LEVELLING UP

Levelling Up Growth-Enhancing Spending

How the most growth-enhancing items of public spending are skewed towards London and other regions that are already productive.
Neil O’Brien OBE MP, Guy Miscampbell
March 6, 2020
Levelling Up Growth-Enhancing Spending
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It is no wonder some parts of the country feel short-changed. For decades we have piled fertilizer on the parts of our economy that are already flourishing while refusing to water the seeds of growth elsewhere. The PM’s mission to level up poorer parts of the country is vital. To change trends that have gone in the wrong direction for decades will need not a few tweaks, but taking a bazooka to the problem. That means we have to use every tool at our disposal, starting by rebalancing the types of spending that do most for growth towards poorer areas.

Neil O'Brien OBE MP

growht-enhancing-spending-onward

Spending to improve economic growth is lower in less productive regions, and higher in regions that are already more productive.

The Chancellor will need to unwind decades of fiscal decision-making that has left productive spending skewed towards already prosperous places if he is to succeed in “levelling up” regional growth. As this report shows, the most growth-enhancing items of public spending – transport, innovation, housing and culture – are skewed towards London and other regions that are already productive.

This is not new – it has been the case under governments of all political parties for many decades.  Looking in more detail, the analysis reveals that headline figures published by the Treasury conceal even wider variations in the kinds of spending most likely to get the local economy moving:

  • Transport. Capital spending on transport in London was around £6,600 per head between 2007/8 and 2018/19. This was more than three times higher than in the East Midlands (£1,880) or South West (£1,980) and nearly three (2.75) times the average in the rest of England (£2,400).
  • Innovation. Taking direct government spending and research funding for universities together, London saw R&D funding per head nearly twice the UK average – £3,900 compared to a national average of £2,300 over the period 2001 to 2017. The next highest spending was seen in other high productivity regions: the East, South East and Scotland. The share of the core research budget spent in just three cities, Oxford, Cambridge and London, rose from 42.1% in 2002/3 to 46% in 2017/18.
  • Housing. Spending on affordable housing in the current (2016-21) programme is five times higher per head in the capital: £650 per head compared to £120 per head in the rest of England.  Funding to unlock housing supply (including infrastructure to support private housing) is also concentrated in the south: the Housing Infrastructure Fund has spent £115 per head in the East of England, £97 in London, £95 in the South East, and £79 in the South West, compared to £10 in the West Midlands and just £4 in Yorkshire.
  • Culture. Taking Arts Council England spending and direct DCMS funding of national institutions together, London received around half (47%) of the total spending in England over the period 2010/11 to 2017/18. Over the period culture funding per head in London was £687. This was nearly five times the average in the rest of England (£144).

Taking all of this together, it is clear that some regions are receiving considerably less growth-enhancing spending despite being relatively less productive and having lower incomes.  

The richest region, London, is one of the top recipients across all four types of spending. Scotland, followed by the East of England, come next, both with productivity close to the national average.  Meanwhile, regions like the East Midlands, Yorkshire and the West Midlands received less productivity enhancing investment, despite lower than average productivity.

The problem with how we allocate growth-enhancing spending

How we fix it

Transport

The formal process has often historically been overruled, with a bias towards funding projects in London. The process is not transparent.

Too much project appraisal is static, not dynamic, and favours richer areas by using current prices. For macroeconomic and welfare reasons we might want to weight growth enhancing spending towards poorer areas, but wider economic welfare
analysis is rarely carried out in practice.

Science, technology and innovation

Some areas are in a stronger position to generate more and better bids.

UK spending on R&D is heavily focused on early stage research in a small number of research intensive universities. In practice this means funding is concentrated in the richest regions. It may also mean less economic impact than more industrially focused spending would.

Business spending on R&D is more evenly spread across the country than government spending. However, some regions combine both low public
and private R&D investment so are stuck at low levels of innovation.

Housing

London had around 21% of those on waiting lists for social housing in England in 2019. London also has more social housing: 22.6% of homes, compared to just 17.1% in the rest of England. Yet without any assessment of value for money, over half the affordable housing budget is devolved to London.

Money that might fund one social property in London might fund more than one in a cheaper region, but funding rules exclude such areas. Funds for housing infrastructure are very heavily skewed towards the south of England. In both affordable housing and housing infrastructure programmes there is little consideration of the second-round effects of such spending on growth. In some cases data on the distribution of spending per head is not even published.

Culture

Unlike the other fields discussed here, it is not the case that there are strong value for money or costbenefit arguments being made for the current distribution of spending. The current pattern seems to simply reflect historical patterns of spending which hugely favour London.

The economic impact of culture funding is not emphasised enough.

We set out a number of recommendations for rebalancing growth-enhancing spending:
  1. Review the Green Book appraisal methodology to take into account of relative as well as absolute returns to local economies within the project appraisal process.
  2. We should weight BCR’s for the economic and social advantages of more balanced growth.
  3. Central government should publish the business cases for all proposed infrastructure projects, including comparable BCRs.
  4. Government should devolve transport powers to more places in England.
  5. We should devote the growth in the innovation budget to funding streams which are more industrially focused.
  6. Government should ringfence funding for regions that combine low public and private R&D investment.
  7. We should also reform the spending which does flow through universities in ways that would make for a more even spread, as well as a greater economic impact.
  8. Government should review the rationale for the regional distribution of its housing spending.
  9. Homes England should start publishing data in a more timely and transparent way, including spending per head per region.
  10. The Government should immediately drop the 80:20 rule for Housing Infrastructure Funding and affordability rules which effectively limit social housing spending to the south of
    England.
  11. The Government should redirect money away from the national institutions and reinvest the savings in growing cultural provision outside London.
  12. The Government should encourage and build up new institutions in areas where there is a clearer link across to economic development and regeneration.

The problem with how we allocate growth-enhancing spending

Transport

The formal process has often historically been overruled, with a bias towards funding projects in London. The process is not transparent.

Too much project appraisal is static, not dynamic, and favours richer areas by using current prices. For macroeconomic and welfare reasons we might want to weight growth enhancing spending towards poorer areas, but wider economic welfare
analysis is rarely carried out in practice.

Science, technology and innovation

Some areas are in a stronger position to generate more and better bids.

UK spending on R&D is heavily focused on early stage research in a small number of research intensive universities. In practice this means funding is concentrated in the richest regions. It may also mean less economic impact than more industrially focused spending would.

Business spending on R&D is more evenly spread across the country than government spending. However, some regions combine both low public
and private R&D investment so are stuck at low levels of innovation.

Housing

London had around 21% of those on waiting lists for social housing in England in 2019. London also has more social housing: 22.6% of homes, compared to just 17.1% in the rest of England. Yet without any assessment of value for money, over half the affordable housing budget is devolved to London.

Money that might fund one social property in London might fund more than one in a cheaper region, but funding rules exclude such areas. Funds for housing infrastructure are very heavily skewed towards the south of England. In both affordable housing and housing infrastructure programmes there is little consideration of the second-round effects of such spending on growth. In some cases data on the distribution of spending per head is not even published.

Culture

Unlike the other fields discussed here, it is not the case that there are strong value for money or costbenefit arguments being made for the current distribution of spending. The current pattern seems to simply reflect historical patterns of spending which hugely favour London.

The economic impact of culture funding is not emphasised enough.

How we fix it

We set out a number of recommendations for rebalancing growth-enhancing spending:
  1. Review the Green Book appraisal methodology to take into account of relative as well as absolute returns to local economies within the project appraisal process.
  2. We should weight BCR’s for the economic and social advantages of more balanced growth.
  3. Central government should publish the business cases for all proposed infrastructure projects, including comparable BCRs.
  4. Government should devolve transport powers to more places in England.
  5. We should devote the growth in the innovation budget to funding streams which are more industrially focused.
  6. Government should ringfence funding for regions that combine low public and private R&D investment.
  7. We should also reform the spending which does flow through universities in ways that would make for a more even spread, as well as a greater economic impact.
  8. Government should review the rationale for the regional distribution of its housing spending.
  9. Homes England should start publishing data in a more timely and transparent way, including spending per head per region.
  10. The Government should immediately drop the 80:20 rule for Housing Infrastructure Funding and affordability rules which effectively limit social housing spending to the south of
    England.
  11. The Government should redirect money away from the national institutions and reinvest the savings in growing cultural provision outside London.
  12. The Government should encourage and build up new institutions in areas where there is a clearer link across to economic development and regeneration.

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