Vivid Thoughts: Revamping Government Appraisals for Levelling Up, Part 1

The Status Quo

 

The Treasury is reportedly considering a refresh of its rules on appraising public spending to align with its new ‘Levelling Up’ agenda. The ‘Green Book’ sets out the approved approaches for assessing the benefits of government projects and choosing between different investments, and has been a Bible for civil servants developing business cases and bidding for funds. But there have been calls to remove the implicit London bias and encourage a greater focus on regional inequalities in both spending and outcomes. At the same time, the UK’s exit from the European Union may also give the UK an opportunity to reconsider its approach to State Aid, and with the prospect of a network of 10 Freeports being launched across the country, we consider how these guidelines should be improved and used to lure investment with long term, sustainable economic impacts.

Part 1: HM Treasury Green Book – the status quo

As the Government looks to change the rules for economic appraisal as part of its Levelling Up agenda, I offer my reflections on the Green Book and how it can be strengthened. This is based on recent first hand experience: For the past two weeks I’ve been attending a public inquiry in the Tees Valley, giving evidence in support of a regeneration scheme for the Southbank at Teesport, one of the UK’s busiest shipping ports. The wharfs are surrounded by a huge area of industrial decay; a graveyard of Britain’s steelmaking industry.

My evidence has focused on the public interest of the scheme. ‘Public interest’ is not defined in law, so the HM Treasury Green Book, which sets out guidelines for appraising all policies, programmes and public investment was a natural starting point. But those guidelines turned out to be inappropriate for a scheme which aims to address the economic challenges of the region following the closure of SSI Steelworks, which put 4,000 people out of a job and left a hole at the heart of the local economy.

The core framework in the Green Book for economic appraisal is a social cost-benefit analysis (CBA). As with all CBAs, this first quantifies and then compares the advantages (benefits) and disadvantages (costs) of government intervention. The ‘social’ prefix means that, rather than looking at the costs and benefits to any particular individual, business or institution (including government), impacts across society are estimated by aggregating all of these.

Ignoring the macro picture

The Green Book includes a number of restrictions on what can count as a benefit. Most importantly ‘macro effects’, including supply chain impacts are generally excluded, unless the programme can demonstrate that it increases productivity or labour supply, on the basis that an efficient economy is already operating an optimum capacity. Creating a job is assumed to displace a worker from another job. This deprioritises any scheme aimed to create jobs and underweights private investment. Essentially, everything that Tees Valley needs, the Green Book is silent on. Indeed, as part of the Levelling Up agenda, displacing a job from London to the North East might be seen as a positive outcome.

This has two important ramifications. The first is a naive appraisal of the economic impacts of an intervention. The assumption that the economy working efficiently is inconsistent with the need for a government intervention in the first place. It means Government spending on UK suppliers has no perceived economic advantage to spending on overseas suppliers. It means making the case for programmes designed to promote investment is tricky if you can’t demonstrate a productivity gain. And secondly, it means that regional regeneration programmes end up trying to demonstrate their merits based on the value they add to land rather than the jobs they create.

Vivid Economics has always been sceptical of the blind application of economic multipliers. But to ignore the potential of government and business spending to induce positive economic impacts through their supply chains is equally disingenuous. A better understanding of supply chains and their potential to absorb slack in the labour market is required. These must be analysed spatially so that the benefits of developing economic clusters, which support economies of scale, knowledge spillovers through and between supply chains, and ultimately productivity gains, can be promoted to support the Levelling UP agenda.

A London bias?

The Green Book also causes a bias towards London. Projects which raise productivity – whether that is skills training or infrastructure – tend to estimate these gains in percentage terms. And because London has higher values of economic activity per person and a larger population, such estimates produce bigger impacts for the capital. Prices are generally higher in London, so market-price based appraisal can favour the capital. The application of these guidelines can thus run against the Levelling Up agenda.

The guidance on considering regional or other distribution effects is sparse, and practitioners using the Green Book would be reasonably left scratching their heads about how they should include such impacts. Local governments have developed economic growth strategies and local industrial strategies, but central government’s appraisal process hasn’t figured out how to ensure these are given priority. Without understanding these nuances and adapting Green Book guidance, the regeneration scheme in Tees Valley would on paper be better moved to London.

All views are those of the author and do not necessarily represent the views of Vivid Economics.

Author

Dan Aylward-Mills

Sectors:

Cities

Capabilities:

Geospatial & Big Data Analytics
Market Design & Economic Regulation
Special Economic Zones
Sustainable development
Trade, Investment & Competitiveness

Regions:

UK

Products:

IIM