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An article by Glenn Athey, Mike Spicer, and Professor Peter Tyler
On the day before the UK Prime Minister convenes the first Council of Nations and Regions of the new UK government, this article - originally published in the Economic Development Insights Newsletter - discusses arguably the biggest factor holding back progress: the proper funding of local and regional economic growth and development.
A funding system to support economic growth in the nations and regions
This article is partly based on a study – The Future of Growth Funding - completed for the Local Government Association in March 2024, we analysed local growth funding between 2015 and 2024 and consulted over 100 local authorities and civil servants. This article represents the sole views and reflections of the authors – between us we have almost 100 years of experience in local and regional economic development and urban regeneration, and have witnessed the transition from early attempts at urban policy in the 1970s right through to today.
The socio-economic challenges remain significant
As 2025 nears, we must reflect on the significant progress and leaps in government policy that are required in order to begin to address the UK’s large and long-standing disparities in local and regional economic performance.
Regional inequalities have worsened over the past 20 years, with many regions now falling behind the former East German states
Research by Martin et al shows that according to the Organisation for Economic Co-operation and Development (OECD) (2020a), at the level of local TL3 areas, regional economic inequalities in the UK are among the very worst across OECD countries, with only Columbia, Turkey and Hungary having more pronounced disparities.
In a recent article Glenn provided updated statistics from the OECD which shows that 8 out of 12 UK regions and nations have a GVA per worker lower than the worst performing East German State. This extends to productivity rates, where the difference between London and the other UK nations and regions is greater than that between States of West Germany and former East Germany (Productivity Institute).
Figure 1: GVA per worker in 2020 (2015 values - US Dollars) in selected German Länder and UK nations and regions - UK nations and regions with GVA per worker below the lowest performing former East German Lander (Thuringia) - are highlighted in orange
In this map – We can see the stark differences in GVA per head between local authority areas in the UK.
Figure 2: GVA per head in UK local authority areas in 2022
Poor economic performance has stark long-term impacts. The proportion of children in relative poverty has risen in every city except Belfast and Basildon, and in-work poverty is up almost everywhere (Centre for Cities).
How much would it cost to address the scale of the regional challenge in the UK?
Research shows (Martin et al, 2021) that expenditure by the UK Government on regional policy has been about approximately £174.5 billion (2020 prices) over 1961-2020. This is equivalent to approx. £3.5 billion per annum (or around 0.15% of GNI). EU funds added another £1.4 billion or 0.12% - so total since mid-1970s around £4.9 billion per annum (0.27% GNI). This compares with £14.5 billion (0.70% GNI) in international aid in 2019. This has to be contrasted with the German Aufbau Ost (‘building up’ East Germany programme) which spent some €2 trillion since 1990 (= approximately £55 billion per annum).
The UK2070 Commission estimated that addressing regional inequalities would require an investment of £250 billion over 30 years. In early 2024 we were talking about pots of money for local growth of, at best, of between £4.7 billion and £5 billion per annum. Clearly this is not enough to facilitate the reversal of economic decline and living standards in our regions.
Funding for local and regional economic growth has been 'a patchwork quilt' that is not agile to changing needs
Over the past decade, local growth funding has been fragmented and 'a patchwork quilt': Over £13bn of funding has been provided for levelling up since 2019 via 12 different funding streams. Over 400 bodies are recipients of this funding encompassing over 350 local authorities, 21 county councils, 12 combined authorities, 27 Local Economic Partnerships, 11 Freeports and 22 other forms of partnership/body (University of West London).
There are a variety of funds, eligible uses, timescales of expenditure and monitoring and claims processes. Some are allocative / some are competitive. The Town Deals were offered to 101 selected towns. The UK Shared Prosperity Fund was allocated to places based on a formula. The Levelling Up Fund and Towns Fund are supporting more than 1,300 individual projects between them, while the UK Shared Prosperity Fund is supporting more than 3,000 projects.
Local growth funding is static and often out of date for today’s socio-economic conditions and challenges. The UKSPF maintains the EU structural fund distribution model - made on the basis of EU Structural Fund allocations, which used evidence from 2011/12. A lot has changed since then.
Funding formulas are also designed to fail areas of need. In 2022, the University of Teeside calculated for the Northern Powerhouse that if future allocation of the SPF and LUF mimics the allocation of pilot funding so far, some areas in need of levelling up would find themselves worse off, such as Tees Valley – one of the most deprived regions in the UK- where annual funding could potentially be cut from £46m to £21m per year, a reduction of £37 per person per year.
Local growth funds are complex & changing. Funding mechanisms and grants have changed every 1-2 years. Some funds are allocative / some are competitive.
Local growth funds are short-term. There is a quick turnaround in applications, often with weeks or a few months until a funding application deadline. Funding lasts from 9 to 36 months. Central government expertise changes and shifts. This is in an environment with significant pressures on all local government resources. The result is underspend.
There has been significant underspend of local growth funding. As the March 2024 Public Accounts Committee Report noted recently, as of September 2023, local authorities had been able to spend only £1.24 billion, just over 10 per cent, of the promised £10.47 billion from the government’s three Levelling Up funds (Towns Fund, Levelling Up Fund and UK Shared Prosperity Fund). It found just 64 of more than 1,100 projects have so far been finished, while more than 80 per cent of those due for completion in this month will miss that deadline.
There have been consistent warnings regarding underspend – with the National Audit Office warning of this in 2023 (Levelling Up Funding to Local Government).
Local growth funds have been predominantly capital funds. Capital funding programmes often lack flexibility to adjust plans as projects progress or unforeseen circumstances arise. Cost inflation has been a recurring challenge, making it difficult to implement some projects by the time funding has been awarded. While capital funding can be used to build infrastructure or purchase equipment, it does not cover ongoing operational costs. This can lead to difficulties in maintaining and utilising the funded assets. Anyone familiar with capital projects knows that they can be notoriously challenging to manage and keep to schedule. The result is - more underspend. There is currently a chronic shortage of revenue funding for economic development projects and services.
Capacity constraints and costs of bidding. A University of Sheffield (2022) study and survey found that 75 per cent of local authorities had to pay costs beyond those provided as part of growth funding. They further estimated that for Round 1 of the Levelling Up Fund, authorities spent £14.7m on bids that were unsuccessful, with £5.5m spent on bids that were unsuccessful and not supported by capacity funding.
There has been a failure to install effective monitoring & evaluation and a lack of recognition of existing local government assurance procedures. To date the funds have had limited evaluation and there was virtually no evaluation for schemes between 2010 and 2018. This is a key issue given the repeated calls for an enhanced evaluation evidence base in the United Kingdom made by the National Audit Office.
Lack of joined up thinking in Whitehall translates into funding silos in regions and localities. There has been a complete lack of joining up central funds – including transport, local growth, and climate change. The local rural economic agenda disappeared for several years, making a surprise reappearance as the Rural England Prosperity Fund was bolted onto the UKSPF.
Local and regional growth funding has significantly decreased since 2008. During the Coalition Government 2010-2015, it was estimated that funding for local and regional economic development and regeneration was at about one-third of 2008 levels. By 2022, the government planned to spend even less on English regional development than previous Conservative governments (2014-21) despite levelling up being a flagship policy.
In the decade up to June 2024, the UK government seemed to have learnt nothing from past policy
Perhaps the biggest failure has been to learn from the past. As experienced professionals and researchers in this field, we’ve seen it all before: competitive grant funds (1980s and 1990s), movements to funding integration of ‘single pots’ from Whitehall in the 1990s and 2000s.
What’s clear is that we need to start learning from the past. There needs to be greater learning from policy and practice, and adapting and developing policy and delivery to continually improve.
But don’t just take our word for it - in 2023, the National Audit Office found that there was significant scope for the Department for Levelling Up, Housing and Communities to improve its understanding of what has worked well in previous local growth programmes and could do more to assess whether individual policies have had their intended impact. This was further validated by discussions with local authorities as part of this study.
Local growth funding reflected the state of national government 2015-2024
We sincerely hope that government improves, and we have our 10–point plan for the future outlined below. However – if we think about it, the approach to local economic prosperity reflects the government and policies we had for almost a decade between 2015 and 2024. They were characterised by:
Policy drift and ad hoc decisions: a lack of clear national government policy for the national and subnational economy incl. how devolution contributes.
Poor levels of trust & capacity: a lack of knowledge and trust of existing local government powers, capabilities and assurance procedures and no priority for building operational expertise.
Instability and discontinuity: with many abandoned policies such as the UK Industrial Strategy, and CSR periods which bear no relation to economic cycles, or the timelines of national infrastructure projects, and constrain long-term funding.
A massive implementation gap: made evident by White Papers with sky high ambitions but insufficient resources and almost zero delivery planning.
Government silos based on departments, capital, revenue, CSR periods - whereas ‘place’ requires joined up solutions (and what about climate change…?).
No subsidiarity system that follows the principle of the right scale and administrative level for the highest impact, and the best administrative level to make decisions.
The future?
Looking forward constructively, the UK government needs to urgently set out a national agenda which includes:
Clear policy objectives
Trust & capacity building
Stability & continuity
White Papers with credible delivery plans and budgets
Restore the Cities and Local Growth Unit or create other similar joining-up initiatives
Clear and rational subsidiarity arrangements
We sincerely hope that much of this is set out by the Prime Minister and cabinet colleagues on October 11 at the first Council of the Nations and Regions. We need to think more about the system for economic growth, as much as the ‘projects’ and activities that are funded.
Much of the growth funding made available over the past decade has been to support specific projects and activities. There has been little thought to the machinery of government, long-term capacity or building strong and stable links and relationships between local and central government, the private sector, education sector, non-profit sector and communities.
There are multiple ingredients for success or system requirements that enable economic growth, development, and regeneration, such as those outlined in the LGA report. i.e. resources are needed to support the ‘system’ that helps local and regional economic development as outlined in the figure below.
Figure 3: The system that is needed to support long term local and regional economic development and growth
Our 10-point plan for the future of local growth funding
It’s our job, as the authors of this article and with our long-standing vocation in this field to provide some constructive advice. There are more details in the report – but in sum, here’s the outline of our 10-point plan which we think makes a lot of sense. We appeal for clarity and consistency in central government policies that can help to enable local and regional economic growth and development.
To realise effective local and regional economic growth and development, and address the long-standing disparities in economic performance between the UK’s nations and regions, the UK government should:
Set out a clear national economic policy that articulates role of local economies and devolution
Match resources and delivery mechanisms to the scale of challenges and opportunities
Long term challenges and opportunities require long term solutions – which means a funding commitment of at least 20 years, and funding cycles of six to eight years
Build operational capacity and capability
Provide capital funding that aims for quality, need, opportunity, impact and a more predictable funding pipeline
Provide a bigger role for fixed allocations but retain better designed competitive funds where appropriate
Design funding mechanisms that promote partnership working and relationship building between tiers of government and stakeholders
Encourage match funding and leverage where suitable and can improve impact
Design a funding system that builds-in efficiency and impact
Establish processes and compliance that are clear and uniform, supported with training and use existing ‘fit for purpose’ approaches
Hopefully some of these points will be addressed on 11 October at the Nations and Regions Summit.
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