From investment zones to the Levelling Up Fund: How government is going for growth

The government’s latest plans for building economic prosperity across the country include investment zones and Levelling Up Partnerships, with “trailblazer deals” and additional regeneration cash thrown in for good measure. We help you navigate the details
Photo: Christopher Furlong/Pool Photo via AP

By Jim Dunton

19 Jun 2023

There are few things politicians of all hues can agree on, but one of them is the need to drive economic growth and get the nation’s finances on a secure footing. Alongside this, they usually agree that this growth must be spread across the country, rebalancing decades of economic imbalance which have seen growth in London and the southeast outpace the rest of the country.

That’s why we’ve seen a number of strategies focussing on regeneration, levelling up or – as the chancellor put it in his Spring Budget this year – realising the “significant untapped growth potential in the UK’s cities outside London”.

As strategy after strategy has put in place new schemes, funds and projects, CSW takes a look at the latest blueprint to deliver, as chancellor Jeremy Hunt put it, “long-term, sustainable, healthy growth” that spreads “opportunity everywhere.” 

Investment zones

Images of levelling up could hardly be bolder than shimmering towers of prosperity rising from post-industrial wasteland. Hunt minced no words in describing the government’s planned investment zones as “12 potential Canary Wharfs” – the Thatcher government’s flagship 1980s regeneration project in east London’s Docklands – at his Spring Budget.

The zones are each offered £80m of “support” over a five-year period that starts in the next financial year. The support includes tax incentives and is supposed to be split 40:60 between resource and capital spending.

According to the government, each zone should drive the growth of at least one sector that is seen as “key” to the UK’s future: the Treasury cited green industries, digital technologies, life sciences, creative industries, and advanced manufacturing as the crucial five sectors. 

Scotland, Wales and Northern Ireland will get up to four investment zones between them. Details will be worked up in partnership with the devolved nations. However, the Treasury said agreement of any investment zone in Northern Ireland will be subject to the re-establishment of the Northern Ireland Executive.

The government has identified eight candidates to host investment zones in England, selected using a methodology designed to identify economically underperforming areas with innovation potential. They are the combined authority areas in Greater Manchester, the West Midlands, South Yorkshire, West Yorkshire, Tees Valley and Liverpool City Region, and the proposed combined authority areas in the East Midlands and the North East. 

Each area will need to submit a detailed bid setting out how mayoral combined authorities, universities, councils and businesses intend to work together to drive growth, including how match-funding will be identified. 

Proposals will also need to demonstrate how each zone would support the government’s commitment to make the UK a net-zero carbon emissions economy by 2050.

A prospectus clearly states that the shortlist for England will be kept “under review” and that other bids to host zones can be added where the areas can demonstrate “clear potential” to deliver in relation to one of the five priority industries. A separate document underpins the methodology under which the eight shortlisted investment zone areas were selected.

Thomas Pope, deputy chief economist at the Institute for Government, and IfG research assistant Maelyne Coggins noted in a blog that the current version of investment zones has been watered down from proposals tabled by Hunt’s predecessor as chancellor, Kwasi Kwarteng, last September. 
In his now-infamous “mini-budget”, Kwarteng said investment zones would be able to enjoy tax breaks for 10 years, rather than five, and would also benefit from new planning freedoms – an offer that is absent from the current proposals. 

Pope and Coggins also observed that the earlier incarnation of the programme did not seek to limit the number of investment zones to 12. Then-PM Liz Truss had insisted that there should be no cap on the number of zones. 

“The success of these zones in creating genuinely new activity will come down to ensuring the incentives offered address the development challenges particular to that area" Will Brett-Harding

Will Brett-Harding, policy officer at the What Works Centre for Local Growth, says there is evidence that clustering innovative businesses close together and near a university or research centre could provide a boost to output.

“Proximity allows sharing of ideas, techniques, and resources, and the potential for collaboration on solving different problems,” he says. 

However, Brett-Harding also notes that the What Works centre’s previous studies of Enterprise Zones – first introduced in the 1980s and then relaunched during the coalition government era – indicated that they can displace jobs from other areas, moving opportunity rather than growing it. 

He adds that making direct comparisons between the new investment zones and Canary Wharf may not be appropriate for the missions each zone would seek to accomplish.

“The success of these zones in creating genuinely new activity will come down to ensuring the incentives offered address the development challenges particular to that area,” he says. “Canary Wharf unlocked development that was curtailed by a specific set of land-use barriers; for example, building height restrictions in the City of London at the time. 

“As plans are developed for IZs, the crucial question will be whether they do something similar to address the key barriers that local businesses face.”

Zoë Billingham, director of the Institute for Public Policy Research North think tank, also notes that the London Borough of Tower Hamlets, the local authority for Canary Wharf, has the highest rate of child poverty in the UK.

Jeremy Hunt and Rishi Sunak speak to two unidentified women in a market hall

Above: Hunt and Sunak at Accrington Market Hall, in January on a visit to community projects backed by the Levelling Up Fund

Trailblazer deals

So-called “trailblazer deals” with the Greater Manchester and West Midlands combined authorities that will expand on current levels of devolution were a feature of last year’s levelling-up white paper. The Spring Budget restated the government’s commitment and presented them as part of the drive for growth.

Under the deals, both sub-regions will get greater control over funding for local transport, skills, employment, housing, innovation and net-zero priorities. They will also get single funding settlements similar to those provided to government departments at the next spending review.

The deals will see both combined authorities get “greater control than ever before over the levers of prosperity”, according to the now-ratified drafts documents. Nevertheless, the deals are not identical. 
Labour mayor of Greater Manchester Andy Burnham and his Conservative counterpart in the West Midlands, Andy Street, have been highly supportive of the deals. They told recent events hosted by the Centre for Cities think tank that money is better spent and projects are more quickly delivered “closer to the ground”.

Details of which funds will be included will be confirmed at the next spending review in 2025. However, the government indicated that if the deals had covered the current spending-review period they would include the UK Shared Prosperity Fund, the Levelling Up Fund, the Brownfield Housing Fund, the Brownfield Infrastructure and Land Fund, and funding for adults’ skills.

Also included would be city-region sustainable-transport settlements, resource departmental expenditure limit funding for buses, active-travel funds and electric-vehicle funds. 

The deals extend business-rates retention pilots for 10 years for both combined authority areas. The West Midlands Combined Authority said the extension would be worth £45m a year alone to local authorities in the sub-region.

The draft deal documents for Greater Manchester and the West Midlands clearly state that the single budgets will not involve an increase in available funding but “represent a change to the wiring, nature and flexibility of funding from central government rather than the quantum”. 

The texts add that the quantum of funding will be “decided by an agreed process” between the government and the combined-authority areas.

The deals also commit Greater Manchester and the West Midlands to new scrutiny arrangements, including publicly broadcast sessions with local MPs and “mayor’s question time” events with members of the public.

Burnham and Street were not the only ones describing the deals as a step forward for devolution. The Resolution Foundation think tank said the deals were a “desirable development” for the way public services are delivered. 

However, the foundation framed its comments within the context of Hunt putting off “big decisions” about public sector pay and “implausibly tight” spending plans beyond the current spending review period, rather than in the context of economic growth.

The agreements are being called “trailblazer” deals because the government stated an ambition for the model to be rolled out to all areas of England with a devolution deal and a directly elected leader “over time”.

The Red Book providing greater detail on Hunt’s Spring Budget contained a pledge to deliver a new wave of devolution deals across England in areas that commit to electing a mayor or other leader. The deals would come with local investment funding.

The book also stated the government’s intention to expand the local retention of business rates to more areas in the next parliament in partnership with interested councils.

LEP of faith

Wider measures to “empower” local leadership include a commitment to bring forward proposals to strengthen the local-government financial landscape in the next parliament and withdrawing central support from England’s 38 Local Enterprise Partnerships – effectively abolishing the business-led groups tasked with driving economic growth.

Hunt framed the demise of LEPs as a positive move, saying that for levelling up to “truly succeed” it would be necessary to “unleash the civic entrepreneurship that is only possible when elected local leaders are able to fund and deliver solutions to their own challenges”.

The chancellor said such a situation would entail giving local leaders “responsibility for local economic growth and the benefit from the upside when it happens”.

“To say we remain puzzled as to why government wants to put at risk a growth engine that has worked so well for them is an understatement" Mark Bretton

LEPs were created as successor organisations to the eight regional development agencies scrapped in 2010 by the coalition government in which both Hunt and levelling up secretary Michael Gove served as cabinet ministers. Over the past decade, LEPs have been allocated billions of pounds from the government’s Local Growth Fund as part of their work. They also had a say in how EU structural funds were spent. 

Mark Bretton, chair of sector body the LEP Network, says there is a recognition from government that abolishing LEPs will cost money rather than save it.

“Unravelling this with the trailing liabilities and accountability for significant sums of money will not be simple,” he says.

“The importance of the role of business in driving a future enterprise economy has never been more important.  

“To say we remain puzzled as to why government wants to put at risk a growth engine that has worked so well for them is an understatement.”

The Local Government Association noted that last year’s levelling up white paper had announced the integration of LEPs and their business boards into mayoral combined authorities and “county deal” areas where they exist, and the Greater London Authority. 

It said abolishing LEPs would require a financial commitment from government and a willingness to work with the sector to identify capacity issues some areas could face.

Levelling Up Fund and Levelling Up Partnerships

Just weeks after the Department for Levelling Up, Housing and Communities announced the successful bidders for the second round of its Levelling Up Fund – worth a combined £2.1bn across 111 projects – Hunt found a further £660m of levelling up cash in the Spring Budget.

So-called Levelling Up Partnerships will offer a combined total of more than £400m in investment to 20 areas determined as being “most in need of levelling up” over the course of this year and 2024-25.

Hunt said the “bespoke” place-based regeneration deals would be agreed in partnership with local council leaders and elected mayors, alongside businesses, community organisations and residents. Among the areas selected are Hull, Middlesbrough, Stoke-on-Trent, Sandwell, Blackburn with Darwen, Hastings, Torbay and Bassetlaw.

A further £211m was earmarked for 16 specific “high-quality regeneration” projects, in some cases in the same boroughs. Sandwell was allocated £20m for the regeneration of Tipton town centre. Blackburn with Darwen was allocated £20m for a new skills and education campus. 

DLUHC subsequently acknowledged that all of the 16 schemes had been shortlisted for the second round of the government’s Levelling Up Fund, but had not been selected at the time. It said that since the second-round winners were announced, more than £200m of unallocated departmental funding for use on levelling up had been “identified” and that it needed to be delivered in 2023-24.

It said opening a new round of bidding would be “disproportionately burdensome” and chose to award support to schemes on the Levelling Up Fund shortlist because the pipeline had been “rigorously assessed” and found to be good value for money and deliverable. 

“The approach to growth is increasingly swinging towards both a prioritisation of a selection of places and a focus on ‘productivity potential’"

Hunt also confirmed funding for a further three projects in the North West with a combined value of £58m. The schemes “narrowly missed” out in the second round of the Levelling Up Fund, according to DLUHC. Described as “levelling up capital projects” in the Red Book, the schemes are a new community hub in Stockport, the transformation of Bootle town centre and the redevelopment of markets in Rossendale, along with transport improvements.

Measures announced in the Budget to “encourage growth and support communities” also included £200m for councils to repair potholes and improve roads. The Red Book said better roads “enable faster and safer journeys for all users, contributing to productivity gains”. More than £60m was also allocated to help providers of public swimming pools make their facilities more energy efficient.

Paul Swinney, director of policy and research at the Centre for Cities, says the Spring Budget shone new light on subtle differences between the government’s thinking on levelling up and growth.

“The approach to growth is increasingly swinging towards both a prioritisation of a selection of places and a focus on ‘productivity potential’ – how well places should be doing given their size – as a key measure of how this prioritisation should be done,” he says.  

“This recognises that different places make, or rather should be making, different contributions to the national economy.”

Swinney says the language used around most policies explicitly badged as levelling up has been “very different” and speaks about delivering a “fair geographic spread” across the regions. He adds that levelling up policies are more likely to be focused outside of large metropolitan centres.

Breaking down barriers to work

Although it was not flagged explicitly as a growth measure, the headline element of the Spring Budget was the government’s decision to extend the provision of free childcare to cover youngsters aged from nine months to three years. Working parents of children aged three and four are already entitled to 30 hours of free childcare.

The Treasury costs the move at £4.1bn in the years to 2027-28. The offer is being rolled out in stages, starting next April, and will not be available in full until September 2025 – months after the deadline by which the next general election must be held. 

The chancellor said that if we could match Dutch levels of female participation in the jobs market, there would be more than a million extra women working. But he also admitted staff shortages and cost pressures that are affecting the childminding sector.

Children’s minister Claire Coutinho told the Education Select Committee this month that the Office for Budget Responsibility had estimated the childcare expansion would allow 60,000 people to return to work or extend their current working hours.

More controversially, Hunt used the Budget to introduce new pensions-related tax breaks for high earners designed to “incentivise highly skilled individuals to remain in the labour market”. Billed as a response to concerns expressed by senior NHS clinicians, the moves will scrap the taxation rules on contributions to pension pots that are already larger than £1m – the so-called “lifetime allowance charge” – and increase the annual tax-free allowance for individuals from £40,000 to £60,000.

The Resolution Foundation said the childcare measures were the biggest increase to support on record and would encourage more parents to work, while making it worthwhile for many more parents to work for longer. However, it said the reforms would cost around £1.2bn but increase employment by just 15,000.

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