Levelling-up & county deals – what does this all mean?

The decision by Devon County Council to bid for a “County Deal” has significant business implications and needs to be understood as part of the National Recovery Programme.

The Government’s policy is flip-flopping as it gropes for clarity on where exactly the UK economy is really heading.  SWBC has been preparing, during the last 2 years, for two key initiatives – The National Industrial Strategy and Devolution Reforms.  Both have been effectively airbrushed out and superseded by the “Levelling-Up” agenda, based initially upon a series of “County Deals”.  The plan is to widen the scope of local devolution beyond larger cities and urban areas, in an attempt to spread prosperity more evenly across the country.  This is a belated manoeuvre to reform one of the most centralised democracies and regionally unequal economies in the world.

Our South West Local Authorities deserve great credit for tackling this opportunity with Unitary Cornwall, a single authority in Somerset and now Devon pursuing the initiative. 

The simple proposition is that the challenges of the economic recovery demand that decision-making be devolved to local government – local leaders.  All the evidence (as confirmed by the All-Party Parliament Group on devolution) is that, across a whole range of issues, putting power and resources into the hands of democratically elected local leaders delivers better outcomes and gives communities a greater opportunity to shape the future of their local area – such as integrated supply chains. 

COVID has clearly demonstrated that local government’s handling of these crises has been more flexible, effective and responsive than central government.  This is for the very obvious reason that the widest range of social and economic factors are realistically only visible to leaders rooted in the local community.  What is equally clear is that the system of local government taxation, already under huge strain, is no longer sustainable, therefore reinforcing greater powers to set revenues locally.

The South West region has been here before, arguing that the Government’s approach was out of step with the needs of the Peninsula economy and our communities.  Whitehall was convinced that the model of metro-mayors was the template to use.  Undoubtedly, this has been successful for a limited number of big cities but arguably it has run its useful course.  A wider and more flexible approach is essential.  Given the scale of the economic and social challenges ahead, metro mayors are clearly not appropriate for every community, not least of all those which are not metropolitan. 

Perhaps a good example of this need for flexibility would be to embrace the conclusions of a recent Frontier Economics survey, which demonstrates that investment in social infrastructure – such as places to meet, local transport and digital connectivity – produces far greater value for money than could be achieved by Whitehall.  For every £1 million spent on social investment, the return is estimated to be £1.2 million in increased incomes, better health and reduced crime.

The Prime Minister himself acknowledged the failing of the current system – why, for example, he asks is it that 31 years after German unification the per capital GDP of North Eastern England is lower than the old East German region?  Why is it that the population of Bath has 78% with the equivalent of A level qualifications, whilst Bradford has only 42%?

It is also a painful reality that Research and Development can materially assist this rebalancing.  Here, the UK has a lot of catching up to do. Currently, we spend just 1.7% of GDP on this, well below Germany 3.1%, the US 2.8% and France 2.2%.  It seems clear that the UK has never properly thought about using R&D investment as a tool for promoting economic development.  This, and the lack of a consistent and coherent industrial policy, has for the last 40 years, suppressed tech and advanced manufacturing.  Instead, we have relied on the services industry, many parts of which have lower-paid jobs and productivity.

The need for local action has never been clearer.  The Government is struggling to understand how to wean the economy off pandemic support.  Intervention financing is masking the route to a healthy functioning system.  The Business Secretary Kwasi Kwarteng is working through plans to adopt a “Free Market Approach” as part of a “National Enterprise Strategy” designed to stimulate investment and encourage Small Businesses and Entrepreneurs.  This will include a new “Infrastructure Bank” and the “Future Fund”.  Apparently, this will also refine regulations to free companies to invest, by providing much more regulatory certainty.  This policy will be rolled out beside new strategies on Innovation and Net-Zero. 

Observers of the history of economic policy would say that you don’t have to roll back too far to see what a dysfunctional approach this is.  Lord Chris Haskin was appointed in 1997 as the Tsar of the Better Regulation Task Force.  Even his brilliance failed, as have “one-in one-out” promises and sunset clauses. 

Was it a deliberate move that no mention has been made of the Shared Prosperity Fund?  This was due to be rolled out in April 2022 and was designed to replace much of the European funding that had been awarded to regions across the country.

Until someone can prise the Treasury’s vicelike grip from public spending, particularly as they work out how to recover the £350 billion spent in fighting COVID, nothing much will change.

Relevant here is a reality check on the UK economy.  It seems clear that the Bank of England is poised to respond to the potential that unemployment has peaked.  It is taking a measured approach to unwinding Quarantine easing, developing a recovery tool kit and (sensibly) avoiding knee-jerk responses to tightening monetary policy.  This is despite concerns regarding inflation, supply chain bottlenecks, labour market dislocation, accumulated debt and unsustainable consumer demand.  Central to its approach is the primacy of interest rates.  It is certainly the case that “modest” interest rate rises should be anticipated over the next 3 years – maybe 0.1% rising to 0.25% by Q2 2022.

It is certainly concerning that nationally, levels of business investment are still over 15% below pre-COVID levels.  Additionally, manufacturing output has currently flat-lined and exports to the EU are down 14.5% in the first half-year and imports down 23%.

Perhaps a reflection on just where we are as a regional economy would also be useful.

On one side of this debate there are grounds for optimism.  Confidence is high that COVID will shortly be downgraded from pandemic to endemic.  Companies across the South West are continuing to hire at record rates, partly driven by the exceptional demand from staycations and relaxation of lockdown measures.  Business activity and recruitment have grown at a faster rate than any other UK region, both in manufacturing and services sectors.  Recent findings by the Resolution Foundation show that labour market losses suffered during COVID have recovered and indeed surpassed their pre-pandemic levels in certain areas including Cornwall and the Isles of Scilly.

Against this must be set issues, such as what will happen when the current tourist spike fizzles out?  The latest productivity figures show that the South West suffered a “sharp and accelerated” rise in the level of “outstanding business”.  The reasons for this are limited capacity and materials shortages.  It is clearly also impossible for local businesses to keep absorbing the effects of steep rises in inflation, greater costs for labour, materials and transport (particularly shipping).  Other significant pressures include unprecedented levels of debt across all business sectors (small retail businesses owe over four times as much as they did 12 months ago – estimated £1.7 billion), the literal carnage of traditional High Streets who are losing turnover to online trading on a daily basis, the residual impact of COVID on hospitality, tourism and leisure, the need to start repaying bills (such as business rates, rents, bounce back loans), pressures for wage growth and the unwinding of the Furlough programme.

The vulnerability of the South West economy is a major concern.  It is highly likely that recovery will be very patchy across the regions of the country.  This further underlines the case for local leadership, rather than waiting for the government’s white charger.  The business community should certainly be fully supporting our Local Authorities’ attempts to wrestle power from Whitehall.

Tim Jones
Chairman, South West Business Council