04Allocating the £13 billion pot for local economic growth
The single pot outlined in Section 3 would streamline the grants system, but if it is to facilitate local and national economic growth, the national strategy for growth which underpins it will need to be clear and evidence based. This section outlines how an example single pot of £13 billion (the sum of the UKSPF, LUF, City deals and Towns Fund) could be allocated in line with the strategic objective of the Levelling Up White Paper to reduce disparities between places in the UK.
The strategic objective of the single pot should be to help each place in the UK reach its own productivity potential. Crucially, this potential varies from place to place because places play different roles in the economy. Because of the inherent advantages they offer to businesses (e.g. larger pools of workers, more businesses to interact with), big cities have higher potentials then deep rural areas for example.
Box 3: Methodology for allocating the single pot
Centre for Cities research has calculated the productivity gap for the Britain’s largest labour markets – identified using the Britain’s 62 Primary Urban Areas (PUAs) – by plotting the size of their labour markets against their productivity, measured by GDP per worker in 2018.72 For the places with GDP per worker less than the trendline would indicate, their distance from the trendline is their productivity gap.
For smaller labour markets outside of these 62 PUAs, it is assumed that each worker has a productivity potential roughly equal to a worker in the urban labour market that the model estimates has the lowest productivity potential – such as Barnsley.
A place’s productivity gap, multiplied by its number of workers, generates the place’s output gap.
As the geographies of the PUAs frequently do not match local authority boundaries, the output gap of each PUA may need to be divided across multiple authorities. Fifty per cent of a PUA’s output gap is allocated across its unitary or district-level local authorities based on their respective share of the PUA’s resident working age population, and 50 per cent allocated based on each unitary or district’s share of the PUA’s employment. This is intended to ensure that both the places in a local economy where the businesses are located and where their workers live receive funding.
Each local authority’s share of the output gap is then assigned to its top-tier ‘lead’ authority – whether that is itself as a unitary authority, an upper-tier authority, or a combined authority, and each lead authority is allocated a share of the £13 billion funding pot equivalent to their share of the output gap.
A minimum threshold is set so that small amounts of funding are not allocated that would have little impact but still require resources to manage. For this example, allocations below £5 million have been redistributed to other local authorities.
The problem in the UK is that, unlike in most other countries in western Europe, most of its largest cities outside of London are quite some distance from their potentials. The underperformance of the eight largest cities outside of London and Bristol is responsible for £47 billion of the UK’s £88 billion national output gap (see Box 3 for methodology) – more than half of this overall underperformance.73
To address this, the allocation of the single pot should be driven by the size of the output gap that exists in different places, shown in Table 1. Of the 136 top tier local authorities covering each place in Britain, 84 are below their productivity potential, and 80 of those have an output gap large enough to receive more than the £5 million threshold. The allocation to these 80 authorities is skewed to the four combined authorities of Greater Manchester, West Midlands, West Yorkshire, and South Yorkshire along with Glasgow City Council. They would receive just under half of the total funding available (£6.5 billion over five years) because together they make up 49 per cent of the national output gap.
Table 1: Indicative allocation of a £13.3 billion fund according to a strategy to narrow places’ productivity gaps
Local Government Type | Recipient Local Government | Output gap, 2018 (£m) | Share of national output gap (%) | Allocation of £13.3bn pot (£m) |
Combined Authority | Greater Manchester Combined Authority | 16,128 | 18.2 | 2,428 |
Combined Authority | West Midlands Combined Authority | 10,599 | 12 | 1,595 |
Combined Authority | West Yorkshire Combined Authority | 5,650 | 6.4 | 850 |
Combined Authority | South Yorkshire Combined Authority | 5,305 | 6 | 799 |
Unitary | Glasgow City | 5,211 | 5.9 | 784 |
Combined Authority | North of Tyne Combined Authority | 3,200 | 3.6 | 482 |
Combined Authority | Liverpool City Region Combined Authority | 2,764 | 3.1 | 416 |
County | Nottinghamshire | 2,164 | 2.4 | 326 |
Combined Authority | North East Combined Authority | 1,806 | 2 | 272 |
Unitary | Renfrewshire | 1,198 | 1.4 | 180 |
Unitary | Nottingham | 1,134 | 1.3 | 171 |
County | Derbyshire | 1,074 | 1.2 | 162 |
Unitary | Leicester | 1,062 | 1.2 | 160 |
County | Oxfordshire | 1,038 | 1.2 | 156 |
County | Norfolk | 1,010 | 1.1 | 152 |
County | North Yorkshire | 913 | 1 | 137 |
County | Essex | 835 | 0.9 | 126 |
County | Devon | 817 | 0.9 | 123 |
Unitary | Plymouth | 806 | 0.9 | 121 |
County | Cumbria | 802 | 0.9 | 121 |
County | Somerset | 801 | 0.9 | 121 |
Unitary | Powys | 781 | 0.9 | 118 |
Unitary | Kingston upon Hull, City of | 759 | 0.9 | 114 |
Unitary | Newport | 745 | 0.8 | 112 |
Unitary | Cardiff | 729 | 0.8 | 110 |
Unitary | Bournemouth, Christchurch and Poole | 663 | 0.8 | 100 |
Unitary | Derby | 662 | 0.7 | 100 |
Unitary | Swansea | 661 | 0.7 | 100 |
Unitary | Cornwall | 659 | 0.7 | 99 |
Unitary | Blackburn with Darwen | 654 | 0.7 | 98 |
County | Gloucestershire | 610 | 0.7 | 92 |
Unitary | Southend-on-Sea | 610 | 0.7 | 92 |
Unitary | Warrington | 556 | 0.6 | 84 |
County | Staffordshire | 535 | 0.6 | 81 |
County | Lincolnshire | 529 | 0.6 | 80 |
Unitary | East Dunbartonshire | 522 | 0.6 | 79 |
County | Hampshire | 514 | 0.6 | 77 |
Unitary | Herefordshire, County of | 494 | 0.6 | 74 |
County | Leicestershire | 490 | 0.6 | 74 |
Combined Authority | West of England Combined Authority | 489 | 0.6 | 74 |
Unitary | Dundee City | 484 | 0.5 | 73 |
Unitary | Carmarthenshire | 472 | 0.5 | 71 |
Unitary | East Renfrewshire | 453 | 0.5 | 68 |
Unitary | West Northamptonshire | 440 | 0.5 | 66 |
County | East Sussex | 433 | 0.5 | 65 |
Unitary | Portsmouth | 429 | 0.5 | 65 |
Unitary | North East Lincolnshire | 425 | 0.5 | 64 |
Unitary | East Ayrshire | 424 | 0.5 | 64 |
Unitary | Blackpool | 409 | 0.5 | 62 |
County | Lancashire | 399 | 0.5 | 60 |
Unitary | Denbighshire | 393 | 0.4 | 59 |
Unitary | Torfaen | 387 | 0.4 | 58 |
Unitary | Dumfries and Galloway | 386 | 0.4 | 58 |
County | Hertfordshire | 378 | 0.4 | 57 |
Combined Authority | Tees Valley Combined Authority | 368 | 0.4 | 56 |
Unitary | Torbay | 361 | 0.4 | 54 |
Unitary | South Ayrshire | 357 | 0.4 | 54 |
Unitary | Flintshire | 353 | 0.4 | 53 |
County | Worcestershire | 349 | 0.4 | 53 |
Unitary | Gwynedd | 342 | 0.4 | 51 |
Unitary | Neath Port Talbot | 332 | 0.4 | 50 |
Unitary | Conwy | 332 | 0.4 | 50 |
Unitary | Rhondda Cynon Taf | 320 | 0.4 | 48 |
Unitary | South Lanarkshire | 303 | 0.3 | 46 |
Unitary | Stoke-on-Trent | 259 | 0.3 | 39 |
County | Warwickshire | 258 | 0.3 | 39 |
County | Kent | 245 | 0.3 | 37 |
Unitary | Isle of Wight | 234 | 0.3 | 35 |
Unitary | Na h-Eileanan Siar | 226 | 0.3 | 34 |
Unitary | Ceredigion | 223 | 0.3 | 34 |
Unitary | Inverclyde | 222 | 0.3 | 33 |
Unitary | Scottish Borders | 221 | 0.3 | 33 |
Unitary | Shropshire | 175 | 0.2 | 26 |
County | West Sussex | 77 | 0.1 | 12 |
Unitary | Telford and Wrekin | 77 | 0.1 | 12 |
Unitary | Isle of Anglesey | 76 | 0.1 | 12 |
Unitary | Merthyr Tydfil | 75 | 0.1 | 11 |
Combined Authority | Cambridgeshire and Peterborough Combined Authority | 72 | 0.1 | 11 |
Unitary | Shetland Islands | 59 | 0.1 | 9 |
Unitary | Argyll and Bute | 57 | 0.1 | 9 |
In contrast to the allocation in Table 1 above, if the Government instead ‘jam-spread’ the single pot across local authorities on a per capita basis (i.e. not guided by a growth-orientated strategy) then every place would get funding worth approximately £205 per person. Under this approach, Greater Manchester would receive an allocation of £581 million, less than a quarter of what it would receive in the allocation in Table 1. Kent by comparison would receive £324 million in the case of a per capita allocation, nearly nine times more than its allocation in Table 1. While such an allocation may be perceived as ‘fairer’, it does little to address the strategic economic objectives that the Government has set out in both the Levelling Up White Paper and in the Spring Budget of this year.