Where next for the Shared Prosperity Fund?

There is a broad consensus that for decades Westminster has not treated the social and economic inequalities that exist across the country with the urgency required. Despite the fanfare that ‘levelling up’ has generated, it has not been matched with action. Under the current government regional inequalities have increased and the spending gap between the North and London has widened.

The reasons why previous attempts to tackle regional inequalities have failed are well known. Centralised policy-making that places too much emphasis on one-size-fits-all approaches; the disruptive churn of policies and institutions that renders long-term action impossible; the failure to integrate regional approaches into mainstream policy-making; and the failure to recognise the scale of the challenge and its corollary – a lack of resource to meet that challenge. The government has repeated these mistakes; the task for the next prime minister is to avoid doing so.

Attention has largely coalesced around the quantum of funding the government has made available to tackling regional inequality. Over the last six decades only £3.5 billion per year has been earmarked for tackling inequalities, equivalent to 0.15 per cent of Gross National Income (GNI). The European Structural and Investment Fund alone provided the equivalent of another 0.12 per cent of GNI – almost doubling the United Kingdom’s spending on tackling regional inequality. Lord Kerslake described the multiplicity of short-term funds that have historically made up this spend as little more than under-powered “pea-shooters” and “sticking plaster policies” which are “too little and too short-lived”. The government’s spending profile appears even less generous when compared with Germany’s Aufbau Ost programme – arguably the most successful example of reducing spatial inequality – which has transferred £55 billion from West Germany to East Germany each year for the past three decades.

The £2.6 billion UK-wide Shared Prosperity Fund - the second largest funding stream earmarked to tackle regional inequalities (behind the Levelling Up Fund) – illustrates the limitations of the government’s approach. The Shared Prosperity Fund will be allocated over three years: £400 million in 2022-23, £700 million in 2023-24 and £1.5 billion in 2024-25. This funding settlement, equivalent to £873 million per year, falls short of its predecessor, the European Structural and Investment Fund, which provided businesses with £1.5 billion each year over seven years, and encourages a short-termist outlook which undermines more strategic approaches to local economic growth. As a result, the IPPR estimates that the Shared Prosperity Fund is the equivalent of a 43 per cent cut in funding each year; in its attempt to create something different, the government has created something worse.

It is difficult to measure the precise contribution of EU funding in tackling regional inequality, but its impact has been tangible. Over the last two decades, EU funding created on average over 1,500 jobs and supported 1,300 businesses each year across Cornwall. It part-funded the flagship Eden Project, superfast broadband connectivity, renewables and universities. In Manchester, EU funding supported the world-leading National Graphene Institute to investigate the applications of graphene. The University of Manchester’s Sir Konstantin Novoselov won a Nobel Prize in physics for his innovation.

Contrast the culture of innovation supported by EU funding with the Shared Prosperity Fund’s culture of bean-counting. If we turn to the local-authority level allocations that the government recently published, the £2.6 billion made available looks even less generous. Once the numeracy programme, Multiply, has been stripped out of the Shared Prosperity Fund, the allocation is just over £2 billion across the next three years, or £1.3 billion in England.

In response to accusations that the spending profile attached to the levelling up agenda is insufficient, the government has often pointed to its commitment to ‘re-wire’ public expenditure to correct regional imbalances – and Andy Haldane has suggested that the focus on new spending is misplaced. But ‘re-wiring’ is not a quick fix, and with public expectations that government will deliver change in the immediate term, the next prime minister will need to ensure that tackling regional inequality is a domestic priority.

Correcting this underspending in the short-term is no easy task, especially in the context of the cost-of-living crisis, which is why government should enshrine in law a long-term national spending commitment to tackle regional inequality. Westminster does not have an aversion to setting spending targets. The Levelling Up White Paper sets out a mission to spend 2.4 per cent of GDP on R&D. Meanwhile, leadership candidate Liz Truss’ committed to increase defence spending to 3 per cent of GDP. And there is evidence that such an approach works: when government enshrined in law its commitment to spend 0.7 per cent on international aid, prior to the pandemic it met it every year and was one of only five countries to meet the target in 2019.

How much precisely the government should commit to tackling regional inequalities, what mechanism should be used to distribute funding, and the time needed to scale that funding up would require further investigation, especially in the context of other immediate and competing demands on the public purse. Two plausible options are further devolution and a new formula for the English regions. The Levelling Up & Regeneration Bill making its way through parliament presents a ready-made opportunity to enshrine such a target in law.

The distribution of levelling up funding

The distribution of the Shared Prosperity Fund has received less forensic treatment than its quantum, but it too illustrates the need to radically re-think the formula that underpin funding streams. If we turn to local-authority level allocations, more than half of England’s local authorities will receive on average less than £1 million per year. Funding formulae inevitably advantage some places and disadvantage others, but areas of relative deprivation such as Luton, Medway, Thurrock, Slough, Mansfield and Hyndburn fall within this camp. It is difficult to see how investment at this small scale will meet the number of investment priorities of the Share Prosperity Fund. Drawing on the ‘missions’ in the Levelling Up White Paper, these include improving well-being, healthy life expectancy and pride in place, increasing productivity and reducing crime.

The government has attempted to provide some level on 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 Fund are different. EU allocations were also decided upon prior to 2014, which means the Shared Prosperity Fund does not take into account how the UK has changed.

Under EU funding, allocations were based on GDP per capita and this approach created a clear ‘geography of need’. The Shared Prosperity Fund draws on this same methodology, despite different policy objectives. It then uses the Community Renewal Fund’s needs-based index, which has its own limitations. For example, one of the five metrics is the proportion of 16-64 year-olds with no qualifications, yet the UK Shared Prosperity Fund only allows expenditure on skills in its final year. That means that, in short, the methodology underpinning the Shared Prosperity Fund bears limited relation with its stated policy objectives such as crime, well-being and pride in place.

This concern that the Shared Prosperity Fund does not account for any recognisable need or deprivation is a concern widely shared by local authorities and devolved administrations. The latter had some flexibility over the formulae used and Wales based part of its allocation on the Welsh Indices of Multiple Deprivation, yet when Rishi Sunak claimed at a recent leadership hustings that he “changed the funding formulae” in order to “correct” previous formulae that “shoved all the funding into deprived urban areas”, the Welsh Minister for the Economy, Vaughan Gething, criticised the former Chancellor for rejecting the Welsh Government’s preference for a Shared Prosperity Fund “based on need for Welsh communities”. Elsewhere, research by the Institute for Fiscal studies found that the methodology the government set out for Welsh councils was “flawed”.

The same could be said in England given per capita allocations across regions don’t align with need, with some regions and the authorities within them receiving more relative to their peers.

Figure 1: Shared Prosperity Fund per capita allocations by region

Source: IPPR analysis of Office for National Statistics mid-2020s population figures, harmonised to account for local government reform; UK Shared Prosperity Fund allocations.

Looking at the most deprived authorities in England, seen in Figure 2, per capita allocations vary significantly. Despite deprivation being primarily concentrated in parts of the North West, this is not represented in its allocation.

Figure 2: Shared Prosperity Fund allocations across the ten most deprived local authorities in England

Source: IPPR analysis of Office for National Statistics mid-2020s population figures, harmonised to account for local government reform; UK Shared Prosperity Fund Prospectus; Indices of Multiple Deprivation, 2019.

If we turn to per capita allocations, seen in Figure 3, Cornwall and the Isles of Scilly’s allocation is notable. It received the most in per capita funding from the EU and receives the most per capita under the Shared Prosperity Fund. Its quantum is equivalent to more than three-and-a-half times Redcar and Cleveland, the authority that receives the second highest per capita allocation, and is the only authority outside of the North East to feature in the top ten.

Internal estimates by Cornwall Council suggest that, despite this, Cornwall has still been short-changed, but data suggests that other parts of the UK would now qualify for additional funding if the UK had stayed in the European Structural and Investment Fund and as such the Shared Prosperity Fund’s concentration in Cornwall – accounting for 1 per cent of the population but 10 per cent of England’s allocation - is difficult to justify.

Figure 3: Local authorities in England with the highest Shared Prosperity Fund allocations per capita

Source: IPPR analysis of Office for National Statistics mid-2020s population figures, harmonised to account for local government reform; UK Shared Prosperity Fund Prospectus; Indices of Multiple Deprivation, 2019.

The funding formula used in the Shared Prosperity Fund does not follow a recognisable pattern of need. There are examples of more affluent regions receiving more funding than their deprived counterparts. The most deprived authorities receive far less than relatively affluent authorities. Cornwall receives more than double the rest of the South West combined. In this context, the government’s position that levelling up funding is being targeted where it is most needed is untenable, and with relative ease we can point to places with high levels of deprivation that have been short-changed. Indeed, the current Levelling Up Secretary, Greg Clark, has described the “very complex” and “difficult exercise” of getting formulae right in the past, and as local experience suggests, it is likely that the UK Shared Prosperity Fund will deliver poor value for money.

Previous IPPR research has highlighted how different methodologies, each with their own limitations, can create different geographies of need. The Shared Prosperity Fund falls into this trap. It does not adequately provide insight into poverty, or quality of life. Nor does it capture concepts like natural capital, well-being or pride in place in their full richness.

In order to ensure that the distribution of funding truly reflects need, there are broader frameworks for understanding place that the government should turn to. The capitals framework in the White Paper might’ve provided an opportunity to think afresh the type of society we want to create and how the focus of the Shared Prosperity Fund formulae could be deployed toward this end. The University of Birmingham’s City Region Economic and Development Institute has drawn on the Sustainable Development Goals, which have been adopted in the UK by local authorities as well as internationally, and there are a series of dashboards that have been created specifically for the purpose of encouraging the government to measure places and their need – and therefore their funding allocation – more holistically.

As the government turns its focus 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 assess need and are best placed to correct the regional imbalances that undermine our economic growth and deprive too many Britons of a fair start in life.

Jack Shaw is a Senior Account Manager at the London Progression Collaboration, part of the Institute for Public Policy Research. He tweets @JackShawLPC.