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The next PM should radically rethink levelling-up funding – here’s how

Exclusive analysis of the Shared Prosperity Fund shows it is not allocated according to need.

By Jack Shaw

Tackling the social and economic inequalities that exist across the country is a long-term project. Few anticipated that Boris Johnson would reverse decades of under-investment within four years, but we are yet to see tangible progress on the outgoing Prime Minister’s flagship policy of “levelling up”. To put it simply, the rhetoric has failed to live up to the reality: regional inequalities have increased since the 2019 election while the spending gap between the north and London has widened.

The reasons why attempts to tackle regional inequalities in the past have not succeeded are well-known, and yet the government has repeated these mistakes. It has failed to provide the resources needed to meet the challenges our communities face, and it has failed to distribute those resources to the places that need them the most.

Over the past six decades only £3.5bn per year has been earmarked for tackling inequalities, according to analysis by the Bennett Institute for Public Policy. Often centrally controlled and short-term, the peer Robert Kerslake, chair of an independent inquiry into the UK’s spatial inequalities, described previous attempts as little more than an “under-powered peashooter” and “sticking-plaster policies”. And the spending profile appears even less generous when compared with Germany’s Aufbau Ost programme, which has transferred £55bn from West Germany to East Germany each year for the past three decades with the intention of rebalancing the inequalities brought about by the Cold War.

The UK-wide Shared Prosperity Fund, set up to replace the European Structural and Investment Funds following the UK’s exit from the EU, illustrates the limitations of the government’s approach. A total of £2.6bn will be allocated over three years – or £873m per year, on average – which falls short of the £1.5bn its EU predecessor provided each year.

The government has defended its reticence to spend more by pointing to its stated ambition to “rewire” existing public expenditure, but that’s not a quick fix, nor is it bearing fruit. And with public expectations for change in the immediate term high, more needs to be done.

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The next prime minister should return to basics. One option is to enshrine in law a long-term national spending commitment to correct regional imbalances, which could generate tens of billions in investment. Westminster does not have an aversion to setting spending targets, having allocated 0.5 per cent of GDP to international aid each year – until recently 0.7 per cent – while leadership candidate Liz Truss has committed to increasing defence spending to 3 per cent of GDP. The approach certainly bears fruit: the UK is one of a handful of countries to consistently meet its international aid commitment. The Levelling Up and Regeneration Bill passing through parliament presents a ready-made opportunity to ensure this commitment becomes law. The mechanism government should use to distribute funding requires further investigation, however. Two plausible options are further devolution and a new formula for the English regions, but what is clear, despite receiving less forensic treatment, is that the current funding formulae that the government relies on are insufficient and need a radical rethink.

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Beyond the fact that it will distribute less total funding than its European predecessor, the Shared Prosperity Fund provides, yet again, another example of governmental failure to properly resource the levelling-up agenda. More than half of England’s local authorities receive less than £1m per year from the Shared Prosperity Fund. Areas of relative deprivation such as Luton, Slough and Mansfield fall within this camp and it is difficult to see how investment at this small scale will meet the Shared Prosperity Fund’s broad investment priorities, outlined in the Levelling Up white paper, to improve well-being, healthy life expectancy and civic pride, and increase productivity and reduce crime.

The government has sought to provide an element of continuity by distributing funding in line with previous EU allocations, but it’s not clear why given the priorities of the Shared Prosperity Fund and the European Structural and Investment Funds are different. Also, given that allocations for the latter were decided prior to 2014, the Shared Prosperity Fund doesn’t take into account how the UK has changed in the past eight years. In short, the formula underpinning the Shared Prosperity Fund bears limited relation with its objectives and doesn’t reflect any locally recognisable need or deprivation.

It’s not that politicians are wholly unaware of this. When Rishi Sunak claimed at a recent hustings that he “changed the funding formulae” in order to “correct” previous iterations that shoved resource into “deprived urban areas”, the Welsh Minister for the Economy, Vaughan Gething, criticised the former chancellor for rejecting the Welsh government’s request for a Shared Prosperity Fund formula “based on need”. Research by the Institute for Fiscal Studies also found that the formula the government set out for Welsh councils was “flawed”. Indeed, the Levelling Up Secretary, Greg Clark, has described in the past the “very complex” and “difficult exercise” of getting allocation formulae right.

The same could be said in England given per capita allocations across regions do not align with need, with some deprived regions and the authorities within them receiving less relative to their peers.

Looking at the most deprived authorities in England (see chart below), per capita allocations of the Shared Prosperity Fund vary significantly. Despite deprivation being primarily concentrated in parts of the north-west, this is not represented in its allocation, according to our exclusive analysis of Shared Prosperity Fund allocations.

If we turn to the authorities that received the highest amount of funding per capita, it’s difficult to justify why, for example, Cornwall and the Isles of Scilly received three-and-a-half times more than Redcar and Cleveland, even if internal estimates by Cornwall Council suggest that it too has been short-changed (see chart below).

The result is that there are more affluent regions receiving more from the Shared Prosperity Fund than their deprived counterparts, which is mirrored across individual authorities. Cornwall receives more than double the rest of the south-west. In this context, it’s clear the Shared Prosperity Fund is not being targeted where it is most needed. This begs the question: what should the next funding system look like?

To better align with need, future funding streams should take a broader approach to place, one that includes poverty, quality of life, natural capital, well-being and civic pride. The “capitals framework” in the Levelling Up white paper provides an opportunity to think afresh how growth is valued in the Shared Prosperity Fund formula. The UN Sustainable Development Goals, which have been adopted at home by local authorities and internationally, provide another option.

As the government’s focus turns to what comes after the Shared Prosperity Fund, it should take another look at how it designs funding streams to ensure that their formulae truly account for need and are best-placed to tackle regional inequality.

[See also: A Liz Truss government means the return of the UK's radical right wing]