Chelsea Dosad 29 May 2020

How local economies can recover from a global crisis

How local economies can recover from a global crisis image

The economic impact of Covid-19 is already affecting the entire country. And while forecasts vary when it comes to the length and breadth of its impact, the effects on local economies depend on local circumstances.

So what factors come into play when forecasting the impact of Covid-19 on regional and local economies?

The local economy’s reliance on sectors that have ‘gone into hibernation’ during lockdown

Many sectors may be the least able to ‘bounce back’ once lockdown is lifted. For example, hospitality, tourism and high street retail rely on consumer confidence and spending. Manufacturers depend on others up or down their supply chain.

The types of businesses in these sectors and their financial resilience

Both the mix of SMEs and larger businesses and the split between employees and the self-employed will have an impact. Their access to working capital will too.

Differences in local demographics

Factors like age, education, and the incomes and make-up of households, all play a part. If residents lack transferable skills, they may struggle to adapt if they have to search for employment. On the upside, this crisis has proved that workers can do their jobs effectively from a distance. This means they can live where they like (as long as the broadband is good enough).

Urban and social structures

These can vary considerably. Is transport use private, public or a mixture of both? Are residents crammed into urban areas or dispersed around the countryside? Is there a high street, a town centre, a city centre or out-of-town retail park? The list goes on.

And let’s not underestimate the influence of government. The medium-term effect on local economies depends on how the government strikes a balance between supporting economic recovery and managing the deficit. Against this background, government departments are turning their attention from ‘respond‘ and ’restart‘ to developing an approach for ’recovery‘ and planning for a ’new reality‘.

We’re also likely to have a Spending Review later this year. It’s an opportunity to promote a place-based approach to economic recovery. Ideally, the government will provide short-term stimulus to local economies as well as locking in longer-term policy priorities. That would allow for an economic recovery which boosts long-term productivity and supports the transition to a high-value, low-carbon economy.

What should local areas focus on now?

Local authorities should combine short-term actions i.e. for the next 12-18 months with planning for a ‘new reality’ in the next three to five years. The challenge is they have to do so with very limited resources.

These are some of the areas they should focus on:

1. Review priorities for future public investments

Pre-pandemic investment plans might not support economic recovery. And if finances are tight, publicly funded investment must go further. With differing views on what the ‘new reality’ looks like, local authorities should focus on scenario planning and risk-based approaches to investment decisions.

Finding ways to boost short-term demand for labour and supply chains. Local capital investment projects can help reduce unemployment and demand-side impacts, while also boosting productivity. To succeed, they need other measures like training and business support initiatives for local residents.

Establishing how these priorities contribute to long-term policy objectives. Challenges like raising productivity and living standards aren’t going away. Avoid capital investments that could turn into a ‘white elephant’. Think about which projects will help accelerate long-term plans, like unlocking new housing, low-carbon transport or retraining the workforce.

Determining what you can do to accelerate delivery timeframes. Focus on what you can deliver soonest, as that will help stimulate the economy.

2. Streamlining and speeding up local decision making

There are other ‘soft’ levers that local areas could pull to encourage private investment. Local planning policy is one example of this. For example, putting construction back on track will generate economic stimulus and support other long-term policy objectives, like a lack of affordable housing.

3. Squeeze the value out of the deal

At a time in which public funding is even more stretched than it was before, investment plans need to be even more ingenious in driving out best value for the taxpayer. Think about commercial delivery structures which help to de-risk projects for the private sector and address finance market failures. Housing and regeneration schemes could be areas of opportunity here. And for schemes which do require grant funding, consider the wider economic and social benefits of these investments – with a sharp focus on how to ‘build back better’. Local areas should work with government to make place-based economic recovery the core of future investment planning. Many of these programmes are still a work in progress, including, MHCLG’s Single Housing Infrastructure; the DfT’s Bus and Cycling Fund, the new Shared Prosperity Fund and the National Skills Fund.

4. Planning for a ‘new reality’

A local economy’s ‘new reality’ needs to be reflected in their medium and long term strategies. With smaller budgets, long-term investments should focus on growth and exploit funding contributions from those who stand to gain from that growth. To succeed, local areas will need the fiscal freedoms to do this on a much more efficient, effective and fairer basis. Covid-19 makes me reflect on whether the current funding model for local government is fit for purpose. It relies on a local tax system that is still controlled nationally, largely based on a 1990s property market, and places a disproportionate burden on a small segment of the local economy. So, we need to rethink funding and we need locally tailored approaches to economic recovery while acknowledging at the same time government bandwidth is taken up by other challenges.

Chelsea Dosad is an associate director in KPMG’s Infrastructure Advisory Group

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