Published on 21 September 2022
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Levelling Up: Where next with bending the spend

In their first blog Geoff White, Peter Tyler and Colin Warnock argued that Levelling Up needs public mainstream services/investment to be bent to priority places but that little has been done on this to date. In this second blog they offer three recommendations to bend the spend to make Levelling Up happen and contribute to economic growth.

Recommendation 1:  Align public spend and investment, procurement and location with spatial need

The criteria and procedures for allocating current spend and making investment decisions should factor in the degree of need at local level. This should be done in a transparent, evidence-based way and feature in guidance given to government departments and agencies in the form of a “Levelling Up Formula”. The method to do so will require detailed work to establish need and the expenditure gap in each policy area.  The work should be the subject of a Royal Commission or some other cross-party body over the next year with a review every five years.

The appropriate spatial level would be for the review to decide in the light of the way devolution in England is playing out (e.g. via Combined Authorities) and the expectation that some of the mainstream funding considered would end up being devolved.  Priority should be given to consideration of the appropriate Levelling Up (LU) formula for spend on education, skills and employability and strategic transport (both inter-city and city-town) since these are fundamental in overcoming spatial inequalities in income and productivity.

As well as specifying an LU formula for revenue spending, the review should also consider how LU should be embedded in guidance on the appraisal of public investment, procurement and relocation decisions. For example, it should examine the possibility of valuing a high skilled job for a resident of a left-behind place more highly than for a resident in another. This is effectively the use of a shadow wage. The Treasury has resisted this in part because of concern that project proposers would abuse the use of shadow wages if given discretion to set their own rates. But, as in the Social Cohesion Fund guidance, the rates could be determined centrally for categories of areas as a function of their need. The latter would have to be identified consistently with the “Levelling Up Formula”. Therefore, it would make sense to consider the use of some mechanism for baking LU considerations into public investment and procurement decisions at the same time as devising the Levelling Up Formula.

Recommendation 2: Align opportunity with need

For LU to succeed, opportunities for left behind areas must be identified and provided as well as their needs addressed. There is a wide range of central government initiatives to identify and take on future challenges and opportunities. Its 2021 Industrial Strategy with its four grand challenges had a place-based dimension. There are also strategies for the transition to Net Zero and for developing post-Brexit trade and inward investment.

When you add in the substantial volume of public procurement and the plans to relocate public offices out of London and the South East, it can be seen there are a significant number of policy levers the government could pull to foster LU from the demand side.  These should all be given an explicit spatial dimension and the needs of local areas (as defined for the proposed “LU formula”) factored into their design and delivery. The Treasury is now asking departments how their spend is allocated by country and region. It could extend this to ask how they are building in spatial need into their support, procurement and relocation decisions and insist that this forms an explicit part of their strategic objectives and outcome delivery plans against which their performance can be judged.

The LU opportunities provided by these various policy levers should be collated and coordinated into an overall Levelling Up Spatial Opportunities Framework.  This would then provide a strategic context for the decisions made more appropriately by devolved administrations and Combined Authorities to use their devolved funds to link specific opportunities and needs in their areas.    

Recommendation 3: Engage the private sector

LU will only happen with a significant commitment by the private sector. Decades of under-investment have demonstrated that, in left behind places in particular, land and property values are often too weak to overcome deep-rooted market failures.  So the scope of policy interventions in support of LU needs to go wider – reaching into business rates, capital allowances, and regulation.  

The government’s commitment to Freeports, as well as its willingness to pull the business rates lever during Covid-19 (and potentially again with the current energy crisis), demonstrates the ability and capacity to target fiscal incentives both sectorally and spatially. Evidence from the experience of the first round of enterprise zones in the 1980s showed clearly that these could facilitate powerful ‘flow of funds” into left behind areas from institutional investors.

The Government is currently consulting on changes to the prudential regulatory regime for insurance firms (“Solvency II”).  If these reforms are delivered, they could see a substantial reduction in the risk margin which long term insurers are required to adopt, as well as other changes which will support investment in long-term assets. To illustrate the potential, recent work by the Impact Investing Institute estimates that, if Local Government Pension Scheme (LGPS) funds targeted on local impact investing were increased to just 5% of the total, this would unlock £16 billion. 

In short, there has never been a better time to position left behind places to attract institutional investment.  The challenge for local authorities and fund managers is to develop a coherent investment strategy at a spatial scale which will align need with opportunity and package this in ways that will appeal to investment managers looking for long-term environmental, social and governance (ESG) opportunities. The LU Spatial Opportunities Framework would help guide institutional investment to those places with strong alignment of need and opportunity.

Make Levelling Up part of the growth package

Levelling Up has been a policy priority in the UK for over a century.  Governments of all colours have understood the issues and experimented with policies to reduce spatial inequalities.  Despite success stories and useful lessons, all of these efforts have failed to bring about sustained improvement.

At the time of writing, the cost of living crisis and the operation of critical national services are understandably at the top of the government’s agenda.  It looks as if the Truss administration will be keen to promote economic growth to help address these issues.  LU should be an essential ingredient in the growth package. It is not just about addressing inequalities. It is about ensuring that the productive potential of all parts of the country is harnessed to the growth purpose. 

More rounds of specific funds and regular reports to Parliament are not sufficient to bring about the change required.  LU can only be successful if clear spatial choices are made in the national interest, if the centre is permanently re-wired to ensure that the mainstream can be tilted to priority places and if local devolution of all relevant funding streams becomes a reality.  Let’s hope the Truss government can rise to the challenge and not just kick the LU can down the road – yet again.

Read the first part of the blog.

Authors

Geoff White

Geoff White is an economist who worked in HM Treasury and the Department of Trade and Industry before directing a wide range of policy evaluations with PwC, Public and Corporate...

Professor Pete Tyler

Affiliated Researcher

Pete Tyler is Emeritus Professor of Urban and Regional Economics at the University of Cambridge, UK, and Emeritus Professorial Fellow of St Catharine’s College, Cambridge, UK. His research interests cover...

Colin Warnock

Colin Warnock is an economist specialising in the appraisal, monitoring and evaluation of economic development, housing and regeneration projects.  His evaluation experience spans four decades and includes enterprise zones, regional...

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