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Derelict former mining houses in South Wales

Levelling up: the quarrel over who gets funding is a sideshow to much bigger obstacles

In the budget, Chancellor Rishi Sunak confirmed a £4.8 billion Levelling Up Fund to help reverse 40 years of growing inequality across the UK’s regions. This stems from the Conservatives’ 2019 manifesto commitment to close the economic gap between the north and south.

Local areas in England will be able to bid for £4 billion, and Scotland, Wales and Northern Ireland for £800 million when the first round of funding gets underway in 2021-22.

There is zero chance that these substantial sums of money will have the desired effect without far-reaching reforms – even ignoring the current dispute over Conservative areas dominating the list of priority places. That was the conclusion of a recent report from an ESRC-funded project, LIPSIT (Local Institutions, Productivity, Sustainability and Inclusivity Trade-offs), which we co-authored.

The scale of regional inequality was recently laid bare in an analysis from the Institute of Fiscal Studies. It found that productivity and earnings in London are a third to a half higher than the UK average.

Wales has the lowest productivity and earnings, approximately 15% below the UK average and around 40% below London. Yet at the same time, inequality is far higher within London than in any other part of the UK.

Why the existing system doesn’t work

In the LIPSIT report, we argued that the key cause of the growth in regional inequality is what happened to parts of the country that suffered most from the late 20th century decline in industries like coal, steel and car-making.

These areas have reinvented themselves to an extent, but with jobs such as working in online retail warehouses, which offer little opportunity for upskilling and productivity growth. We refer to these areas as being stuck in “low skills equilibria”, meaning the supply of and demand for highly skilled people are balanced, but at a low level.

Other countries, cities and regions that suffered similar de-industrialisation have managed to avoid this fate. Notable examples are Brenta in Italy, the Ruhr Valley and Hamburg in Germany, and San Antonio in the USA.

We investigated why the UK has done worse, and found that the English institutional arrangements do not foster the necessary conditions for recovery. We then identified five linked policies that have often made the difference elsewhere:

  • Identifying firms and sectors with the potential to create good jobs. These are often not the “growth firms” and winning sectors that UK policy prioritises, such as biotech and artificial intelligence. It’s about targeting sectors that generate the greatest benefits in terms of productivity and knowledge transfer rather than simply attempting to maximise employment.

  • Carrying out focused inward investment activities to attract and retain these firms.

  • Helping firms to innovate and change their product-marketing in ways that increase the need for highly skilled workers. South Korea did this by investing heavily in its electronics sector.

  • Tailoring training and education to the resulting demand. This is done best by people with detailed local knowledge rather than trying to impose it from the centre.

  • Adopting town planning and transport policies that help people get to these jobs. For example, subsidising bus routes.

Once you have this combination of policies, they need to be coordinated effectively. The government, businesses and the education sector need to work in partnership. Local government needs the ability and resources to plan strategically. And it needs to be accountable to the local people, letting them know where money has been spent and what it has delivered.

Rishi Sunak delivering the March 2021 budget
The Levelling Up Fund is one of flagship policies of Chancellor Rishi Sunak’s budget. EPA

These conditions don’t exist in the UK. It is difficult to coordinate policies because the power to make local industrial strategy and to implement it sometimes reside in different agencies. For example, the combined authorities that exist in some parts of England set skills strategies, but education authorities fund training.

Meanwhile, funding is allocated using multiple competitions for small pots of money, wasting resources in writing unsuccessful bids. The UK has also not prioritised having economic development specialists in the right local roles, so the ability of officers is very uneven, while all too often Whitehall makes decisions without telling the relevant local people.

There is too little long-term funding and officers are uncertain about who is responsible for what, making it very difficult for everyone to work in partnership. Finally, there is weak local accountability for industrial strategy and very little citizen engagement.

The Levelling Up Fund does nothing to alleviate these problems. And because it is based on a bidding model with politically contentious evaluation criteria, it might make things worse.

Making success more likely

None of this means the UK government should abdicate responsibility, or abandon national objectives and programmes. It should act more like a hands-off leader and foster stronger local institutions. We recommend a four point plan:

  1. Powers should no longer be split between multiple authorities.

  2. The current system in which councils and mayors’ offices bid for regional development funding should be replaced – either by a formula system (similar to Scotland) or a rolling five-year settlement. Funding should also be linked to a negotiation through which local authorities set economic objectives that are only challenged by Whitehall if they fall short of national targets.

  3. The government should make it easier to recruit good development specialists at local level by signalling that it will make local institutions bigger and stronger and set higher standards for them.

  4. Local accountability needs to be strengthened, partly by setting up a national brand for levelling up. The government should encourage local institutions to use this to improve how they engage with citizens, including using the economic objectives agreed during the funding process to create visible targets.

These reforms won’t happen overnight, but the government should set the direction of travel soon. It needs to build on the post-COVID recovery plan and harmonise with the UK’s climate change policies.

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