IFS: Brexit offers an opportunity to rationalise regional funding schemes. It’s past time government announced what it will do

Monday, 13 July 2020 00:01

With less than six months until the UK leaves European regional development funding schemes, the UK government has yet to confirm details of its proposed replacement: the Shared Prosperity Fund. A new report from IFS researchers, funded by the Economic and Social Research Council, looks at the issues and options for the design of this scheme, including how different regions would fare if different indicators are used to determine funding levels.

The way in which a replacement scheme is designed will make a huge difference to which areas will gain and which will lose. Four years after the Brexit vote, it is high time we had some idea of the government’s intentions.

The report finds that Cornwall is likely to lose many millions of pounds of funding per year once any transitional arrangements expire, but other areas in the North and Midlands could gain.

Despite having output per person just 4% lower, Cornwall currently receives over seven times as much per person per year (€144) as Lincolnshire (€20) and South Yorkshire (€18). This is a result of arbitrary EU rules that mean much more funding is given to areas with economic output per person just below 75% of the EU average than to areas just above this threshold. A more rational scheme would see Cornwall lose in the long term unless overall regional development funding is very substantially increased.
Urban and former industrial areas of the Midlands and North are set to receive above-average levels of funding irrespective of the precise formula used. This is because they perform relatively poorly across a wide range of indicators including deprivation, employment, pay, productivity and qualifications. The Black Country, for example, is one of the three most disadvantaged areas for each of these indicators. And the Tees Valley is in the bottom four for all except productivity.
How more rural areas such as Devon and Somerset and the (Welsh) Marches will fare is less clear. Levels of pay and productivity are some of the lowest in the country, so they would do relatively well under a formula based on these indicators. But rural areas perform better in terms of deprivation, employment and qualifications and would do less well if these indicators are more highly weighted.
A pledge that Scotland, Wales and Northern Ireland will receive at least as much funding as now could perpetuate differences in funding for comparable regions in the different UK nations. Welsh regions, in particular, could receive much more funding than comparable regions of England.

As well as looking at funding allocations, the report also looks at the lessons that can be learned from EU and previous UK regional development programmes:

Existing EU schemes are complex and opaque. Various minimum and maximum shares of funding currently need to go to projects satisfying EU-determined ‘thematic objectives’, meaning there is scope to make the Shared Prosperity Fund more flexible and tailored to local priorities. And information on how funding for different areas is determined is patchy, meaning there is scope for improved transparency.
Research suggests EU funding boosts economic growth. However, the benefits are larger in areas with better-educated workforces and stronger governance. Some studies find impacts largely fade following the cessation of funding, suggesting that an increased focus on the long-term drivers of productivity would be valuable.

Finally, the report considers the implications of the COVID-19 crisis for the new Fund:

The long-term social and economic effects of the COVID-19 crisis are still uncertain, but could differ significantly between regions, and in ways that do not reflect existing patterns of economic disadvantage. Impacts on the hospitality, leisure, retail and travel industries and changes in remote working and commuting could hit both poorer coastal areas and higher-wage inner London, for example. The government must therefore consider how to trade off the greater certainty that long-term funding allocations would bring, versus the need to respond to potentially significant changes in the economic geography of the country.

David Phillips, an associate director at the IFS and an author of the report said:

“EU regional development funding, while tiny in the context of overall UK government spending, is the biggest source of funding explicitly aimed at convergence between the poorer and richer regions of the UK. Its replacement, the Shared Prosperity Fund, will therefore be at the heart of the ‘levelling up’ agenda.

With less than six months until it will have to be in place, it is therefore disconcerting that detailed proposals have yet to be consulted on, let alone finalised and approved. With limited time left, one option the government could consider would be to continue with existing EU funding allocations for one more year. This is similar to what it has done for council funding, where big reforms planned for next April have been pushed back until at least 2022.”

Alex Davenport, a research economist at the IFS and another author of the report:

“New rules and funding formulas will ultimately be needed. And this will mean winners and losers, at least if we want to avoid the new system being an irrational fudge. Cornwall is almost certainly going to be a loser in the long term, unless the government simply replicates arbitrary cliff edges in existing EU rules, which see this area receive over seven times as much as areas that are only slightly less poor.

Predicting the winners is more difficult given the literally infinite possibilities with the new formula. However, urban and former industrial areas of the Midlands and North perform relatively poorly on a range of needs indicators and are therefore likely to receive above-average funding under any formula. And research suggests governments tweak funding rules to benefit their politically marginal constituencies – which for the current government includes a new swathe in areas such as the Black Country and Tees Valley.”