Professor Kevin Morgan says that Wales has one of the biggest economic development problems in Western Europe. The new Local Growth Fund (LGF), which will replace the Shared Prosperity Fund (SPF), will play a key part in the Welsh Government’s work to address this.
Ahead of the Plenary debate on the Senedd’s Economy, Trade and Rural Affairs (ETRA) Committee’s report on the LGF on 11 March, this article outlines the economic challenges the fund is trying to address. It also explores how the proposed design and approach to delivering the fund will impact how effective it is at contributing to tackling these issues.
Our article from last December sets out how the LGF will operate.
What challenges is the Local Growth Fund looking to address?
Professor Morgan highlights that Wales is approaching “a century of relative economic decline”. He has called for “serious firepower” and “multi-annual thinking” to start to address the challenges the Welsh economy faces.
The Welsh Government intends to use the LGF to “support productivity growth and tackle issues leading to economic inequalities across Wales”. The latest figures from 2023 show that Gross Domestic Product per head in Wales was 73.6% of the UK average, and that our productivity per head was 84.9% of the UK average. As the Federation of Small Businesses Wales highlights, “our overall gross value added or productivity levels [per head] are pretty much where they were 25 to 30 years ago” as a proportion of the UK average. While unemployment is currently below the UK average, the economic inactivity rate in Wales has been higher than the UK average for much of the last ten years.
There is also considerable variation in economic performance across different parts of Wales.
To what extent will the Local Growth Fund help address these challenges?
FSB Wales highlighted that a single funding stream won’t change Wales’ economic performance on its own:
…let's be under no illusion: this isn't the policy lever that's going to change Wales's economic fortunes; it's a supplement, not the answer on its own.
There is agreement from stakeholders that the areas the LGF will cover are the right priorities, with the Welsh Government’s consultation finding “strong endorsement for focusing on economic inactivity, productivity gaps, and inequalities”. However, there are concerns about whether the proposed design of the LGF will maximise potential benefits. For example, the Industrial Communities Alliance (ICA) says that, under the current proposals:
…we won't have the big vision, we won't have the transformative projects that we really need to have, and we certainly won't have the capability of having anything like a long-term programme for investment.
Funding reductions will also pose a challenge. The UK Government is providing £547 million to Wales for the LGF between 2026-27 and 2028-29, which works out at around £182 million per year. The ICA calculates the annual funding Wales will receive through the LGF has been reduced by almost half compared to the level of funding Wales received through the SPF in 2024-25. The ETRA Committee is “disappointed with the large reduction in funding” Wales faces compared to previous funding streams.
How will revenue and capital allocations affect delivery of the fund?
In Wales the LGF will be around 70% capital funding (spending on fixed assets like buildings and equipment) and 30% revenue funding (spending on day-to-day running costs such as pay). This is a change from the SPF, which was mainly revenue funding, and is in line with the UK Government’s approach to industrial strategy. The situation for the LGF in Wales, Scotland and Northern Ireland is different to that in England. The LGF in England will transition from around 25% capital and 75% revenue in 2026-27 to around 60% capital and 40% revenue in 2028-29.
There will be considerable challenges associated with delivering a mainly capital fund that lasts for three years. The ICA notes this hasn’t worked previously, saying that:
We had thought the Treasury had learnt the lesson, so clearly demonstrated by Johnson-era levelling up initiatives, that it is unrealistic to expect meaningful capital projects to be delivered on short timescales.
Despite the challenges outlined, there are ways to spend capital funding over a short timescale that could be impactful. Professor Paul Boyle told ETRA Committee that universities could increase growth and productivity by investing in equipment. Professor Morgan said that “having a real blitz on sites and premises” would make a tangible impact.
The ETRA Committee heard widespread concern about the capital-revenue split, due to the potential impact it will have on jobs in local authorities. Councillor Rob Stewart, Leader of Swansea Council, explained that:
One of the challenges with the split that’s been proposed in terms of revenue/capital is that we’ve got, across Wales, over 2,000 people employed on programmes that are supported through the current SPF programme, through the revenue that’s provided.
The Welsh Government is “deeply unhappy” with the current split, and has sought to mitigate against potential consequences by introducing a transition year for the fund, which will use existing SPF delivery mechanisms and allocate funding in the same way as the SPF.
The Cabinet Secretary has met with the UK Government to seek changes, but doesn’t think that “we're in a place now where we're going to see a change in mind from the UK Government on that particular point”. The UK Government told the Cabinet Secretary that, when the England-only Mayoral Revolving Growth Fund is combined with the LGF, English Mayoral Strategic Authorities will also have a roughly 70% capital and 30% revenue split. The ETRA Committee was unconvinced by this explanation, which it does not think is a like-for-like comparison.
What roles should organisations play in delivering the fund?
Disputes about which level of government should deliver regional development programmes have been a feature of recent initiatives. The Welsh Government intends that there will be some Wales-wide LGF interventions, but that the majority will be developed regionally, by Corporate Joint Committees (CJCs), following the transition period.
Some respondents to the Welsh Government's consultation “expressed concern about current CJC capacity, governance maturity and sectoral representation”. The ETRA Committee highlighted challenges some CJCs had faced in delivering City and Growth Deals, and in directing investment towards more economically deprived areas.
The Cabinet Secretary said she would work with local government and CJCs as part of the transition year to address the concerns raised. She said CJCs have been chosen as:
Strategic economic development, regional transport planning and land use planning are going to be core levers that will be required to underpin regional growth and will be crucial to the success of the local growth fund.
Decision-making has been returned to the Welsh Government for the LGF. The Welsh Government will report to the Senedd on the performance of the fund, and to the UK Government through an annual review process. The Cabinet Secretary has described the proposed oversight by the UK Government as “a very light‑touch relationship” compared to working with the European Commission on EU Structural Funds. However, the ETRA Committee is concerned about the level of control the UK Government will have in relation to the fund. It has called for the relationship between the two governments to be clarified in the Memorandum of Understanding the two governments are currently developing for the LGF.
What’s next?
Over the coming weeks, the Welsh Government will publish its investment plan, and hopes to finalise its MoU with the UK Government in relation to the fund, ahead of the fund starting in 2026-27.
You can watch the debate on the ETRA Committee’s report on Senedd TV.
Article by Gareth Thomas, Senedd Research, Welsh Parliament
