01What’s wrong with the current system of grants?

There are eight major problems with the current system that any streamlined system must try to resolve or minimise:

1. Fragmented and complex funding streams
2. Short termism and the churn of grants
3. Lack of national strategy
4. Reliance on competition
5. Centralised decision-making
6. Fragmented local government structures
7. Local government accountability
8. Local government capacity

Figure 1 shows that these eight problems broadly fall into four categories. Each category must be resolved for a streamlined grants system to function more effectively.

Consolidation

Problem 1: There is a multitude of grants, ring-fenced for different purposes, which makes it difficult for local government to develop long-term, joined-up plans for economic growth. There are at least 53 different grants for economic development and regeneration, and roughly 15 different ones for transport.⁶ And these have proliferated in recent years; there were up to four times as many grants issued to local authorities in 2018 as there were in 2013.⁷

This fragmentation is made more complex for local government to manage by a lack of coordination by central government to ensure the grants complement each other or advance similar objectives. Different departments – and sometimes even different teams within departments – do not have an overview of what other grants are being issued. For example, more than a year on from the launch of the Levelling Up White Paper in February 2022, the Department of Levelling Up, Housing and Communities does not have a coherent understanding of what grants are contributing to levelling up, and there has been little sustained cross-departmental work on levelling up.⁸

Timescales

Problem 2: Compounding this is that these grants are often short term, with a high churn rate. For example, a third of the 366 grants available to local government between 2015 and 2017 were wound-up over the same period.⁹ This further fragments funding and makes long-term planning very difficult for local authorities.

Allocation

Problem 3: The Government lacks a clear, consistent, over-arching strategy for economic growth to coordinate the various grants.¹⁰
In the last five years there have been four strategies for growth, the Industrial Strategy (2017), the “Plan for Growth” (2021), the “Growth Plan” (2022), and the latest “four Es” strategy laid out by the Chancellor.¹¹ In a country as centralised as the UK, the strategy chosen by central government has outsized importance for the behaviour of local government.

The lack of a clear strategy from central government to guide allocation often results in funding being ‘jam-spread’ across areas rather than directing funding to where it can have the most national and local impact. It also opens the Government to accusations of pork-barrel politics playing a role in determining the allocation. For example, the Levelling Up Fund has both explicitly jam-spread funding across different local authorities to “maximise the geographical spread of investment” but has also been accused of favouring areas which elected Conservative MPs.¹²

Problem 4: A high proportion of grants are competitively allocated. Up to a third of all grants to local authorities are competitive, and over half of all transport funding is competitive.¹³ In principle, competition is supposed to deliver two benefits: let central government select the best bids from those submitted, and improve the quality of local government’s bids through the competitive process.¹⁴ But this does not play out in practice for several reasons.

First, to work effectively it requires central government to have good local knowledge in order to act as the judge on the submissions. It is highly unlikely that the Government has this knowledge for everywhere in the UK it receives bids from.

Second, competition reduces certainty for local government and makes it more difficult to plan long-term, as they do not know whether their bids will be successful or not.

Third, competition wastes a huge amount of local government’s scarce resources on developing bids that are unsuccessful. Three-quarters of bids (618 out of 834) under rounds one and two of the Levelling Up Fund (LUF) were rejected,¹⁵ with each bid in the first round, costing local authorities nearly £88,000 to prepare, not including the substantial costs of their staff’s time. This could put the costs of developing bids for both rounds as high as £73 million, with local authorities themselves reporting at least £23 million was spent on consultants to help develop bids.¹⁶ Durham County Council alone reported spending £1.3 million on consultants to help prepare its LUF bids.¹⁷

And fourth, the competitive processes are often run in ways that prevent local authorities from developing strong bids. Competitions often have short turn-around times for submitting bids, meaning local governments submit the ‘shovel ready’ projects, rather than developing the best bids that they could.¹⁸ The investments zones are an extreme example of this. In October 2022, local authorities were given less than two weeks to submit expressions of interest, which were to be used to identify the places the Government thought were most suitable.¹⁹ Central government often does not make clear how bids are to be assessed and why the winning bids were selected over others. This has meant that local government is not certain how they can improve their bids (as well as raising concerns that political favouritism played a deciding role).²⁰

Competition can be a powerful policy tool for improving outcomes (See Box 1) but it should be used more selectively and not form the basis of funding for local government’s economic growth policies.

Management and accountability

Problem 5: Decision-making is centralised within central government, which means local government has little flexibility in determining which policies and projects would be the most impactful for economic growth in its area. Central government typically decides what intervention or narrow range of interventions each grant can be used for, or even chooses individual projects to fund when the grant is competitive.

Problem 6: Fragmented local government structures complicate the delivery of joined-up, local economic policies. In areas where there are two-tier district and county authorities, it is not straightforward as to which body should lead on the delivery of local economic policies as the two tiers have overlapping responsibilities. The Government seems to have inconsistently navigated this in recent years, for example making upper-tier county authorities the coordinating ‘lead’ authority for the Community Renewal Fund, but giving the ‘core’ allocation of its successor, the UK Shared Prosperity fund, to the lower-tier districts.²³

Local government boundaries often do not reflect the geographies in which people both live and work, which means a local economy is frequently split across different local authorities that need to coordinate to deliver effective economic policy. Combined authorities have been formed across a number of city-regions to mitigate this, but in other places this is still a problem. For example, Nottingham’s urban area is governed by nine different authorities.²⁴

Problem 7: Local government executive structures vary, often making effective leadership more difficult and reducing clear accountability to the local electorate, both of which increase the risk of poor governance.²⁵ Because of this, the Government is not willing to fully devolve funding to them. For example, the mayoral-led combined authorities receive five-year devolved transport budgets, but the Government has pushed back on calls to provide them to all county, unitary and non-mayoral combined authorities because of concerns about governance and local accountability.²⁶

The recent trailblazer deals with the mayoral-led Greater Manchester and West Midlands combined authorities shows that the Government will further devolve funding if additional accountability arrangements are put in place. But most places do not have the mayor-led executive model or these additional accountability arrangements, and without significant local government reform, a streamlined grant system must try to navigate this by increasing accountability over the funding in other ways.

Problem 8: Finally, local government capacity to manage and effectively deliver economic policies has been reduced significantly by funding cuts since 2010. Local authority net spending on economic development fell by 64 per cent in real terms from 2010/11 to 2017/18.²⁷ This has led to a reduced capacity in local government to both design and deliver effective policies.