North East Devolution and Levelling Up

Real levelling up or just more dabbling?

As we await publication of the delayed Levelling Up White Paper, it is worth considering in greater depth than we have before how much we know so far about the funding that is likely to be available, and to place it in the context of earlier attempts at North East regional economic development this century.

According to the Centre for Cities in 2009, based on a report commissioned by the government from consultants PwC, England’s nine regional development agencies (RDAs) were spending about £1.9bn a year. Of this, the most significant spending was 32% on regeneration (place), 17% on the umbrella Single Regeneration Budget, 17% on business development and competitiveness and 8% on labour market and skills interventions (people). Other spending included 12% on national programmes.

RDA budgets were weighted heavily in favour of lagging regions, led by the North East. The Centre for Cities found that spending per head in the North East between 2002-3 and 2006-7 was £523 (£105 per annum), significantly ahead of second-placed Yorkshire & Humber’s £307 and the England average of £223. East of England got only £94.

With a population of roughly 2.6m, that totalled about £271m a year in the North East during that period.

Independent research by this author found that the North East’s RDA, One North East, invested around £3bn during its 13-year lifespan between 1999 and 2012, an annual average of £230m, and from 2007 onwards also managed the region’s European funding of £45m a year on average, bringing its total annual spend during its peak years to £275m.

The Centre for Cities and this author’s research therefore arrived at broadly the same figure.

When the Coalition Government abolished RDAs and replaced them with 38 local enterprise partnerships (LEPs) it followed up by introducing Local Growth Funds (LGF) and committed to annual funding of £2bn from 2015-16.

At this point the North East ceased to top the league table of recipients. The region’s two LEPs, North East and Tees Valley, together received total LGF of £505m for the six years 2015-20 out of a national total of almost £10bn.The region received £194 per head of population over the period, close to the top of the second tier of grants of between £158 and £196.

On an annual basis this corresponded to £84m a year for the region, or roughly £32 per head.

The North East was still, however, top of the league for European funding. For the seven years between 2014 and 2020 it was allocated 739 million euros (about £620m), equivalent to about £88m (or £34 per head) per annum. This funding however was no longer managed regionally but centrally, unlike under the RDA; the region now simply advised.

Finally, extra funding was available to combined authorities which chose to do devolution deals with the government. Tees Valley is receiving £15m a year for 30 years from 2017 and North of Tyne £20m. a year from 2019, while the four councils south of the Tyne are receiving nothing, having declined to do a deal in 2016.

Had these four agreed a deal, the then seven-council North East Combined Authority (NECA) would have received £30m a year instead of the £20m going to North of Tyne. This would have placed NECA near the top of the grants league, alongside Greater Manchester, Liverpool and the West of England and trailing only the West Midlands (£38.5m) and West Yorkshire (£38m).

Taking the Tees Valley and North of Tyne grants together and applying them hypothetically to the region as a whole, they add £35m or about £13 per head to the funds available for regional economic development.

The total thus fell over a decade by almost a quarter from £271m (£105 per person) at the peak of the RDA’s spending power to £207m (£79 per person).

Control of some other existing funds has also been devolved to combined authorities, notably the adult education budget (£29m over two years to Tees Valley and £23m for one year to North of Tyne) and the Transforming Cities Fund for intra-city transport (£75.5m over two years to Tees Valley).

WHAT DOES THE FUTURE HOLD?

The government has announced a Levelling Up Fund (LUF) of £4.8bn over four years and across the whole UK. The Fund operates on the basis of bids by local authorities, not regional allocations. Ten of the North East ‘s 12 local authorities are among the 123 UK-wide to rank as top priority for funding. The exceptions are Darlington and North Tyneside.

According to the LUF Prospectus: ‘While the Fund is open to every local area, it is especially intended to support investment in places where it can make the biggest difference to everyday life, including ex-industrial areas, deprived towns and coastal communities’.

In the first round of 106 allocations from the LUF, totalling £1.7bn, the North East had five successful bids worth a total of £99.8m from County Durham (for Bishop Auckland), Newcastle (two bids), Stockon (for Yarm and Eaglescliffe) and Sunderland. Only Sunderland had neither a devolution deal nor a Conservative MP.

If the region receives the same proportion in subsequent rounds (about 5.9%) it will get about another £170m. Added to the £99.8m already allocated, that would give roughly £270m over four years or £67.5m (about £26 per person) per year.

The next most significant source of funding for the North East is the UK Shared Prosperity Fund (SPF), due to come into operation in April 2022 as a replacement for EU funding. The funding profile for the SPF was announced in the Autumn 2021 Budget and Spending Review: it will spend £0.4bn in 2022-23, £0.7bn in 2023-24, and £1.5bn in 2024-25 and thereafter. This compares with approximately £2bn a year from EU funding, The early years gap may be partly filled by EU funds allocated before the UK left the Union and still being spent, and partly explained because agriculture is now funded separately.

With only three months until it comes into operation, how the North East will fare in the distribution of the SPF remains unclear. Even if it fares as well as it did in 2014-20, topping the regional league table, the overall size of the new Fund means it can expect no more than 75% of what it received then, even in 2023-24 when the SPF is due to reach £1.5bn. That will mean building up to a maximum of £66m or about £25 per person per year, compared with the £88m (£34 per person) under the EU.

Total annual funding for development in the region, having fallen from £271m (£105 per person) at the peak of the RDA’s spending power to £207m (£79 per person) following the abolition of RDAs, is therefore set to fall further to a maximum of £133.5m or £51 person based on the LUP and SPF.

However, alongside the LUF and SPF are a number of other funds serving broadly similar purposes. The £3.6bn Towns Fund is for struggling towns across England. Of 101 offers worth £2.3bn so far seven worth a total of £172.2m have come to the North East. The largest grant of £33.2m went to Bishop Auckland, with others to Blyth, Darlington, Hartlepool, Middlesbrough, Redcar and Thornaby. Once again, all recipients were in areas with either devolution deals or Conservative MPs.

Again assuming a similar proportion of the Towns Fund’s remaining £1.3bn comes to the North East as has already done (about 7.5%), the region can expect another £97.5m. Added to the £172.2m already allocated to the region and spread over four years, as the LUF is, this gives the region a total of about £67.5m, or £26 per person, per year

The £1bn Future High Streets Fund (FHSF) provides grants to renew and reshape town centres and high streets in a way that drives growth, improves experience and ensures future sustainability.  Allocations totalling £830m have already been announced for 72 towns including £92.7m to six in the North East – Bishop Auckland, Middlesbrough, Blyth, South Shields, Stockton and Sunderland. All but South Shields and Sunderland have either a devolution deal or a Conservative MP.

There appears to be some overlap between the Towns Fund and the FHSF – though this is far from clear – but again assuming the remaining £170m of the latter is still available and that the North East continues to receive the same proportion as before (about 11%) it can expect roughly another £18m bringing its total to approximately £110m. Again spreading this over four years, the region would receive £27.5m, or roughly £11 per person, per year.

Two more funds are aimed at levelling up but are much smaller and may be banded together for the purpose of estimating the level of investment in the regional economy.  

The £220m UK Community Renewal Fund will provide funding to help places across the UK prepare for the introduction of the SPF (see above). Of 225 grants allocated, mainly of under £1m, 14 worth a total of £7.7m have come to the North East – to County Durham, Gateshead, Sunderland and the North of Tyne and Tees Valley combined authorities.

The Community Ownership Fund will provide £150m over four years to support community groups throughout the UK to take ownership of assets and amenities at risk of being lost. No allocations have yet been made.

The £370m in these two funds combined and spread over four years gives a total of £92.5m a year. Assuming a generous 10% share for the North East, it will receive £9.25m a year, or about £3.50 per person.

It is now possible to estimate the amount that is known or can reasonably be expected to come to the North-East to support the government’s manifesto pledge to level up every part of the UK.

Taking all these funds together, the best the region can hope for by end of the current parliament in 2024 is to be receiving annual levelling up funding of around £237m or £91 per person. That is less than £271m (£105 per person) the RDA invested in the regional economy in the first decade of this century but higher than the £207m (£79 per person) under the system of LEPs and combined authorities in the second decade.

CAVEATS

Several important caveats must be made about these calculations. While not prepared by an expert in the field of local government finance, they are the work of a long-term close observer. They are based on official documents and so are not, the author hopes, to be fairly characterised as back-of-an-envelope estimates or as plucked from thin air.

Some assumptions that have been made, such as the proportion of national funding that will come to the North East, may turn out not to be justified. Some funding included in the calculations has already been allocated and should not be regarded as ‘new money’. It is included because it will continue being spent and feeding into the regional economy until the end of the current parliament in 2024.

Any assumptions made here about the level of future funding have deliberately tended to be on the optimistic side. Any errors are likely to have over-estimated the amounts that will to come to the region. Some figures are rounded up or down for convenience.

The amount invested in regional development is notorious among scholars worldwide as being difficult to calculate. Nevertheless, it is hoped – in the sense of wanting to provide the reader with a fair picture of the current state of play – that the sums given here will prove to be reasonably accurate at the time of writing.

Equally, it is hoped in another sense – that of wanting a higher level of investment in the North East economy – that they are significant under-estimates.

FUNDING ROADMAP

Whether that will be so should become clearer with publication of the Levelling Up White Paper, which according to media reports will include a Funding Roadmap.

With a three-year Spending Review completed only in the autumn, it seems unlikely that any extra money specifically for levelling up will become available. Any extra funding for lagging regions like the North East will therefore have to come through relaxing austerity and rebalancing mainstream budgets, especially the local government settlement.

The provisional settlement for 2022-23 has already been announced at £53.9bn and is under consultation until January 13. There is no indication that the settlement for the coming year has been rebalanced to favour lagging areas, though it could be by 2023-24. The Department for Levelling Up, Housing and Communities said:

‘The government is committed to ensuring that funding allocations for councils are based on an up-to-date assessment of their needs and resources. The data used to assess this has not been updated in a number of years, dating from 2013-14 to a large degree, and even as far back as 2000. Over the coming months, DLUHC [the Department for Levelling Up] will work closely with the sector and other stakeholders to update this and to look at the challenges and opportunities facing the sector before consulting on any potential changes’.

This appears to be a reference to the Fair Funding Review, for which councillors have been waiting almost a decade. Updating could make a significant difference to the government funding that councils receive.

Research by Chris Tambini published by the centre-right think tank Onward found, for example, that as well as council tax still being based on 1991 property values, key data still used to calculate grants to individual councils include child tax credit information based on amounts received between 2008 and 2011, unemployment data based on claimant numbers between 2009 and 2012, and data on single-parent households and children in good health from the 2001 census.

According to Tambini: ‘The current system of council tax is regionally highly regressive, benefiting more prosperous regions and adding disproportionate cost in poorer regions’.  

He argues that although in the long-run fundamental reform of local government financing will be necessary, in the immediate term the government could introduce an interim measure to level up around 30 poorer local authorities mainly based in the Midlands and the north of England at a cost of about £300m.

‘It is time for a brave government with a sizeable majority to address this challenge and fundamentally review the whole system’ he writes. ‘Doing so would not only better reflect the needs of different communities, in the process helping areas to level up, but also ensure that better resourced local authorities continue to innovate to deliver value for money and better services’.

This would also be a step towards achieving two of Levelling Up Secretary Michael Gove’s four declared aims for levelling up: to improve living standards, particularly where they are lower, and to improve the quality of public services, particularly where they are lagging.

The funds discussed above (except perhaps the SPF) seem mainly designed to achieve another of Gove’s objectives – to enhance pride in place, something that can potentially be done more quickly and cheaply than improving living standards and public services and therefore offer the government a more rapid political return.

Reforms like the Fair Funding Review almost inevitably produce winners and losers, and according to the Local Government Chronicle small towns in the north and Midlands could be the biggest winners while some counties and London boroughs are concerned they could lose out.

Prime Minister Boris Johnson said in July that many governments had ‘dabbled’ in levelling up with disappointing results. With little prospect of new money specifically for levelling up over the next three years, eyes will perhaps turn now to the Fair Funding Review. Without radical action on that issue, Johnson and Gove will go down as just another pair of dabblers.