their deletion – is disheartening. LU only plays a bit part and certainly does not appear to have been embedded in departmental planning and spend allocations with one or two possible exceptions.

The same lack of read-across would seem to be the case with the Spending Review (2021-22). LU is given a separate chapter but not with the ambitions of the White Paper to come. It is presented as an initiative designed to spread opportunity and improve public services where they are weaker, boost living standards where they are lower, restore local pride and empower local leaders and communities. Laudable enough but not the grand missions of the White Paper. And the price tags on its proposed actions are in the thousands and millions not billions. If SR 2022 treats LU in the same way, it’s likely to be hello Truss and farewell Levelling Up.

Read our next blog for what needs to be done to make LU happen.

^[i]See Martin, R. et al (2021) Op. cit. for a development of this argument.
^[ii]Ogden, K. et al. (2022). Op. cit.
^[iii]For criticisms of the Green Book and HM Treasury response, see the following: