Glenn McCauley Tim Padgett 07 July 2016

Securing a ‘Brexit Dividend’

Regardless of individual personal views on the result of the EU referendum it is clear that the change in our relationship with Europe will require our leaders to make significant changes to how they generate economic prosperity.

In particular, the referendum results in the English regions and Wales highlight a growing disaffection with how the benefits of economic growth are shared across the UK. That means economic development in the UK regions must be a priority for Government.

This will have to start with the replacement of the arrangements that have shaped economic support policies since 1973, including the structural funds received from Europe. These support mechanisms will need to be re-engineered to safeguard current businesses and employment and then to enable new approaches to secure our future growth.

Securing a ‘Brexit Dividend’

Understandably the immediate focus for LEPs and local authorities’ is on what this means for their earmarked European funding streams. To ensure continuity, they will be lobbying hard for the funding currently paid through the EU to now come directly from central Government. This repatriation of funding displaced from our national contributions to the EU should bring a ‘Brexit Dividend’ to the UK regions, and should form a major part of city regions’ future negotiations with the Chancellor. In the context of potential further public sector austerity nobody though should be under any illusions as to how difficult it will be to secure these resources.

The sums involved are significant. The current European Regional Development Fund (ERDF) in England alone is in the order of £3bn and funding to Wales from the ERDF and European Social Fund is close to £2bn. There is no doubt that, without additional Government support to replace these, many of the existing programmes will have to be curtailed or stopped, leading to economic decline.

How should regions use their ‘Brexit Dividend’ in the new world?

This focus on the funding risks, however, draws attention away from the real challenges facing UK regions. In the immediate term, investment is frozen, imported component costs are increasing due to the weakened pound and cash flow will be under severe pressure. This is a far cry from business as usual, so justifying the continuation of new funding simply to continue old policies will not be the answer.

In response, regional economic authorities need to assess which sectors will be most impacted by Brexit and which of these to support. Then they will need to assess what capabilities they will need to deliver that support in the future. LEPs and local authorities already have a good knowledge of the most important sectors in their area, in terms of employment and wider economic benefit. The LEPS and LAs around Silverstone for example, the venue for the 2016 British Grand Prix, have created the High Performance Technologies Partnership to exploit their capability around technology, automotive and engineering. However, what is now needed is more granular level, company-by-company stress testing.

This should identify which particular businesses and sectors are most at risk from factors such as weak margins and high levels of imported inputs. This analysis should then be used to decide which sectors can realistically be helped, and so should be prioritised for targeted business support.

Reengineering business support

The advantage of this new environment is that support programmes can be developed unfettered by the need to fit within the EU’s ‘one size fits all’ economic policies, rules and regulations. Specifically the relaxation of State Aid and clawback regulations can be a catalyst for the private sector to play a bigger role in a mixed economy for the provision of business support services. Most of the support that businesses require can be provided by the private sector and policy makers do not need to invest in creating new providers.

Instead they can help create markets and add real value by creating an infrastructure which gives businesses the right information to find the provider who best meets their needs. Through providing smart digital diagnostic tools, the public sector can help businesses to assess their own needs and then direct them to the right advice and support at the right time. These applications - enabled by digital technology - can collect and distil large amounts of data which businesses can then use to respond quickly to, and even predict, new opportunities and changes in their markets. This data will also ensure that business support services can adapt to changing needs.

The UK economy is at a cross roads, but the regions do not have to go down the road of further economic decline. If the UK regions can design and invest in their own business support mechanisms they can begin to take hold of their own economic destinies and build the stronger and more dynamic businesses that will bring future prosperity

Glenn McCauley and Tim Padgett are economic development experts at PA Consulting Group

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