Grant Thornton Blog – Balancing economic growth and economic pressures

CCN Blogs | 29 March 2019

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The announcement last month that the Government is forecasting that the UK economy would be 6-9% smaller over the next 15 years’ in the event of a ‘No Deal’ Brexit has caught the headlines.  It has also added further weight to the very pressing challenges facing Councils and their leadership on the subject of growth.

At a macro level, UK economic growth remains sluggish.  It has been so since the 2008 financial crises and the subsequent recession.  It is a sluggishness that is projected to continue with the Treasury’s survey of independent forecasts showing growth of 1.4% in 2019 and 1.6% in 2020.  While the European Commission’s economic forecasts actually have UK growth at 1.2% for 2019.

It is no real surprise that the forecasters disagree.  What is clear is that slower growth is being driven by weaker private consumption, modest growth in real wages and households looking to maintain savings.  This is compounded by constrained business investment and uncertainty around future trade contributions.  Something the latest forecasts from the Government on the impact of ‘No Deal’ are only likely to compound.

Therefore, perhaps the only firm conclusion that can be drawn is that the scale of future growth is incredibly difficult to predict. And it is this uncertainty around the future of the UK economy that makes decision making at the local level all the more challenging.

For some places the local economy will be protected somewhat from the changes at the macro level as their local sector specialisms will be those that stronger growth.  At the other end of the spectrum there will be those that are harder hit.  And for these places there is the very real risk of a ‘double whammy’ with slower growth impacting on Council income (particularly in terms of business rates) alongside increasing expenditure as pressures increase on local services in response to reduced employment and business failure.  Given the already high pressure on local authority budgets it is an increase few can afford.

As we work with local authorities in navigating these challenges we are seeing four separate, but clearly closely related, themes.

  • The importance of rigorous business cases that are subject to a range of different sensitivities – Authorities are increasingly seeing the importance of adopting a more commercial approach to real estate as a means of supporting income generation and growth opportunities. These are complex investment decisions and need to be grounded in strong business cases that are subject to rigorous appraisals and cover a broad range of sensitivities – not least what if the economy were to shrink by 9% over the next 15 years.
  • The exploration of different growth models – We are seeing at both the local level and through conversations with Central Government a move away from the previous focus on growth as measured simply by jobs created and increases in Gross Value Added (GVA). For Central Government the arguments are driven by a policy imperative to improve productivity and an economic argument that the country is at ‘full employment’ so any new jobs created are simply displacing employment from elsewhere in the economy. At the local level the picture is more complex, and is increasingly driven by a desire to better connect economic growth with social improvement.  For some this has driven a focus on productivity improvements through R&D and the investment in skills or a focus on higher productivity jobs as a means of raising wage levels and in turn the quality of life in the local area.  For others it is ensuring that the links are in place so that growth in the economy more directly impacts on or benefits the more deprived elements of their community – for example creating clearer employment pathways that provide local residents with the skills and support to access local job opportunities.
  • A focus on place over the organisation – Increasingly we are seeing local authorities tackle the challenge of growth by focusing on place as opposed to the organisation. In practice this has meant two things. First, drawing together local leaders from across different organisations to identify the strengths, opportunities and challenges of the place as a whole and then to collaboratively work out what actions, investments and activities are required.  Second, to think beyond the administrative boundary of their place and to understand the wider economic area in which they are part of.  The unique nature of two-tier governance in and the scale of county areas means that county leaders are well placed to lead in these discussions as there is an inherent experience in dealing with this organisational and geographic complexity.
  • Taking a longer term view – While the financial pressures for local authorities are very real in the short-term and there is significant uncertainty around the longer term growth of the economy this does not diminish the need for local authorities to take a longer term view around what they would like the economy of their place to be in 20 or 30 years. This longer term horizon is something a number of authorities are or are starting to look at. Establishing this vision is not easy, it requires extensive engagement within and outside the authority; it needs boldness and creativity; and it requires strong place-based leadership.  However, where a local authority is able to establish a longer term vision it provides an invaluable framework against which shorter term priorities can be set and investment decisions made.  It provides a set of short and longer term outcomes against which progress can be measured and communicated.  It provides a roadmap for the place brining partners and budgets together. And culturally it can also provide energy and excitement amongst officers enabling them to feel more positive about the important role they have to play.

Balancing longer term economic growth against immediate term economic pressures is not easy.  It is a very real challenge and one that is made all the more complex with the uncertainty that remains around the UK’s exit from the European Union.  Positively authorities are not standing still and waiting.  They are taking action.  They are adapting their approach.  They are taking responsibility.

Rob Turner

Director, Public Services

Grant Thornton UK LLP