City Finance and Governance

POWERS TO GROW: CITY FINANCE AND GOVERNANCE

SEPTEMBER 2014

ABOUT THE CITY GROWTH COMMISSION

Chaired by renowned economist Jim will seek to influence all political parties in O’Neill, the City Growth Commission the run up to the 2015 UK General Election, seeks to understand: and make the case for cities to take a new • how we can achieve complementary role in our political economy. growth between London and our other The Secretariat is hosted and run by the cities RSA, an organisation committed to finding • what fiscal powers and governance innovative and practical solutions to today’s arrangements are needed to deliver social challenges through its ideas, research this, and and 27,000-strong Fellowship. • how public service reform can start The City Growth Commission was to make cities more fiscally sustainable launched in October 2013 and is funded The ultimate objective of the by the Mayor of London, London Councils, Commission’s twelve month inquiry is the Core Cities Group and the Local to lay the foundations for a stronger UK Government Association. Our partners economy through a significant power shift include New Economy Manchester, away from the centre and towards cities, and the British Venture Capital Association, to show the next government, of whichever Universities UK and the Joseph Rowntree party, why this is needed and how it can be Foundation. achieved. Our recommendations will set out a road map for change; the Commission

1 FOREWORD BY JIM O’NEILL

In each of our three previous City Growth and long-term economic future. What Commission report I found myself arguing happens in the likes of Bristol, Cardiff, each was the most important – well at Edinburgh, Glasgow, Leeds and all of the least to date! There we set out to define other 15 metros we defined in our first paper what we mean by metros and the scope will be more important for UK economic of our analysis; skills and employment; growth than what happens in the rest of and connectivity and infrastructure. Scotland combined. In this report, we discuss in detail the So enabling the leaders of these major crucial topic of city finance and governance urban areas to decide what is right for – significant issues for our policymakers them, and with it, for them to carry the at all levels of government to consider responsibility for those decisions is crucial. in order to realise the full potential In this report, we lay out the key areas of of the UK economy. financial responsibility we believe should be Here, and in our final recommendations transferred to some metros. Crucially, and in October, we present the ideas of the as clearly suggested by the Chancellor in Commissioners and the RSA research team. early August, it is only sensible to devolve But, what is ultimately critical for our metros this fiscal responsibility to those urban areas to thrive is for each to identify what is right that can demonstrate they can succeed with for them. Just as it is the case that those in this greater autonomy. We have found from Whitehall are hardly in a position to know our evidence gathering around the country what is best for the future of different parts that some metros are more ready today of our country, however well-intentioned, than others, and it would not make sense it is also the case that our central to devolve responsibility to them all now. recommendations, again well-intentioned Indeed, it is probably the case that only the and evidenced-based, may work for some best organised and most focused should be cities and not for others. given those responsibilities. As we highlight, the degree of centralised We have deliberately held back from control in the UK is dramatic compared to naming those metros that might be capable other major economies, whether developed of increased responsibility in this report. or developing, and it doesn’t seem obvious The experience of our previous reports has as to why this makes good economic sense taught us that our ideas can quickly gain for either those that live in different parts traction, promoting responses from national of the country nor the country as a whole. and city leaders; our recommendations for As we have all witnessed with the run-up to limited devolution for some today might the Scottish referendum on independence, encourage others to organise themselves some of our citizens want to have more more effectively to warrant the same decisions made about their futures by those responsibilities tomorrow. who live and operate in their communities. However, the economic importance of our metros is the basis of our medium

2 CONTENTS

FOREWORD 2

ABOUT THIS REPORT 4

EXECUTIVE SUMMARY 6

1. THE RISE OF THE CITY STATE 12

2. THE ROADMAP TO DEVOLUTION 24

3. RECOMMENDATIONS 27

REFERENCES 34

3 ABOUT THIS REPORT

This report, the Commission’s fourth Acknowledgements research output, is based on evidence The authors would like to thank City received and research undertaken by the Growth Commissioners Jim O’Neill and City Growth Commission. It has been Ben Lucas for their guidance throughout informed by three regional hearings and the project. Alex Gardiner, Alex Jones, in-depth discussions with experts across Zach Wilcox and colleagues at New local, city and national governments, Economy Manchester and Centre for Cities academia, other think tanks and have also provided research support and consultancies, as well as written policy insight throughout the process. evidence submitted to the Commission.1 The practitioners and policymakers In this report, as with all reports of with whom we have consulted in this the City Growth Commission,2 we use project are too extensive to mention here. the concept of a metropolitan area as However, particular thanks should be the relevant geography to understand extended to a few individuals who have city growth. Metros are not just about been particularly generous with their time city centres. Their reach extends to suburbs and support: Damien Smith, Joe Manning and surrounding areas as places of work, and Andrew Sissons (Cabinet Office, leisure and retail. Many rural businesses, Cities and Local Growth Unit), Jeremy for example, depend upon metros for Skinner and James Lee (Greater London accessing urban markets, customers Authority), Karl La Ferla (Infrastructure and the connectivity cities provide to the UK, HM Treasury), Tom Flude (Transport rest of the UK and the world. This report for London), London Councils Finance and uses the terms metro, city and city-region Performance Team, and colleagues at the interchangeably. Local Government Association. Thanks also go to those who responded to the City Growth Infrastructure Survey. These responses were especially helpful for framing the debate.

1. Available to view online at www.citygrowthcommission.com. 2. See our first three research outputs, “Metro Growth: The UK’s economic opportunity”, “Human Capitals: Driving UK metro growth through workforce investment” and “Connected Cities: The link to growth”.

4 ECONOMIC SNAPSHOT

NOMINAL GROSS VALUE ADDED (GVA) INCREASED BETWEEN 2011 AND 2012 FOR ALL REGIONS AND COUNTRIES EXCEPT FOR THE EAST MIDLANDS WHICH WAS BROADLY FLAT. THE SOUTH EAST SAW THE GREATEST INCREASE IN ITS TOTAL GVA, INCREASING BY 3.3% FROM £196 BILLION IN 2011 TO £203 BILLION IN 2012.

NORTH EAST In 2012, exports of goods as a percentage of GVA were highest in the North East (30.8%) and lowest in London (11.3%).

WEST MIDLANDS EAST MIDLANDS From 2010 to 2012, the East Midlands had The largest fall in unemployment between the largest proportion of innovation active February to April 2013 and February to April businesses, at almost 50%. 2014 was in the West Midlands (falling 1.9 percentage points from 9.4% to 7.5%).

NORTHERN IRELAND EAST OF ENGLAND In 2013, Northern Ireland had the lowest In 2012, business R&D expenditure weekly earnings, £463 (residence based) as % GVA was highest in the East of and £460 (workplace based). England (3%)

WALES Between 2007 and 2012, Wales saw the largest percentage point increase in exported goods as a share of GVA, from 20.3% to 28.1%.

KEY £ per head 2012

24,000 to 38,000

22,000 to 23,999 SOUTH EAST 20,000 to 21,999 In 2012, London and the South East were 19,000 to 19,999 LONDON the only regions which were more productive than the UK average (by 31.2% and 7.7% 18,000 to 18,999 London saw its share of UK GVA rise respectively). from 19.8% in 1997 to 22.8% in 2012. 17,000 to 17,999

16,000 to 16,999

15,000 to 15,999

UK average SOURCE ONS Regional Economic Indicators July 2014 NOTE Data not available at city-region (NUTS3) level

5 EXECUTIVE SUMMARY

Innovative, competitive and resilient is awarded on an annual basis. Revenues economies are built on stable institutions are inflexible, uncertain and contingent that engender trust between trading on national politics. The economics of partners, encourage investment in quality ‘place’ are not part of the complex Local infrastructure and public services, and foster Government Finance equation, leaving socially productive communities. cities restricted in the degree to which In the UK, one of our strongest attributes they can respond to the current and future as a major global economy is the strength needs of their functional economic areas. of our institutions: our trusted legal system Over recent months, the importance forms the backbone of many international of cities in driving growth and prosperity contracts, our mature and transparent has been increasingly recognised, rising legislative system helps to minimise political up the political agenda to the highest risk for investors over the long term, our levels. Two speeches from the Chancellor independent Bank of England depoliticises of the Exchequer, a commitment from the our monetary policy and balanced regulation Leader of the Opposition that he would provides a stable platform for competition ‘champion devolution’ in government in global markets. and an active listening campaign from the However, the configuration of our Deputy Prime Minister – Northern Futures – political economy – while cultivating this have set a new political tone. healthy business environment – is holding Already many of the Commission’s our metros back. The UK economy is falling ideas have gained traction in Whitehall short of its potential as our cities, with and Westminster, notably the Chancellor’s their concentration of labour, capital and warm welcome of improved East-West information flows, are stifled by the overt connectivity via the proposed ‘One North’ centralisation of policy decision-making. integrated transport system.4 A clear space While global competitors are free to invest for real change has opened up in policy in their major cities, UK metros are at the terms; metros could soon be in the drivers mercy of central government, hoping for a cut of economic policy-making. of a fixed pot of national income. The UK has However, this report argues that while the most centralised system of public finance much has been achieved under the Coalition of any major OECD country; sub-national to further the cause of city-led growth (e.g. taxation accounts for only 1.7 percent of City Deals, Growth Deals and the formal Gross Domestic Product (GDP), compared to establishment of 5 Combined Authorities) 5 percent in France and 16 percent in Sweden.3 the UK’s default mode of centralisation With this comes tight ringfencing of which emerged over the last half century, capital and resource funding, most of which still represents a significant hurdle. This

3. Travers, Professor, T. for the Local Government Association (2012). 4. One North (2014). A strategic transport proposition put forward by city regions Leeds, Liverpool, Manchester, Newcastle and Sheffield.

6 report addresses some of the biggest and challenges to the social and economic challenges involved in the decentralisation fabric of our cities, with some facing the process, with a view to embedding prospect of a fall in the suitably-skilled transformational reform. working-age population. To compete on the global stage, the City City-regional devolution will take time, Growth Commission argues that UK metros as national and local governments develop need sufficient decision-making powers a more mature partnership, respecting and flexibilities to become financially self- new boundaries and spheres of influence. sustainable. Social and democratic arguments Crucially, it will rely upon demonstration for devolution have been made by others,5 of sophisticated financial capability and while the City Growth Commission and risk management, enabling metros recognises many of these, we concentrate on to deliver their share of continued budget the merits of the economic case for change. consolidations.6 Working with local partners to support City-regional devolution will also growth and deliver high quality public service hinge upon effective governance and outcomes, metros need to be empowered accountability structures, visionary to tackle the long-term causes of welfare leadership and the economic growth dependence, manage down their share of potential to ride the difficult storms of the national deficit and – by more integrated, decentralisation and devolution. City-region informed investment decisions – help put devolution is therefore not for everyone. the UK economy on a more inclusive, Our recommendations do not immediately sustainable footing. apply to all metro areas as some are not This report stands behind the conclusions yet ready to deal with those challenges or of the London Finance Commission and responsibilities. But some cities do already Communities and Local Government exhibit these qualities and are eager to take (CLG) Select Committee report, but aims the opportunity to power their economic to go further, advocating more ambitious futures with greater autonomy. For these decentralisation and devolution for those cities cities, central government must relinquish able to shoulder the burden of genuine risk. control as soon as is practical. Devolution should not be a top-down If the UK economy is to continue to blanket ‘policy’ but a process through which grow, and if this growth is to be inclusive the UK’s major metros can benefit from and sustainable, our cities need to be new powers and flexibilities that match empowered to reach their economic their capability and ambition. For some potential. This will require devolution cities, the economics of agglomeration of finance away from central government – concentrating and connecting highly to city-regions, as well as genuine productive resources – might remain elusive. decentralisation of decision-making Local politics and entrenched identity issues and risk transfer. can make collaboration within and between This Commission supports functioning economic areas difficult; modern decentralisation to the top 15 metros in travel to work patterns do not always the country,7 as defined in our first research align with the legacy of administrative output,8 as economic growth measures denote boundaries or the relationships between that these metros are most fit for supporting local authorities. Similarly, changing decentralisation. This does not, however, demographics can pose both opportunities preclude decentralisation to other metros

5. See for example Communities and Local Government Committee (2014) and Institute of Public Policy and Research (2014). 6. In the context of unprecedented levels of public sector debt and cross-party commitment to deficit reduction, this is a valid concern that the City Growth Commission recognises needs to be addressed. 7. London, Greater Manchester, West Midlands, West Yorkshire, Glasgow, Merseyside, Tyne and Wear, South Yorkshire, East Midlands, South Hampshire, Edinburgh, Cardiff Capital, Bristol, Belfast, Leicester, South Sussex, South Dorset, Teeside and Potteries metros. 8. City Growth Commission (2014).

7 or localities at a later stage, should they be tax bands, apply a ‘tourist tax’ or pool ready to operate under a reformed system. their finance streams to enable place-based Those 15 metros will wish to move at budgeting at city-regional scale without different speeds along the devolution and departmental ringfencing. The City Growth decentralisation trajectory. For example, Commission argues that the spectrum Greater London already holds certain of economic potential, administrative powers that allow for some strategic finance and capability and local political ambition can planning across the capital region, but the city be accommodated, but it will demand a has ambitions to grow and respond more radical shift in how national and city-regional flexibly to the changing needs of its rapidly governments see themselves. growing population. Meeting these challenges With that in mind, we advocate a series will require greater devolution of decision- of recommendations for cities and central making and financial controls, including government, found on page 27. Some devolution to groups of boroughs, if deemed should be applied across the board, suggesting appropriate. To achieve this, the London asks of both central government and metros, Finance Commission has prioritised devolution while others will need to be implemented in of property taxes as a key next step. consideration of individual metros’ readiness Meanwhile, other cities have indicated for further decentralisation and devolution. a desire to retain business rates, set council

DEFINITIONS

The Commission uses the following • flexibility to borrow, for example, definitions for decentralisation and through the creation of place-based devolution to metros: budgets; Decentralisation: denotes the relaxation • Have sufficient flexibility to create of central government’s control over a sustainable borrowing portfolio spending programmes, allowing local within the rules of the Prudential retention of revenue and freedom to Code,9 which includes borrowing spend central government grant funding in open capital markets. For example, (both capital and revenue) without cities may choose to follow a similar ringfencing, creating a move away from arrangement as agreed via the Silk siloed, project-based spending, allowing Commission in Wales, granting local areas to flexibly spend according borrowing flexibility up to a maximum to local needs and characteristics. of £400 million, enabling a limited, known sum to appear on the central Fiscal devolution: denotes the balance sheet. passing of a set of powers down from central to metro governments’ control, Devolved Status: status given to metros enabling metros to: that have been independently assessed as demonstrating robust governance • Raise and retain funding through and accountability structures, visionary a range of existing taxes and leadership and the economic growth charges, such as property taxes; potential sufficient to ride the difficult • Pool revenue streams and leverage storms of devolution. Devolved Status other assets, giving metros the implies metros receive all aspects of fiscal devolution defined above.

9. Chartered Institute of Public Finance and Accountancy

8 KEY TAKEAWAYS FOR METRO GROWTH

The strength of UK institutions is one meantime, we advocate reforms across of our strongest attributes as a major the board, for both central government global economy. Yet, despite cities and metros, including: being the drivers of UK growth, the • Tax and local government finance configuration of our political economy reform; is holding our metros back. Metros are at the mercy of central government, • Constitutional and Whitehall with tight restrictions on capital and reform; and resource funding – limiting the degree • Demonstration of metro commitment to which metro leaders can respond to to competence and capability the current and future economic, social and environmental needs of their city. And further decentralisation for those ready to gain greater autonomy and While many of the City Growth move along the trajectory towards Commission’s proposals have already devolution, including: gained traction across political spheres, the default mode of ‘Whitehall knows • Multi-year finance settlements; best’ still remains a significant hurdle • Freedom to spend grants without to future economic prosperity. Radical ringfencing and greater borrowing change to overcome this can be flexibilities; and achieved, but only if all three parties are daring enough to take on the ground- • The ability to retain the proceeds breaking package of fiscal devolution of growth through outcomes- measures put forward in this report. focused finance models. Some cities are ready and able to take Of course central government will still on the responsibility and associated risks continue to have a role; the Commission of devolution – they have the leadership, does not advocate full devolution. financial management and accountability Central government will still be dominant structures to administer a devolved in setting and administering taxes where city-region – and should be freed to there is a clear argument for national drive investment, job creation, inclusive rates (e.g. income tax, corporation sustainable growth and public service tax or VAT). Similarly local government reform as soon as is practical. Greater finance will still be allocated from representation in national decision- central coffers for places without the making forums from these metros and administrative capacity or economic associated collaboration with other basis for financial self-sustainability. metros will also serve to ensure – for the Metros have proven their economic first time – our urban powerhouses can worth. Now is the time for the central enhance the UK’s economic potential. government to follow suit and allow The City Growth Commission does not those that are ready to take forward advocate that all metros should take this greater metro autonomy for the good leap. Devolution is a process and not a of their cities and the UK economy top-down blanket policy so should be as a whole. treated as such – other metros will need to wait until their economic performance, potential and governance structures lend themselves to devolution. In the

9 CITIES DRIVE GROWTH BUT ARE HELD BACK

cities already account for up to 80 percent of global gdp

75% 31% of the world’s in total, china’s 600 population will cities are expected live in cities to host 31 percent by 2050 of all global gdp growth to 2025

10 CITIES DRIVE GROWTH BUT ARE HELD BACK 61% of uk growth is generated by city regions10

in the last 10 years, core cities11 grew by 9.6 percent against overall uk population growth of 7.6 percent, while wider local economic partnership areas, anchored by core cities, grew by 6.1 percent.12

2007 7% 2025 19% £

cities with populations but are forecast to between 200,000 and generate 19% of all 2 million had 7% global gdp growth of global population through 202513 in 2007

10. Centre for Cities (2014). Note: city-regions here refers to the Centre for Cities definition of Primary Urban Areas 11. The Core Cities are a self-defining group of the largest 8 cities in England by population size: Birmingham, Bristol, Glasgow, Leeds, Liverpool, Manchester, Newcastle, Nottingham and Sheffield. 12. Figures calculated by Oxford Economics for Core Cities (2013), estimated 2003–2013. 13. McKinsey Global Institute (2011).

11 1. THE RISE OF THE CITY STATE

“Already global business is beginning chains and international flows of labour to plan strategy from a city, rather than and financial capital are creating a world a country, perspective. Understandably where national boundaries are subsumed so: well over half of the world’s by global economics. population lives in cities, generating more than 80 percent of global GDP. “Today, after a long history of regional Standard population projections show success, the nation-state is failing us that virtually all global growth over on the global scale. It was the perfect the next 30 years will be in urban areas.” political recipe for the liberty and The Economist Intelligence Unit (2013)14 independence of autonomous peoples and nations. It is utterly unsuited We live in an urban age. Cities and their to interdependence. suburbs are increasingly powerful in national and global politics and are driving … the city now appears to be our economic growth in developed and emerging destiny. It is where creativity is markets across the world. This trend is unleashed, community solidified and set to continue, already accounting for citizenship realized. If we are to be up to 80 percent of global Gross Domestic rescued, the city rather than the nation- Product (GDP).15 The importance of metros state must be the agent of change.” as centres of knowledge with intensive Benjamin Barber (2013)16 and highly productive activity makes the political economy of cities hard to While impact might be detected at the ignore. Empowering our cities gives them macro level, the challenges and uncertainties the opportunity and scope to fulfil their of a globalised economy are experienced economic potential, creating thriving at a local level. Here, national governments places of inclusive, sustainable growth are too removed, constrained by ‘incomplete and prosperity. information’ and ‘coordination failure’ The academic literature has increasingly (in the jargon), which prevents them from emphasised the role of the metropolitan acting in an optimal, integrated fashion. area – or city-region – as the appropriate As more people live in cities, and these unit of analysis for tackling social, political centres of economic activity account for and economic problems. In ‘If Mayors Ruled more of nations’ wealth, the politics of metros the World’ Benjamin Barber argues that the are gaining importance. The City Growth globalised economy has grown ‘too big’ Commission has considered what this means for our nation states to respond effectively. for the UK political economy: what is the role Multinational companies, global supply of cities in enabling a more locally responsive,

14. The Economist Intelligence Unit (2013). 15. The Economist Intelligence Unit (2013). 16. Barber, B. (2013).

12 innovative and productive place? What turnout. Political engagement and devolution economic levers and political structures are are tightly related, creating a virtuous needed to realise this? How can the UK break circle of taxation powers, accountability our default mode of centralisation and benefit and political engagement at the local level. the economy as a whole? With the most recent electoral turnout at City-led devolution has risen up the UK around only 36 percent, local democracy political agenda rapidly in recent months. is in desperate need of revival, and genuine In June 2014, the Wales Bill17 went into the devolution would give significant impetus. House of Lords and will enter the committee The City Growth Commission recognises stage in October, shortly after the result of the importance of accountability and the Scottish referendum on independence the relationship between a thriving local on the 18th of September. The latter, in democracy and its effective use of public particular, has prompted discussion about finance in pursuit of inclusive and the ‘English question’ and, whilst largely sustainable economic growth. Already, ignoring that constitutional can of worms, 61 percent of UK GDP is generated senior figures in each of the main political by city-regions,21 this proportion will parties in Westminster have committed to increase significantly as city populations champion city-led devolution in some guise. continue to rise disproportionately22 and knowledge-intensive industries cluster “Devolving power from Whitehall to our in and around city-centres. For economic towns and cities is essential to generate reasons, we therefore argue that our political the new jobs we need. Cities and towns institutions of policymaking, regulation that come together with local businesses and financial management should be will be given historic new powers over reconfigured away from central government transport, housing, skills and economic towards metros. development… And towns and cities This economic argument has gained will be given clear incentives too: traction domestically over recent months. by being able to share in the proceeds The Chancellor of the Exchequer dedicated of growth in their area.” two speeches to realising the potential Leader of the Opposition, Ed Miliband (April 2014)18 of the ‘Northern Powerhouse’ by improving connectivity between northern cities to “… local leaders and businesses need magnify agglomeration effects, heighten a much bigger say in where public productivity and create more jobs. investment in their areas should be Citing OECD analysis, he accepted: targeted in the future…Nobody knows more about what local economies “… there is a powerful correlation need than the people who actually live between the size of a city and the and work day in and day out in the productivity of its inhabitants. The communities themselves.” top 600 cities in the world contain Deputy Prime Minister, Nick Clegg (July 2014)19 just 20 percent of global population but create 60 percent of global GDP. The democratic arguments in favour Over recent decades economists have of decentralisation and devolution (see, explored all the different reasons why for example, Institute for Public Policy cities raise their residents’ productivity: Research (IPPR) (2014))20 are strong and specialisation is greater, competition timely in our age of chronically low voter and economies of scale increase, ideas

17. Wales Office (2014). 18. Miliband, E. (2014). 19. Clegg, N. (2014). 20. Institute of Public Policy Research (2014). 21. Centre for Cities (2014). 22. The Economist Intelligence Unit (2013).

13 and innovation spread faster. Crucially, leaders are tackling the biggest challenges cities are also where clusters of successful we face – from fighting poverty to industry are created – like the financial addressing climate change – with bold services cluster in London, or the digital new ideas. But doing so requires money. economy of California’s Silicon Valley.” Empowering cities to invest in their own Chancellor of the Exchequer, George Osborne (June 2014)23 futures not only makes them stronger, it makes their nations stronger, too.” The Communities and Local Government Michael Bloomberg, Mayor of New York City (2002–13)27 (CLG) Select Committee has also put forward its case for devolution in England, Crucially, metros are the right scale for with the link to economic growth a central convening the powers and expertise required pillar of the argument: to appropriately drive social, environmental and economic change within an area. They “…fiscal devolution – as part of create opportunities for difficult political a package of wider decentralisation decisions to be made in support of growth – – would encourage greater decisions that single local authorities might economic growth across England. otherwise not be able to take (e.g. building The Government has, through its own on Green Belt land). As shown by the business rates retention scheme, accepted recent ‘One North’ proposal on transport the logic behind this. Putting a wider connectivity between five northern cities,28 range of tax and borrowing powers into they also provide the scale needed to work the hands of local politicians simply with other cities in the UK to lead and shape extends this logic… Cities and their strategic infrastructure investment. wider regions have the most potential to Together, these political advantages mean drive growth.” city-regions have sufficient critical mass CLG Select Committee Report (July 2014)24 to compete on the world stage against other leading metro economies. But to achieve this This report was soon followed by a draft potential, metros need greater freedoms and Independence for Local Government Bill,25 flexibilities – individually and collectively – proposed by Graham Allen, a respected to make strategic decisions in the long-term backbench MP. The London Mayor, interest of their populations and the wider London Councils and Core Cities also economic sustainability of the UK as a whole. published a statement of progress against the London Finance Commission’s detailed Making the shift from centralisation report of 2013.26 The concepts of fiscal to city-led growth decentralisation and city-led devolution History has firmly shaped the nature and are increasingly being considered as vital extent of centralisation in UK governance. if we are to put the UK economy on more The legacy of Beveridge’s universal welfare productive, sustainable footing. state has embedded public expectations of centrally determined and, more recently, “The more control local governments centrally guaranteed minimum service have over the revenue they raise, the standards. This has gradually eroded easier it is for the public to hold them power and accountability away from local accountable for delivering results, which areas and created a vicious cycle of ever helps make governments more innovative diminishing capability. Without sufficient and effective. Across the world, city influence over how local finance is spent

23. Osborne, G. (2014). 24. Communities and Local Government Committee (2014). 25. Private Members’ Bill (2014). 26. Greater London Authority (2014). 27. Quoted in Greater London Authority (2014). 28. One North (2014).

14 and with ever declining grant funding, local its highly centralist system of governance government’s incentive to invest in capability is a step in the right direction. The UK is is eroded. Central government then has little the most centrally-controlled system of incentive to devolve power and financial public finance of any major OECD country, responsibility to those local areas. with sub-national government taxation Many of the messages of decentralisation accounting for only 1.7 percent of GDP, and devolution are not new. Talk of the need compared to 5 percent in France and, at the to move away from the UK’s highly centralised top of the scale, 16 percent for Sweden.31 system has been around for decades. What That limited control over taxation means appears to be new is the degree to which that, compared to their counterparts in other central government is starting to take heed of developed nations, UK cities disproportion- this talk and put it into action. For example, ately rely on central government funding. the Localism Act of 201129 brought some The centre dictates how, what and when cen- further flexibility to the Greater London tral government funding and revenue should Authority (GLA) enabling it to determine be spent and generated, without due regard how to spend housing and transport funding, to local need and economic conditions. Such and allowed for the creation of City Deals dependence on central government arguably – tailored arrangements between individual puts UK city-regions at a disadvantage in city-regions and central government – aimed relation to our international competitors. at providing targeted grants and greater Instead, metros rely on an outdated system flexibility that restricts innovation and integrated Yet these actions were only a tentative step investment, constraining the ability of local in the right direction. The same Localism Act leaders to support the specific requirements introduced greater restrictions on council tax, of businesses and individuals within their the only tax fully retained by local authorities. wider city-regions. The City Deals, and their successor ‘Growth There has been a long-term trend of Deals’, were a deeply centralised process in UK people wanting Scandinavian-style which cities’ ‘homework was marked’ by high-quality public services but with Whitehall officials and city-led strategies low American-style taxes.32 Yet without for growth were reduced to funding specific significant public service reform (including projects. Far from Lord Heseltine’s ‘single greater data-driven, outcomes-focused pot’,30 the Local Growth Fund deals were policy-making), expectations on the quantity reduced to a competitive funding bid model, and quality of public services will have to with relatively small local projects given the be restrained. The ever-declining pot of green light by central government. Too often, public funds and ever-rising need for services cities feel like there are two steps forward to support the UK’s ageing population and one back, promised policy initiatives mean that a large gap is opening up, most get turned into Whitehall processes that noticeably at the local level, where much have a tendency to revert to a centralising of the effects are felt – the gap between default mode. expenditure and funding is expected to Despite this, the move by the Coalition widen to £12.4bn by 2019/20.33 Government to support the models of Earn Reform is needed to enable city-regions Back, Gain Share and greater flexibility for to manage their budgets more strategically other specific projects, e.g.West Yorkshire between services and over time. This will plus Transport Fund, is welcome. Anything allow greater investment in economic that moves the UK slightly further away from development and preventative spend,

29. Department for Communities and Local Government (2011). 30. Heseltine, Lord M. (2013). 31. Travers, Professor, T. For LGA (2012) Giving evidence to the CLG Select Committee Professor Travers added “even if the 50% of business rates that local authorities have retained since April 2013 were included, the figure would only rise to perhaps 2.5 percent” CLG Select Committee (2014). 32. Ipsos MORI (2012). 33. Local Government Association (2014).

15 helping to manage down the demand for Realising this projection of economic welfare. The most ambitious metros are uplift will require central government and eager to play their part in driving local and city-regions to find a new understanding, national economic growth, and becoming where both share the risks and responsibilities financially self-sustainable. For example, of reducing the deficit, managing down public new HM Treasury analysis shows that sector net debt and making decisions in the if the northern cities of the UK were able best interests of metros and the UK economy to grow at the same rate projected for as a whole. While Detroit, for example, is the whole of the UK, it would add £56bn often used as a case against decentralisation, in nominal terms to the northern economy, much can be learned from this city’s decline benefiting these cities and UK growth (see ‘Detroit – a case against decentralisation). as a whole.34 An ambitious package of fiscal devolution

DETROIT – A CASE AGAINST DECENTRALISATION? Throughout the first half of the 20th “Detroit’s twentieth-century growth century, Detroit had emerged as a major brought hundreds of thousands of less- national automotive manufacturing well-educated workers to vast factories, centre, growing to a population of 1.85 which became fortresses apart from million by 1950, the 5th largest city in the city and the world. While industrial the U.S.. By 2008, the city’s population diversity, entrepreneurship, and education had more than halved in size and in July lead to innovation, the Detroit model led 2013 the city filed for bankruptcy. At an to urban decline. The age of the industrial estimated $18–20bn debt, it represented city is over, at least in the West.” the largest municipal bankruptcy filing Edward Glaeser, ‘Triumph of the city’ in U.S. history. (2013) 35 Ineffective and unaccountable local leadership was a significant factor in WHAT LESSONS CAN WE LEARN FROM THIS? Detroit’s decline. Compounded by global • Despite a directly elected mayor and economic shifts in manufacturing towards the appointment of an ‘emergency Asian producers as well as deep social fiscal manager’ in 2013, Detroit problems of racial segregation, the city failed to rectify its economic and experienced a stark ‘hollowing out’ of financial woes. Whatever the structure its inner city. This further eroded the tax of governance and leadership, base and exacerbated levels of poverty. accountability mechanisms need Today, one third of Detroit’s citizens live in to be transparent and robust; poverty; median family income is about half the U.S. average and in 2008, the city had • Large cities often have the advantage one of the highest murder rates in America. of a diverse, resilient sectoral base. This enables dual-skilled Reliant on its single industry, and households to move into the area, heavily influenced by the wishes of with a reasonable promise of gainful major employers General Motors and employment in different sectors, Ford, local investment decisions were creating a virtuous circle of investment, made to the detriment of wider public job creation and high productivity. transport, amenities, infrastructure and Without economic diversity, growth skills, undermining the city’s growth is unlikely to be sustainable in the over the long run. face of external shocks.

34. Osborne, G. (2014). 35. Glaeser, E. (2013).

16 measures of the type described in this report can why those policies do not work better than be ground-breaking and doesn’t need to end in they could or should?38 problems for HM Treasury; if they are daring The answer lies in the fact that city-regions enough, all three major parties have the ability are not uniform in their economic activity, to effect radical change. social productivity or needs. Centrally determined policy, lacking local information Embracing the ‘postcode lottery’ and coordination, relies on the mere hope An innate challenge for city-led growth that one size fits all. Metro-led devolution and decentralisation is the ‘postcode lottery’ and decision-making would enable integrated critique. Coined only in the 1990s, the term investment and pooled place-based budgeting for captures a deeper expectation among the the benefit of the city centre and its surrounding British public that the role of the (central) State economic area. With the right fiscal and financial is to ensure equality of opportunity and access flexibilities, metros could be sufficient in scale, to public services and welfare. ambition and reach to raise and redistribute City Growth Commissioner, Tony Travers, revenue within their own areas. argues that this expectation emerged in the This is already starting to happen in some 1930s because with the “advent of Keynesian areas that are setting up business-rate pools, economics, the Beveridge report and the spreading the gains from places within the city- economic depression...” there was a “shift in the region that have a higher tax base and growth balance of control away from local government potential to those where the strain on public and towards the centre.”36 Subsequent policy resources is greater. Over time, however, shifts in response to, and anticipation of, effective economic development should allow irresponsible local authority tax-and-spend an increase in the proportion of revenue to tactics have entrenched a political culture in be reinvested in productive forms of capital, which local and regional disparity is resolved enabling the welcome rise – some argue – by redistributing and ringfencing locally- of “postcode choice”.39 raised revenues. The UK’s political economy It is not the case that devolution removes the has created a default mode of centralisation need for redistribution entirely. The City Growth as a safeguard for equality. Commission makes clear that central government As a result, a common argument levied will still be dominant in setting and administering against decentralisation and city devolution taxes where there is a clear argument for is that it will exacerbate inequality between national rates to avoid undue complexity or places and constrain the ability of central perverse ‘cross-border’ behaviours (e.g. income government to redistribute accordingly. Indeed, tax, corporation tax or VAT). Similarly, local this might be the case and more than one government finance will still need to be allocated witness at the Commission’s formal evidence from central coffers for places that do not hearings made this point.37 have the administrative capacity or economic However, the centralised efforts to basis for financial (let alone fiscal) self-sufficiency. redistribute resources and minimise variation However, those metros that have the leader- in local outcomes had been ineffective. ship, financial management and accountability For example, Professor Alan Harding structures to administer a devolved city-region, of the Heseltine Institute at the University should be freed to drive investment, job creation of Liverpool Management School noted “many and inclusive, sustainable growth. Collaboration places that were poor 30 years ago are still between metros and with greater metro rep- poor now” as cities policy – to the extent it resentation in national decision-making forums, exists beyond the collection of other decisions will also serve to ensure – for the first time – impacting at the metro level – “hasn’t made our urban powerhouses can enhance the UK’s a lot of difference”. What, he asked, explains growth potential.

36. Travers, T., and Esposito, L., (2003). 37. City Growth Commission Public Evidence Hearings (2014). 38. City Growth Commission Manchester Evidence Hearing (2014). 39. City Growth Commission Manchester Evidence Hearing (2014).

17 SURVEY RESULTS

100% of respondents40 felt a model similar to ear n bac k o r gai n s har e would appeal, but saw the following as barriers to progressing such deals:

CENTRAL GOVERNMENT

71%

LACK OF FINANCE OTHER TO SUPPORT COMPETING THE SCHEME PRIORITIES

47% 29%

40. Respondents here refers to the 18 responses to the City Growth Commission Infrastructure Survey conducted June 2014. We had 17 responses from Core and Key Cities across the country and a collective response from London Councils, taking the total to 18 responses. All quotes from cities that appear throughout this report are taken from survey responses.

18 SURVEY RESULTS

popular policy options 80%

devolution of financial instruments to city level

60%

devolution of accountability to city level

40%

improving capability/capacity of the city

popular governance structures

less combined control authority for leps other* 43% 21% 29% *which included unitary authorities at city-region level, devolved settlement backed by statute, Flexibility in regulations to allow governance structures to be locally designed

19 THE UK PUBLIC WANTS SCANDINAVIAN PUBLIC SERVICES BUT AMERICAN TAXES

People have different views about the ideal JAN 2006 APR 2009 JUN 2012 society. For each of these statements, please tell me which one comes closest to your ideal. % % % a) A society which emphasises the social 48 47 41 and collective provision of welfare

b) A society where individuals are 46 49 42 encouraged to look after themselves

c) No opinion 6 4 17

Total 100 100 100

Base: 1,011 British adults 18+ Source: Ipsos MORI (2012)41

CENTRALISATION OF UK TAX AND SPENDING

STATE/ LOCAL + LOCAL CENTRAL SOCIAL Tax set at each level of REGIONAL STATE/ TOTAL government as a % of GDP GOVT GOVT SECURITY GOVT REGIONAL Canada 2.9 12.3 15.2 12.9 2.9 30.7 France 6.0 0.0 6.0 14.9 24.3 45.3 Germany 3.1 8.1 11.2 11.8 14.4 37.6 Italy 7.4 0.0 7.4 23.4 13.5 44.4 Spain 3.2 10.6 13.8 7.4 11.6 32.9 Sweden 16.2 0.0 16.2 22.3 5.7 44.3 United Kingdom 1.7 0.0 0.0 26.6 6.8 35.2 United States 3.7 4.9 8.6 10.3 5.4 24.3 OECD (2011) 3.9 5.2 9.1 20.3 8.4 34.1

All figures related to 2012, except the OECD totals which are for 2011. Source: Travers, Prof. T. for the LGA (2012),42 data from the OECD.43

41. Ipsos MORI interviewed a representative sample of 1,011 adults aged 18+ across Great Britain. Interviews were conducted by telephone 9th to 11th June 2012. Data are weighted to match the profile of the population. Where percentages do not sum to 100 this may be due to computer rounding, the exclusion of “don’t know” categories, or multiple answers. Responses for 2006 and 2009 from Ipsos MORI for 2020 Public Services (2011). 42. Travers, Professor, T. for the Local Government Association (2012). Giving evidence to the CLG Select Committee, Professor Travers added “even if the 50% of business rates that local authorities have retained since April 2013 were included, the figure would only rise to perhaps 2.5 percent” Communities and Local Government Select Committee (2014). 43. OECD (Downloaded August 2014).

20 63% OF TOTAL LOCAL GOVERNMENT INCOME RECEIVED IN 2012–13 WAS IN THE FORM OF CENTRAL GOVERNMENT GRANTS, WITH COUNCIL TAX RECEIPTS MAKING UP 17% OF TOTAL INCOME44

<1% Revenue Support Grant Redistributed non-domestic rates 12% Specific grants inside AEF 15% Other grants 8% Council tax Other income (including capital receipts) Charges for services (including rents)

17% 27%

21%

Source: Department for Communities and Local Government (2014)

RISING PRESSURE OF AN AGEING POPULATION

5 %GDP

2 %GDP

-1 2020–21 2030–31 2040–41 2050–51 2060–61

Pensions Health and long term care Education Total

Source: HM Treasury (2014)45

44. Department for Communities and Local Government (2014). Note AEF stands for Aggregate External Finance 45. HM Treasury (2014).

21 1920–30S 1940–50S 1950–60S 1960–70S 1970–80S 1980–90S 1990–2000S 2000–2010S 2010 ONWARDS

VARIATION CREATES CENTRAL-LOCAL DEVOLUTION AND INCENTIVE FOR CENTRALISATION RELATIONS AT LOWEST EBB REGIONAL DEVELOPMENT

– 1925 Rating and Valuation Act – Centre controls profligate local – New Labour creates Devolved brought different local authority authorities by effectively capping Administrations in Scotland rates into one single rate. rates (1984). and Wales (1998), granting limited – Local authorities still responsible – Poll tax introduced in Scotland fiscal, spending and other policy powers. for recalculations (1989) and England and Wales (1990). – 8 Regional Development Agencies – Burden of local tax increasingly Backfires on central government, in England (1998) awarded (total) falls onto domestic ratepayer. although local authorities set flat rate. £1.8–2.3bn single pot funding per year. – Council Tax introduced 1993 based on – Greater London given devolved powers 1991 valuation – never updated. under 2000 Local Government Act, which also gave all local authorities responsibility for economic, social and environmental well-being.

EQUALISATION DRIVES CITY DEALS FOR LOCAL GOVERNMENT SOME, GROWTH DEALS FINANCE REFORM FOR ALL – 1948 Local Government Act gave – Coalition abolishes RDAs in 2010, unringfenced central grant to local creating Local Enterprise Partnerships authorities on the basis of need. Aim (LEPs) with increasing responsibility. LOCAL GOVERNMENTLOCAL FINANCE of equalisation through redistribution. – Trigger referendum in Localism Act – Local authorities increasingly reliant 2011 for Council Tax increases above 2%. on grants as rates revenue diminishes – 28 City Deals for largest/fastest as rates revaluation repeatedly stalled. growing cities followed by Growth – 1958 Local Government Act aimed Deals and Single Local Growth to increase local independence by Fund allocation in July 2014. enlarging local tax base and emphasising general rather than speciﬁc grants.

INDUSTRIALISATION NEW PUBLIC BRINGS PROSPERITY MANAGEMENT (NPM) DRIVES AND INEQUALITY SERVICE REFORM – Launched under Major and – As early as 1870, Goschen Report accelerated by Blair, NPM seeks to expressed mounting concern embed increased information, choice, as to fragmentation of local clear standards, user consultation, welfare institutions. and greater accessibility to more – Rationalisation of local structures via TIMELINE OF CENTRALISATION responsive services. 1888 Local Government Act. Provision – New Localism undermined by not regulated until mid 1930s. concerns of ‘postcode lottery’ and government response of targets and national minimum standards. – Academies and Foundation Trust BEVERIDGE REPORT hospitals designed to improve local (1942) FOR UNIVERSAL freedom and accountability STANDARDS

– Central state as the guarantor of universal access to services of the highest quality based on need – Services mostly funded by general taxation; – Delivered primarily by the state CENTRAL CONTROL OF PROMISES OF – by 1950 electricity, gas, local SERVICES TIGHTENS DEVOLVED POWER

PUBLIC SERVICES hospitals, major trunk road all under UNDER RISE OF FALL SHORT central control. MONETARISM – Central deﬁcit budget cuts hit local – By end of mid ’70s water supply, government hardest, with fall of 1/3 sewerage, local health services under over the course of Parliament. Leaves central control. non-statutory services (e.g. housing, – Internal markets ﬁrst introduced, with planning) particularly exposed. contestability and Compulsory – Policy and regulation increasingly Competitive Tendering and privatiza- centralised (e.g. school curriculum, tion (e.g. British Telecom in 1984 and hospital inspection). British Gas in 1986). – New Homes Bonus, Community Infrastructure Levy and Business Rate Retention designed to enable and reward growth, but often in lieu of other funds.

22 1920–30S 1940–50S 1950–60S 1960–70S 1970–80S 1980–90S 1990–2000S 2000–2010S 2010 ONWARDS

VARIATION CREATES CENTRAL-LOCAL DEVOLUTION AND INCENTIVE FOR CENTRALISATION RELATIONS AT LOWEST EBB REGIONAL DEVELOPMENT

INDUSTRIALISATION NEW PUBLIC BRINGS PROSPERITY MANAGEMENT (NPM) DRIVES AND INEQUALITY SERVICE REFORM – Launched under Major and – As early as 1870, Goschen Report accelerated by Blair, NPM seeks to expressed mounting concern embed increased information, choice, as to fragmentation of local clear standards, user consultation, welfare institutions. and greater accessibility to more – Rationalisation of local structures via responsive services. 1888 Local Government Act. Provision – New Localism undermined by not regulated until mid 1930s. concerns of ‘postcode lottery’ and government response of targets and national minimum standards. – Academies and Foundation Trust BEVERIDGE REPORT hospitals designed to improve local (1942) FOR UNIVERSAL freedom and accountability STANDARDS

23 2. THE ROADMAP TO DEVOLUTION

The RSA City Growth Commission July 2014, for example, were initially supports the conclusions of the London intended to enable single-pot financing Finance Commission and CLG Select of strategic economic priorities agreed Committee reports,46 similarly arguing by LEPs and local authorities. By the time for greater autonomy, decentralisation they had been through the Whitehall and devolution. However, the Commission machine, they amounted to little more has aimed to go further, advocating more than central government approval of ambitious devolution for city-regions able specific local projects that happened to shoulder the burden of fiscal and financial to align with ministerial priorities. Such risk. These metros, which would be few veiled ‘centralised localism’ needs to stop. in number to start with, would be granted As a first step, we advocate the creation ‘Devolved Status’. of an independent City-Region Devolution Achieving Devolved Status will depend Committee. This Committee would take upon metros demonstrating robust decision-making outside of the immediate governance and accountability structures, political- and Whitehall arena and allow visionary leadership and the economic for an open, transparent and independent growth potential to ride the difficult assessment of metros’ readiness for storms of decentralisation and devolution. devolution. We believe the focus on the metro scale is vital here to realise the economic Securing greater autonomy benefits of such bold reform. To be granted Devolved Status metros In order for decentralisation and will need to demonstrate they are able to devolution to be meaningful and sustainable, take on the risks associated with devolution. both national and city-level governments The diagram below illustrates a framework would need to adapt to new boundaries by which metros could be assessed on their and spheres of influence. This joint effort suitability for devolution. It demonstrates would enable a move from dependence that a combination of capabilities and eco- to collaboration, for greater growth nomic strength is needed to ensure cities have for the UK as a whole. the administrative capacity to mitigate and City-regional devolution needs to manage downside risk, as well as maximise be a process through which the UK’s economic opportunities. As metros are major metros can benefit from new able to generate and increasingly rely upon powers and flexibilities that match their own revenues, so too must they be their ambition and capability. It means able to cope with volatility of revenue from central government will have to make a devolved taxes over the business cycle. conscious shift to realise its own rhetoric. The Local Growth Deals announced in

46. London Finance Commission (2013) and Communities and Local Government Committee (2014).

24 INDEPENDENT CITY-REGION DEVOLUTION COMMITTEE An independent City-Region individual metros should proceed Devolution Committee would evaluate to negotiating the specifics of their metro applications for Devolved Devolved Status with central government. Status. A standard set of criteria To ensure continued effectiveness would be devised by the Committee of governance and a continued drive regarding capability, governance for growth, metros’ Devolved Status and economic potential, against should be reviewed at least every five which bids will be assessed in years, enabling Combined Authorities an open and transparent manner. to propose and bid for new powers, The independent Committee would and for new metros to achieve make recommendations as to whether Devolved Status when they are able.

DEVOLVED STATUS VENN DIAGRAM

capability in growth governance and potential a proven track and success record

25 Capability in Governance and a proven Growth potential and economic success track record In order to weather the volatility and A robust, accountable model of governance downside risks that come with devolution, is needed for effective collaboration between metros will need to demonstrate their local authorities to ensure decisions economic success as well as their future can be taken in the best interest of the city- growth potential. Growth promotion in region. The Combined Authority model a city means putting strategic plans in place demonstrates great potential in delivering to support, promote and encourage the this strong and stable structure, enabling creation of innovative and successful clusters places to cooperate along boundaries across sectors, connecting people with high they identify with and align relevant LEP quality transport infrastructure, enabling boundaries accordingly. information flows and attracting talent However, there might be other resilient from across the country and globally. forms of governance that metros choose Together with a long-term commitment to adopt, with varying degrees of formality to education, skills development and and flexibility. For example, London public health delivery, each tailored to meet could see the development of groups of the current and future needs of the city’s boroughs with the creation of sub-city population, creating future growth potential regional Combined Authorities, setting and requires the promotion of sustainable, delivering strategic priorities within their inclusive growth. The Commission heard boundaries while working within London- from several cities about their concern wide devolution and the overarching mayoral regarding economic and social inequality structure of the GLA, to deliver a strong – a problem that puts additional strain strategic vision for growth across the capital. on public services and welfare, already To support this process, metro under pressure from increased demand governments may also consider the and diminishing resources. applicability of introducing an elected As a result, economic growth means or non-elected mayor or chief executive more than simply increasing Gross Value into their model of strong, stable Added (GVA) and boosting headline governance. The Chancellor has publically Gross Domestic Product (GDP). To avoid advocated elected mayors, with HM spiralling costs, whether from welfare and Treasury seeing them as an indicator public services or adaptation to climate of good governance. While many benefits change (e.g. flood defences), the distribution can abound from the introduction of a of the proceeds of growth across the city- mayor (e.g. visible leadership domestically region will need to enable increased social and abroad), this is unlikely to be applicable productivity and promote environmental to all metros and metros should be free to sustainability over the long-term. decide if, when and how the metro should be led, with the aid of a public referendum if a metro so chooses.

“governance will not make a difference by itself – it also requires power (e.g. others to be accountable to it) and resources” –liverpool

26 3. RECOMMENDATIONS

The City Growth Commission makes a bold 1. Reform across the board: economic case for the UK’s major metros asks of central government to be given the opportunity to receive, at a minimum, greater flexibility about how they 1.1 Tax reform pool and spend revenue streams, and, for The Mirrlees Review47 was the most the most mature metro political economies, comprehensive analysis of the UK tax devolved fiscal powers. These powers will system in decades. This review called enable city-regions to make more effective, for a modernisation and streamlining integrated decisions for their functional of the system to create a progressive economic areas, allowing for redistribution and economically efficient UK tax within city-regions and investment for a environment. We propose the Mirrlees more prosperous future. Review be revisited – in light of moves For any metro granted Devolved Status, towards greater decentralisation and central government must relinquish control devolution – to consider how taxes and as soon as is practical. Other cities not the tax base might more closely reflect granted this status should be assisted to the modern UK economy. take on greater autonomy over the longer Those taxes most likely to be term, while they continue to operate under devolved (e.g. property taxes for the current system until such time as they Devolved Status metros) would undergo are ready and wish to apply for further a dual process of evaluation rather decentralisation and devolution. than a long, drawn-out national review under the tax reform rubric, to be followed, only then, by consideration With that in mind, we advocate a series for devolution. We would not wish to see of recommendations for cities and central tax reform used as an excuse for delaying government. Some should be applied devolution to cities. across the board, while others will need to be implemented in consideration of 1.2 Constitutional reform individual metros’ suitability for fiscal Fiscal devolution and decentralisation devolution: are ultimately about constitutional 1. Reform across the board: asks of central change in the distribution of power government and accountability within the UK. 2. Reform across the board: asks of metros The UK’s ‘unwritten constitution’ has 3. Policy and financial decentralisation allowed for flexibility and adaptability, for leading metros but it has been a one-way street towards 4. Devolution to ‘Devolved Status’ metros greater centralisation since the 1948 Local Government Act, with notable

47. Mirrlees Review (2011).

27 exceptions of devolved powers to authorities, restoring freedom over this Scotland, Wales and London. form of local revenue and putting council The Greater London Authority (GLA) tax back on an equal footing with all other Act 1999 granted significant transfer of UK taxes, which do not require specific powers to the GLA and started London mandates for each individual rate rise. on the route to greater autonomy, arguably opening the door to the great 1.4 Local government finance reform economic growth it experiences today. The Independent Commission on While we recognise that the details of Local Government Finance, chaired constitutional reform are beyond the by Darra Singh, has been set up by remit of this Commission, we believe Chartered Institute of Public Finance that cities (including London) need a new and Accountancy (CIPFA) and the legal settlement to strengthen and widen Local Government Association (LGA) the GLA Act of 1999 to metros granted to examine: Devolved Status by the independent –– The current position of the local City- Region Devolution Committee. government finance system; A binding legal entity provides a –– A potential new system that enables platform for metros to coordinate and better public services and encourages collaborate within their boundaries economic growth; to create stable, formally recognised –– Practical options for changing the governance structures (be that a system that could be implemented Combined Authority or otherwise). by an incoming government. It should also enable Devolved Status metros to levy taxes at a city-region The City Growth Commission scale and make appropriate arrangements encourages this programme of work for sharing those revenues across the to develop and test options for local metro region. government finance reform – an issue Metro leaders – whether directly increasingly pressing in the face of or indirectly elected – would then be rising demand for health and social care, accountable directly to Parliament, education and skills development, as well against place-based priorities, perhaps as housing. Interim findings of the Local supported by a City-Regional Public Government Finance Commission will be Accounts Committee of local MPs. published in autumn and the final report is due in early 2015.48 1.3 Removing the requirement for referenda on council tax 1.5 Reform of central government The Localism Act 2011 introduced a In order to support decentralisation, requirement that all local authorities reform of Whitehall and the civil service wishing to raise council tax over 2 percent is needed to minimise the risk of falling in one year would be required to hold back to the default mode of ‘Whitehall a referendum. Central government has knows best’. Attempted reforms under also incentivised local areas to freeze the Coalition government have sought council tax and apply for other funding to improve the commercial skillset of through central government, putting extra the civil service and introduce more downwards pressure on council tax and ‘open policy-making’ involving industry constraining local financial autonomy partners and other external stakeholders. all the more. However, a more fundamental reform We recommend the requirement is needed to drive change. For example, for referenda be removed for all local the creation of a single public service

48. Independent Commission on Local Government Finance (2014).

28 rather than separate central and local 2. Reform across the board: level bureaucracy could be a step towards asks of metros aligning the status of local government officers with that of Whitehall officials. 2.1 Demonstrate commitment to competence and capability 1.6 Private finance market In return for granting greater flexibility, The City Growth Commission’s Connected cities that wish to move along the Cities report49 describes how the UK trajectory of greater decentralisation currently lags behind our competitor and devolution should build up their economies in the quality and long-term capability and expertise, demonstrating sustainability of our infrastructure. Often, a stable system of effective, accountable central government policy uncertainty governance. This could include: is to blame for limited domestic and a. Private and public sector swaps to international investment. Enabling build and share expertise, particularly metros to have greater flexibility over around financial management; their long term planning and financing b. In addition, metros should actively of capital projects – including the ability recruit from different sectors, attracting to pool domestic and EU revenue streams good talent with appropriate salaries; – could pave the way to greater long-term c. Data and information: Metros should strategic investment in infrastructure actively work to improve their for growth. collection and analysis of data and In addition, we recommend other evidence. This would enable them government take steps to attract them to evaluate the impacts of metro greater private finance for metro investment and provide supporting infrastructure. A similar model has evidence on bids to the independent previously been advocated by the Smith City-Region Devolution Committee. Institute in their call for the creation Building on their existing engagement of a British Investment Bank to support with businesses, Local Enterprise funding in housing and local growth.50 Partnerships (LEPs) should develop We suggest that various options for capacity to provide a formal data- infrastructure finance are considered driven advisory role; by Infrastructure UK, complete with d. Metros should demonstrate metro-leader representation (as argued collaboration between and within in Connected Cities). metros. Where possible, this should Metros with Devolved Status and also include collaboration with public an independent credit rating should service agencies (e.g. health- and social also be free to raise finance – within the care) to align strategy, policy and Prudential Code – from private markets. delivery across the metro region.

“more local control (e.g. taxes raised and retained locally, place-based approach, longer budget cycles) enables longer-term certainty and planning” – newcastle

49. City Growth Commission (2014). 50. Falk, Dr. N for the Smith Institute (2014).

29 “government should provide flexibilities and regulations to allow locally designed solutions” – plymouth

3. Greater decentralisation 3.2 Freedom to spend grants without for leading metros ringfencing We recommend Devolved Status The majority of local government metros and those deemed on the path finance comes from central to devolution (by the Independent government – 63 percent in 2013/1452 Commission) be enabled to pool and and, at face value, 20 percent of allocate retained revenue and central funding is ringfenced.53 In reality, government capital and revenue grant other unringfenced elements of grant without ringfencing. In support of this funding are subject to centrally imposed we recommend: restrictions and departmental policy. We recommend that metros awarded 3.1 Multi-year finance settlements greater decentralisation powers be One-year finance settlements severely given the flexibility to manage their constrain the degree to which metros and grant funding without ringfencing. public sector organisations can plan their This would enable those metros to pool expenditure and design strategic policy funding (capital and revenue) to finance initiatives. growth-promoting activity in their For example, Transport for London metro region collaborating with other has estimated that stop-start funding metros, the private- and third sector can add between 10 and 15 percent to and delivery partners where appropriate. the costs of rail project investment with Metro-level flexibility would allow for unplanned road works also costing six greater efficiency of public spending by times more than planned ones, with allowing cities to target funding in areas emergency works some 30 times more. where there is most need, and focus on Long-term certainty would allow a preventative investment to break cycles constant programme of procurement of welfare dependence. and renewal to be put in place, generating long-term contracts with suppliers to 3.3 More flexible borrowing arrangements achieve the best value for money and Whilst keeping in line with the Prudential sustained jobs outside of London.51 Code and in-year budgeting, metros that The Commission recommends a five- have demonstrated their capability and year finance settlement be put in place for been granted greater decentralisation metros, with an extension to a minimum should have the freedom to explore of 10 years for capital projects related alternative borrowing options beyond to long-term strategic infrastructure the Public Works Loans Board. investments. In-year budgeting would For some metros (and similarly local still apply. areas) the cost of obtaining a credit rating might be too high and the incentive for

51. Investment in London’s infrastructure is estimated to have supported 45,000 jobs outside of London in Trasnport for London’s supply chain in 2013/14. GLA (2013). 52. Department for Community and Local Government (2014). 53. Centre for Cities (2014).

30 borrowing outside of the traditional Tax Incremental Financing or Greater system not strong enough. For those Manchester’s Earn Back. metros and local authorities, the LGA a. Greater flexibility over the use of Tax have devised a municipal bonds market54 Increment Financing (TIF) where beneficial, to allow them to access – individually or to enable local authorities and cities to collectively – bond finance at a competitive use a range of mechanisms to support rate. This could be a cost effective finance infrastructure investment and economic avenue for many metros. development, based on reinvesting a proportion of an area’s future business rates. 3.4 Retaining the proceeds of growth b. Models similar to Earn Back and Gain Leading metros should be free to explore Share: While Earn Back-type models have new and emerging models of retaining a become increasingly popular with three share of the upside of growth (and take on other propositions now in train, HM commensurate downside risk). Negotiated Treasury seems to have reached the limit with central government under a positive of its appetite to negotiate such deals presumption in favour of these forms while still proving the concept. However, of ‘payment by results’ models, such as some metros that currently have an Earn

EARN BACK

This Greater Manchester inspired reform, The government’s position on this, agreed as part of the City Deal in 2012, and future models, is not wholly clear, was the first of its kind in the UK. It aimed with proposals for these models finally to mirror the way in which a city would agreed, but arguably from the cities’ approach growth investment under tax point of view, much diminished from their localisation, without any actual change initial proposals. Part of the issue lies in tax structure. It links a locally funded with a lack of a mechanism or metrics step change in infrastructure investment in the Office of Budget Responsibility to a ‘payment by results’ revenue formula (OBR) that would allow HM Treasury to agreed with HM Treasury. This revenue take account of the additional revenues it formula provided Greater Manchester would receive if it were paying out under with a share of the tax proceeds HM an Earn Back-type formula. The implicit Treasury would gain as a result of growth assumption is that any additional growth generated by locally funded investment. in one place simply substitutes for the After protracted and difficult negotiations, same amount of growth elsewhere; there an initial formula was agreed in 2013. are no overall productivity gains and no Recognising the innovative nature of increases in labour market participation, the Earn Back mechanism a review and therefore no net national increase process was included in the agreement in GDP or net additional tax revenues. to allow for further development and This leaves only costs on the scorecard improvements over time. which, according to current accounting rules, can appear more than once – up- Three similar propositions are in play front capital spend by the city, addition across Glasgow, Leeds (West Yorkshire to national debt due to city borrowing, plus York) and Greater Cambridge. and the payments to city over time. Combined, the metros covered by these The government is ill-equipped to propositions are home to just under 7 engage with cities on the current and million people, with combined economies forecast linkages between investment of more than £130bn in annual Gross and growth. Value Added (GVA).

54. Local Government Association (2014) 31 Back model may wish to move forward Over the long-term, many metros to apply for Devolved Status, and other with Devolved Status may wish to aim metros may then come to the fore, for financial self-sustainability. However, demonstrating economic potential and it is important to note that the City competence in governance to take on and Growth Commission does not anticipate negotiate Earn Back-type models without that metros can or should become entirely full devolution. Although not suitable fiscally self-sustainable. There will remain for all, the City Growth Commission some taxes and tariffs including, for nevertheless recommends that Earn Back example, National Insurance contributions and Gain Share models be available for and corporation tax, best levied and metros when negotiating the extent of their redistributed at the national level. decentralisation reform package. 4.1 Devolution of taxes 4. Devolution for Devolved Status metros Metros granted Devolved Status will see For those metros independently assessed a significant shift – from the centre to as meeting the economic and governance metros – in determining the mix and rate conditions for ‘Devolved Status’, a change of taxes, enabling metros to choose from of mindset within the city-region and a range of taxes, including property – and Whitehall will be needed to support a sales tax. Under devolution, metros would new relationship between the two tiers of be revenue-neutral against a baseline and government. Devolved Status would be revalued at each Spending Review (or predicated upon a productive, collaborative annually, in the case of property taxes). relationship where metros have the Cities ready to shoulder the burden may autonomy and accountability to manage aspire to the full suite of property taxes (e.g. their city-regions as they see fit to support stamp duty land tax, council tax, business long-term growth and prosperity. rates, annual tax on enveloped dwellings, This significant shift from the centre to capital gains on property). Several of the metro would allow – as above – metros these taxes may require central and/or to pool revenue streams and leverage assets, local reform to ensure they more closely as well as borrow more freely in open capital reflect cities’ tax base and the modern UK markets. Crucially, it would also enable economy. For example, in accordance with Devolved Status metros to: the London Finance Commission, Greater • Raise and retain funding through new London is ready to receive – under a revenue- and existing taxes; neutral settlement – all five property taxes, • Integrate public service reform and taking the share of the capital’s total economic development with a new power tax base from 6 percent to 11.5 percent.55 to convene other public and quasi-public- Other cities, given the dynamics of their sector bodies (e.g. Network Rail, local own property markets, might not prioritise Further Education Colleges, NHS this form of devolved taxation. England, Public Health England); and, All Devolved Status cities should • Take their seat at the table in national be free to: policy making – extending the a. Retain business rates: in line with principle for infrastructure outlined the London Finance Commission, in Connected Cities of special we recommend business rates be fully attendance or a permanent place at devolved to metros with Devolved Cabinet and sub-Committee meetings. Status, alongside a corresponding Metro representation would enable reduction in the central government more informed, strategic national core grant. This will allow cities with decision-making. Devolved Status to set, revalue and reform business rates as they see fit.

55. Greater London Authority estimates (2014)

32 Metros would therefore be free to move see fit (in accordance with Valuation away from the uniform business rate. Office regulations); The recently reformed scheme of c. Other taxes or subsidies: metros business rate retention, tariff and top-up should have greater flexibility to allows local areas to retain 50 percent create and fully retain new specific of their business rate revenue, which is taxes that reflect the needs of the city then supplemented or tariffed depending economy and are mindful of the local on a central government assessment of impacts on markets and behaviour. the area’s funding requirement and the By negotiation with HM Treasury, revenue collected. Full devolution of these might include hotel taxes, business rates to metros with Devolved environment/sustainability taxes and Status would require reform to this a local sir passenger duty tax or subsidy. current system. For example, if London were granted full devolution, the 4.2 Greater flexibility over the use Exchequer would lose an estimated £800 of capital reserves million in ‘excessive growth’ tariffs each Throughout the Commission’s inquiry year. A corresponding reduction in central we have heard from cities that the level government core grant to those areas and inflexibility of siloed funding streams with Devolved Status would be required is the key barrier to achieving their to supplement this loss of revenue. ambitions. One such inflexibility is over Any reform or rate change would also the use of capital reserves/receipts of sale require engagement with the business of capital assets for revenue expenditure, community. The Crossrail supplement a process known as ‘capitalisation of demonstrates that businesses are willing revenue expenditure’. to accept an increased rate rise, and Currently capital reserves/receipts contribute towards investment, if they cannot be used for revenue spending can see the genuine benefit to them (although proceeds can be used to fund as a business. We recommend that the infrastructure investments) as HM Treasury LEPs in each metro leverage their role as believes allowing for this flexibility would business engagers to work with Business fuel excess spending. We recommend the Improvement Districts (BIDs) and other restrictions be lifted to allow Devolved business organisations to aggregate the Status metros to leverage their assets and business voice, testing proposals before pool these resources to support growth- they are put into practice; promoting activity, within the bounds of the b. Revalue and set council tax bands: cities Prudential Code. This would put the UK in with Devolved Status should be able line with other OECD countries which have to flex and reform council tax, including more flexible controls over the use of local revaluing and upgrading bands as they authority capital reserves.

“have an attractive city deal that gives us direct control over all business rate growth in our growth locations across the city region. earn back/gain share would be attractive, however, it is another formula grant and would have some reluctance to enter into such a complex arrangement and would rather just keep more of the taxes raised in the city directly” – bristol

33 REFERENCES

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