Tyne Bridge in Newcastle

Pot luck: What government needs to do to streamline local government funding

The Levelling Up White Paper committed to streamlining the grants system for local government. A year on and the current system is still holding local government back.

Briefing published on 8 June 2023 by Stuart Bridgett

Local government relies heavily on central grants to deliver economic policies, and the current system hinders its ability to respond effectively to economic change. The Levelling Up White Paper committed to streamlining the grants system for local government. However, a year on, no concrete developments have been made.

This briefing proposes a way forward, identifying persistent issues with the current grant system before setting out proposals for a new streamlined grants system. It then builds on these proposals to outline what an allocation under this streamlined system could look like.

What’s wrong with the current system of grants?

  • The system’s fragmented funding streams make it complex, with over 53 different grants for economic development and regeneration, and roughly 15 for transport
  • Grants are often short term and have a high churn rate, leading to difficulties in long-term planning for local authorities
  • Lack of any national strategy coordinating the various grants
  • Over-reliance on competition, with up to a third of all grants competitively allocated
  • Decisions made centrally with little understanding of local context and the needs of local government
  • Fragmented local government structures complicating the delivery of economic policies
  • Weak executives and accountability arrangements across local government limiting further devolution
  • Strained local government capacity to design and deliver economic policies

What lessons can be drawn from other grants?

The Local Growth Fund, UK Shared Prosperity Fund (UKSPF), and City Region Sustainable Transport Settlement (CRSTS) have had some successes, but none have overcome the problems outlined above entirely.

The Local Growth Fund aimed to simplify funding by creating a single pot of funding for economic development allocated to Local Enterprise Partnerships on a competitive basis. However, this pot wasn’t entirely free of ring-fencing, and LEPs were under-resourced, resulting in an underspend of £1.1 billion of the £12 billion committed.

Meanwhile, the UKSPF allocates funding by formula. While this provides more certainty to local authorities, funding is also partially ring-fenced and its three-year funding settlement is short compared with the seven-year EU funds that preceded it. The UKSPF also has a monitoring and reporting system for local government which in principle should help increase accountability over how the grant is spent.

The CRSTS is the closest the Government has come to designing a grant which overcomes the problems listed above. However, it only works for mayoral-led combined authorities and therefore substantial local government reform is required if it is to be viable.

Each grant has had some successes, but none have been entirely successful

What needs to change?

To be successful, future grant systems should consolidate funding, set long-term timescales and allocate funds strategically, while ensuring sufficient accountability and clear management.

Government should do this by:

  1. Creating a single pot of funding for local economic development free from internal ring-fencing
  2. Allocate funds in five-year rounds to increase certainty over funding and reduce the churn of grants
  3. Allocate the funding non-competitively based on a national strategy that devolves decisions over how funding is spent to local government. The Government will need to decide on this strategy, but it should recognise that the greatest benefits for national growth and ‘levelling up’ can be made by concentrating on the UK’s underperforming big cities
  4. For each place that receives funding, designate the top-tier of local government as the ‘lead authority’ responsible for drafting investment plans and accountable for their delivery

How a single pot could be formed and managed

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