£560 million in levelling up funding lost to inflation

Inflation is expected to create a £560 million hole in the government’s Levelling Up Fund (LUF) and Shared Prosperity Fund (SPF) by 2025/26 according to our analysis of new figures published today following the Autumn Statement. The failure to inflation-proof two of the largest funding streams available to local authorities will force them to downsize their infrastructure projects and casts serious doubt over the government’s plan to tackle regional inequalities and its commitment to economic growth.

In October, Michael Gove’s predecessor as levelling up secretary, Simon Clarke, confirmed that the Department for Levelling Up, Housing and Communities (DLUHC) cannot “buck” the cost of inflation and that “there is a mechanism within the Levelling Up Fund to allow bids to be resized”. Clarke added that Whitehall is “working with local authorities to see specifically how we can support them in ensuring that their projects are delivered”, but it is not clear that authorities have yet been formally engaged.

Despite Gove returning to the fold, the government’s failure to inflation-proof levelling up in the Autumn Statement and means that resizing only applies in one direction: downsizing. With £1 in every £13 of the LUF and SPF now expected to be lost to inflation, cancelling, scaling back or pausing infrastructure investment is inevitable without additional support. And the contrast between the ambition to speed up major infrastructure projects outlined in the previous government’s growth plan on the one hand while now forcing local authorities to do the opposite on the other hasn’t gone unnoticed by local government leaders. Calderdale Council’s plans for a new leisure centre has now been put on hold after inflation increased the project by £4 million, while some schemes will “have to be deferred” in Barnsley as a result of rising inflation.

Given the chancellor had asked each department to identify savings ahead of his autumn statement, reluctance to protect local growth spending is unsurprising. But reducing the scope of levelling up projects will have implications for the impact they deliver, both in terms of any contribution they may have made to local economic growth and the success of the missions outlined in the levelling up white paper.

UK Shared Prosperity Fund

Our analysis shows that over £220 million of the promised £2.6 billion SPF is expected to be lost to inflation by 2025/26. If the SPF continues to follow the trend of the Community Renewal Fund (CRF) and LUF, both of which have been delivered slower than anticipated, this cost of inflation is likely to increase.

Though the methodology that underpins the SPF is not without its shortcomings, a decision not to protect it from inflation poses a tension for Rishi Sunak’s commitment to return to the principles outlined in the 2019 Conservative manifesto.

Table 1: The impact of inflation on the Shared Prosperity Fund

Source: Authors’ analysis of OBR (2022), Autumn Statement (2022), UK Shared Prosperity Fund Prospectus (2022). The SPF allocation was originally announced at the October 2021 Budget.

The department’s change of direction earlier this year in favour of investment zones has also stalled the progress of the SPF and this has created two issues.

First, the anticipated spending profile of the SPF is no longer going ahead. It is not possible to spend the £400 million promised for this financial year, given the government is yet to take a decision on the ‘investment frameworks’ that were submitted by local authorities earlier this summer. This was recognised in the Autumn Statement and the impact of this delay will mean that the proportion of funding lost to inflation is now greater, given double digit inflation is expected to continue into the new year.

Second, the setback this financial year poses a challenge to the integrity of the SPF. Given allocations are required to be spent within each financial year, local authorities could be put in an untenable position where each year they are required to launch programmes from scratch, deliver them and wind them down again. This reflects a misunderstanding in Whitehall about how programmes are delivered locally and ignores the time it takes to negotiate contracts or service-level agreements, recruit staff, deliver a programme of work, evaluate its impact and more.

Should local authorities fail to spend allocations within the financial year, they will be asked to return any underspends. The government risks creating a vicious cycle where it rationalises that the failure to spend this funding is evidence that local authorities do not need it.

This leaves the government with two options: either recovering expected underspends – which is likely to be politically unpalatable - or providing additional spending flexibility which will impact the government’s anticipated delivery horizon. The knock-on effect of the latter would result in a higher proportion of the funding profile being lost to inflation.

Its predecessor, the European Structural and Investment Fund, allowed allocations to be spent within three years, rather than a single financial year.

Levelling Up Fund

Turning to the £4.8 billion UK-wide LUF, which has been running since 2021–22, the government has set out indicative spending. The government previously outlined that £600 million of the LUF would be spent in 2021–22, though it conceded this was an ‘early planning assumption’. It subsequently revised that figure down to £200 million during the 2021 spending review, but based on current spending the LUF still underperforms. Earlier this year the government announced that only £128 million had been spent throughout 2021–22. Last month, approximately £243 million of the LUF had been spent over the course of 18 months, equivalent to five per cent of the spending profile within 30 per cent of the lifecycle of the fund. Similar to the SPF, the consequence of slower than expected spending is that the LUF is more exposed to inflation.

Table 2: The impact of inflation on the Levelling Up Fund

Source: Authors’ analysis of OBR (2022), Autumn Statement (2022), Treasury Minutes (2022), Levelling Up Prospectus (2022). The LUF spending allocation was originally announced at the November 2020 spending review.

From our analysis, £340 million of the LUF is likely to be lost to inflation. This is higher than the SPF in part because spending is drawn down over a longer period.

Our analysis of the LUF is also likely to be conservative given construction materials – which are expected to account for a significant proportion of spending – are experiencing higher levels of inflation.

Conclusion

The failure to inflation-proof infrastructure projects poses a serious question about the prime minister’s commitment tackling regional inequality. Fiscal restraint is not the only option available and there are alternative levers available to cover the funding gap that do not involve reducing spending across public services or measures to tackle regional inequality.

In the context of the cost-of-living crisis, communities need more investment, not less, and fewer or scaled back infrastructure projects will make a dent in local economic growth as the prospect of a recession looms. There is also significant evidence that reducing public spending undermines business investment and exacerbates inequalities.

Government inaction exposes the chasm between rhetoric and reality and is symptomatic of the need for the levelling up agenda to be underpinned by a significant and long-term funding settlement.

The Autumn Statement was a lost opportunity to put tackling regional inequality back at the centre of the government’s agenda. How it responds to the ongoing challenge of inflation on future funding streams is an important consideration for the prime minister. It will send a strong message about how seriously tackling regional inequalities will be taken under Rishi Sunak’s premiership.

Jack Shaw is a senior account manager at the London Progression Collaboration, part of the Institute for Public Policy Research. He tweets at @JackTShaw. Marcus Johns is a research fellow at IPPR North. He tweets at @MarcusIPPR.

Methodological note:

• We have not included the £110 million Rural England Prosperity Fund as it is not clear over which timescale it will be spent.
• Our analysis of the SPF is based on allocations as ‘investment frameworks’ submitted by local authorities are currently being evaluated by DLUHC.
• Our analysis of the LUF is based on the spending profile of the first and second tranche of the LUF, equivalent to £3.4 billion. The government has not clarified how many tranches are expected to be announced in total, so we have forecasted that the remaining £1.4 billion will be the third and final tranche, and assumed all spend will be complete by 2025/26.
• For information on IPPR North’s analysis of SPF allocations, visit: https://www.ippr.org/blog/where-next-for-the-shared-prosperity-fund.