powers to grow: city finance and governance

8/11/2019 Powers to Grow: City Finance and Governance

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POWERSTO GROW:

CITY FINANCEANDGOVERNANCESEPTEMBER 2014


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ABOUT THE CITY GROWTH COMMISSION

Chaired by renowned economist JimONeill, the City Growth Commission

seeks to understand: how we can achieve complementary

growth between London and our othercities

what fiscal powers and governancearrangements are needed to deliverthis, and

how public service reform can startto make cities more fiscally sustainableThe ultimate objective of the

Commissions twelve month inquiry isto lay the foundations for a stronger UKeconomy through a significant power shiftaway from the centre and towards cities, andto show the next government, of whicheverparty, why this is needed and how it can beachieved. Our recommendations will setout a road map for change; the Commission

will seek to influence all political parties inthe run up to the UK General Election,

and make the case for cities to take a newrole in our political economy.

The Secretariat is hosted and run by theRSA, an organisation committed to findinginnovative and practical solutions to todayssocial challenges through its ideas, researchand ,-strong Fellowship.

The City Growth Commission waslaunched in October and is fundedby the Mayor of London, London Councils,

the Core Cities Group and the LocalGovernment Association. Our partnersinclude New Economy Manchester,the British Venture Capital Association,Universities UK and the Joseph RowntreeFoundation.


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FOREWORD

BY JIM ONEILL

In each of our three previous City GrowthCommission report I found myself arguingeach was the most important well atleast to date! There we set out to definewhat we mean by metros and the scope

of our analysis; skills and employment;and connectivity and infrastructure.In this report, we discuss in detail the

crucial topic of city finance and governance significant issues for our policymakersat all levels of government to considerin order to realise the full potentialof the UK economy.

Here, and in our final recommendationsin October, we present the ideas of theCommissioners and the RSA research team.

But, what is ultimately critical for our metrosto thrive is for each to identify what is rightfor them. Just as it is the case that those inWhitehall are hardly in a position to knowwhat is best for the future of different partsof our country, however well-intentioned,it is also the case that our centralrecommendations, again well-intentionedand evidenced-based, may work for somecities and not for others.

As we highlight, the degree of centralisedcontrol in the UK is dramatic compared toother major economies, whether developedor developing, and it doesnt seem obviousas to why this makes good economic sensefor either those that live in different partsof the country nor the country as a whole.As we have all witnessed with the run-up tothe Scottish referendum on independence,some of our citizens want to have moredecisions made about their futures by those

who live and operate in their communities.However, the economic importance ofour metros is the basis of our medium

and long-term economic future. Whathappens in the likes of Bristol, Cardiff,Edinburgh, Glasgow, Leeds and all of theother metros we defined in our first paperwill be more important for UK economic

growth than what happens in the rest ofScotland combined.So enabling the leaders of these major

urban areas to decide what is right forthem, and with it, for them to carry theresponsibility for those decisions is crucial.In this report, we lay out the key areas offinancial responsibility we believe should betransferred to somemetros. Crucially, andas clearly suggested by the Chancellor inearly August, it is only sensible to devolve

this fiscal responsibility to those urban areasthat can demonstrate they can succeed withthis greater autonomy. We have found fromour evidence gathering around the countrythat some metros are more ready todaythan others, and it would not make senseto devolve responsibility to them all now.Indeed, it is probably the case that only thebest organised and most focused should begiven those responsibilities.

We have deliberately held back fromnaming those metros that might be capableof increased responsibility in this report.The experience of our previous reports hastaught us that our ideas can quickly gaintraction, promoting responses from nationaland city leaders; our recommendations forlimited devolution for some today mightencourage others to organise themselvesmore effectively to warrant the sameresponsibilities tomorrow.


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CONTENTS

FOREWORD

ABOUT THIS REPORT

EXECUTIVE SUMMARY

1. THE RISE OF THE CITY STATE

2. THE ROADMAP TO DEVOLUTION

3. RECOMMENDATIONS

REFERENCES

2

4

6

12

24

27

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ABOUT THIS REPORT

This report, the Commissions fourthresearch output, is based on evidencereceived and research undertaken by theCity Growth Commission. It has beeninformed by three regional hearings and

in-depth discussions with experts acrosslocal, city and national governments,academia, other think tanks andconsultancies, as well as writtenevidence submitted to the Commission.

In this report, as with all reports ofthe City Growth Commission,we usethe concept of a metropolitan area asthe relevant geography to understandcity growth. Metros are not just aboutcity centres. Their reach extends to suburbs

and surrounding areas as places of work,leisure and retail. Many rural businesses,for example, depend upon metros foraccessing urban markets, customersand the connectivity cities provide to therest of the UK and the world. This reportuses the terms metro, city and city-regioninterchangeably.

AcknowledgementsThe authors would like to thank CityGrowth Commissioners Jim ONeill andBen Lucas for their guidance throughoutthe project. Alex Gardiner, Alex Jones,

Zach Wilcox and colleagues at NewEconomy Manchester and Centre for Citieshave also provided research support andpolicy insight throughout the process.

The practitioners and policymakerswith whom we have consulted in thisproject are too extensive to mention here.However, particular thanks should beextended to a few individuals who havebeen particularly generous with their timeand support: Damien Smith, Joe Manning

and Andrew Sissons (Cabinet Office,Cities and Local Growth Unit), JeremySkinner and James Lee (Greater LondonAuthority), Karl La Ferla (InfrastructureUK, HM Treasury), Tom Flude (Transportfor London), London Councils Finance andPerformance Team, and colleagues at theLocal Government Association. Thanksalso go to those who responded to theCity Growth Infrastructure Survey. Theseresponses were especially helpful for framingthe debate.

1. Available to view online at www.citygrowthcommission.com.2. See our first three research outputs, Metro Growth: The UKs economic opportunity, Human Capitals: Driving UK metro growth

through workforce investment and Connected Cities: The link to growth.


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ECONOMIC SNAPSHOT

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%).

LONDON

London saw its share of UK GVA risefrom 19.8% in 1997 to 22.8% in 2012.

WEST MIDLANDS

The largest fall in unemployment betweenFebruary to April 2013 and February to April

2014 was in the West Midlands (falling 1.9percentage points from 9.4% to 7.5%).

NORTHERN IRELAND

In 2013, Northern Ireland had the lowest

weekly earnings, 463 (residence based)and 460 (workplace based).

SOUTH EAST

In 2012, London and the South East werethe only regions which were more productivethan the UK average (by 31.2% and 7.7%respectively).

EAST OF ENGLAND

In 2012, business R&D expenditure

as % GVA was highest in the East ofEngland (3%)

EAST MIDLANDS

From 2010 to 2012, the East Midlands had

the largest proportion of innovation activebusinesses, at almost 50%.

SOURCE ONS Regional Economic Indicators July 2014

NOTE Data not available at city-region (NUTS3) level

NOMINAL GROSS VALUE ADDED (GVA)

INCREASED BETWEEN 2011 AND 2012

FOR ALL REGIONS AND COUNTRIES

EXCEPT FOR THE EAST MIDLANDSWHICH 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.

WALES

Between 2007 and 2012, Wales sawthe largest percentage point increase inexported 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

20,000 to 21,999

19,000 to 19,999

18,000 to 18,999

17,000 to 17,999

16,000 to 16,999

15,000 to 15,999

UK average


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EXECUTIVE SUMMARY

Innovative, competitive and resilienteconomies are built on stable institutionsthat engender trust between tradingpartners, encourage investment in qualityinfrastructure and public services, and foster

socially productive communities.In the UK, one of our strongest attributesas a major global economy is the strengthof our institutions: our trusted legal systemforms the backbone of many internationalcontracts, our mature and transparentlegislative system helps to minimise politicalrisk for investors over the long term, ourindependent Bank of England depoliticisesour monetary policy and balanced regulationprovides a stable platform for competition

in global markets.However, the configuration of our

political economy while cultivating thishealthy business environment is holdingour metros back. The UK economy is fallingshort of its potential as our cities, withtheir concentration of labour, capital andinformation flows, are stifled by the overtcentralisation of policy decision-making.

While global competitors are free to investin their major cities, UK metros are at themercy of central government, hoping for a cutof a fixed pot of national income. The UK hasthe most centralised system of public financeof any major OECD country; sub-nationaltaxation accounts for only . percent ofGross Domestic Product (GDP), compared to percent in France and percent in Sweden.

With this comes tight ringfencing ofcapital and resource funding, most of which

is awarded on an annual basis. Revenuesare inflexible, uncertain and contingenton national politics. The economics ofplace are not part of the complex LocalGovernment Finance equation, leaving

cities restricted in the degree to whichthey can respond to the current and futureneeds of their functional economic areas.

Over recent months, the importanceof cities in driving growth and prosperityhas been increasingly recognised, risingup the political agenda to the highestlevels. Two speeches from the Chancellorof the Exchequer, a commitment from theLeader of the Opposition that he wouldchampion devolution in government

and an active listening campaign from theDeputy Prime Minister Northern Futureshave set a new political tone.

Already many of the Commissionsideas have gained traction in Whitehalland Westminster, notably the Chancellorswarm welcome of improved East-Westconnectivity via the proposed One Northintegrated transport system.A clear spacefor real change has opened up in policyterms; metros could soon be in the driversof economic policy-making.

However, this report argues that whilemuch has been achieved under the Coalitionto further the cause of city-led growth (e.g.City Deals, Growth Deals and the formalestablishment of Combined Authorities)the UKs default mode of centralisationwhich emerged over the last half century,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.


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report addresses some of the biggestchallenges involved in the decentralisationprocess, with a view to embeddingtransformational reform.

To compete on the global stage, the CityGrowth Commission argues that UK metrosneed sufficient decision-making powers

and flexibilities to become financially self-sustainable. Social and democratic argumentsfor devolution have been made by others,and while the City Growth Commissionrecognises many of these, we concentrate onthe merits of the economic case for change.Working with local partners to supportgrowth and deliver high quality public serviceoutcomes, metros need to be empoweredto tackle the long-term causes of welfare

dependence, manage down their share ofthe national deficit and by more integrated,informed investment decisions help putthe UK economy on a more inclusive,sustainable footing.

This report stands behind the conclusionsof the London Finance Commission andCommunities and Local Government(CLG) Select Committee report, but aimsto go further, advocating more ambitiousdecentralisation and devolution for those cities

able to shoulder the burden of genuine risk.Devolution should not be a top-down

blanket policy but a process through whichthe UKs major metros can benefit fromnew powers and flexibilities that matchtheir capability and ambition. For somecities, the economics of agglomeration

concentrating and connecting highlyproductive resources might remain elusive.Local politics and entrenched identity issuescan make collaboration within and betweenfunctioning economic areas difficult; moderntravel to work patterns do not alwaysalign with the legacy of administrativeboundaries or the relationships betweenlocal authorities. Similarly, changingdemographics can pose both opportunities

and challenges to the social and economicfabric of our cities, with some facing theprospect of a fall in the suitably-skilledworking-age population.

City-regional devolution will take time,as national and local governments developa more mature partnership, respecting

new boundaries and spheres of influence.Crucially, it will rely upon demonstrationof sophisticated financial capabilityand risk management, enabling metrosto deliver their share of continued budgetconsolidations.

City-regional devolution will alsohinge upon effective governance andaccountability structures, visionaryleadership and the economic growth

potential to ride the difficult storms ofdecentralisation and devolution. City-regiondevolution is therefore not for everyone.Our recommendations do not immediately

apply to all metro areas as some are not

yet ready to deal with those challenges or

responsibilities. But some cities do already

exhibit these qualities and are eager to take

the opportunity to power their economic

futures with greater autonomy. For these

cities, central government must relinquish

control as soon as is practical.If the UK economy is to continue to

grow, and if this growth is to be inclusiveand sustainable, our cities need to beempowered to reach their economicpotential. This will require devolutionof finance away from central governmentto city-regions, as well as genuinedecentralisation of decision-makingand risk transfer.

This Commission supportsdecentralisation to the top metros inthe country,as defined in our first researchoutput,as economic growth measures denotethat these metros are most fit for supportingdecentralisation. This does not, however,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).


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or localities at a later stage, should they beready to operate under a reformed system.

Those metros will wish to move atdifferent speeds along the devolution anddecentralisation trajectory. For example,Greater London already holds certainpowers that allow for some strategic finance and

planning across the capital region, but the cityhas ambitions to grow and respond moreflexibly to the changing needs of its rapidlygrowing population. Meeting these challengeswill require greater devolution of decision-making and financial controls, includingdevolution to groups of boroughs, if deemedappropriate. To achieve this, the LondonFinance Commission has prioritised devolutionof property taxes as a key next step.

Meanwhile, other cities have indicateda desire to retain business rates, set council

tax bands, apply a tourist tax or pooltheir finance streams to enable place-basedbudgeting at city-regional scale withoutdepartmental ringfencing. The City GrowthCommission argues that the spectrumof economic potential, administrativecapability and local political ambition can

be accommodated, but it will demand aradical shift in how national and city-regionalgovernments see themselves.

With that in mind, we advocate a seriesof recommendations for cities and centralgovernment, found on page . Someshould be applied across the board, suggestingasks of both central government and metros,while others will need to be implemented inconsideration of individual metros readiness

for further decentralisation and devolution.

DEFINITIONS

The Commission uses the following

definitions for decentralisation and

devolution to metros:

Decentralisation: denotes the relaxation

of central governments control overspending programmes, allowing local

retention of revenue and freedom to

spend central government grant funding

(both capital and revenue) without

ringfencing, creating a move away from

siloed, project-based spending, allowing

local areas to flexibly spend according

to local needs and characteristics.

Fiscal devolution:denotes the

passing of a set of powers down fromcentral to metro governments control,

enabling metros to:

Raise and retain funding through

a range of existing taxes and

charges, such as property taxes;

Pool revenue streams and leverage

other assets, giving metros the

flexibility to borrow, for example,

through the creation of place-based

budgets;

Have sufficient flexibility to create

a sustainable borrowing portfoliowithin the rules of the Prudential

Code,9which includes borrowing

in open capital markets. For example,

cities may choose to follow a similar

arrangement as agreed via the Silk

Commission in Wales, granting

borrowing flexibility up to a maximum

of 400 million, enabling a limited,

known sum to appear on the central

balance sheet.

Devolved Status:status given to metros

that have been independently assessed

as demonstrating robust governance

and accountability structures, visionary

leadership and the economic growth

potential sufficient to ride the difficult

storms of devolution. Devolved Status

implies metros receive all aspects

of fiscal devolution defined above.

9. Chartered Institute of Public Finance and Accountancy


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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 20032013.13. McKinsey Global Institute (2011).

CITIES DRIVE GROWTHBUT ARE HELD BACK

, 9.6

7.6 , ,

, 6.1.

61%

2007 7% 19%2025

%

,

%


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1. THE RISE

OF THE CITY STATE

Already global business is beginningto plan strategy from a city, rather thana country, perspective. Understandablyso: well over half of the worldspopulation lives in cities, generating

more than percent of global GDP.Standard population projections showthat virtually all global growth overthe next years will be in urban areas.The Economist Intelligence Unit ()

We live in an urban age. Cities and theirsuburbs are increasingly powerful innational and global politics and are drivingeconomic growth in developed and emergingmarkets across the world. This trend is

set to continue, already accounting forup to percent of global Gross DomesticProduct (GDP).The importance of metrosas centres of knowledge with intensiveand highly productive activity makesthe political economy of cities hard toignore. Empowering our cities gives themthe opportunity and scope to fulfil theireconomic potential, creating thrivingplaces of inclusive, sustainable growthand prosperity.

The academic literature has increasinglyemphasised the role of the metropolitanarea or city-region as the appropriateunit of analysis for tackling social, politicaland economic problems. In If Mayors Ruledthe World Benjamin Barber argues that theglobalised economy has grown too bigfor our nation states to respond effectively.Multinational companies, global supply

chains and international flows of labourand financial capital are creating a worldwhere national boundaries are subsumedby global economics.

Today, after a long history of regionalsuccess, the nation-state is failing uson the global scale. It was the perfectpolitical recipe for the liberty andindependence of autonomous peoplesand nations. It is utterly unsuitedto interdependence.

the city now appears to be ourdestiny. It is where creativity isunleashed, community solidified and

citizenship realized. If we are to berescued, the city rather than the nation-state must be the agent of change.Benjamin Barber ()

While impact might be detected at themacro level, the challenges and uncertaintiesof a globalised economy are experiencedat a local level. Here, national governmentsare too removed, constrained by incompleteinformation and coordination failure(in the jargon), which prevents them fromacting in an optimal, integrated fashion.

As more people live in cities, and thesecentres of economic activity account formore of nations wealth, the politics of metrosare gaining importance. The City GrowthCommission has considered what this meansfor the UK political economy: what is the roleof cities in enabling a more locally responsive,

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


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innovative and productive place? Whateconomic levers and political structures areneeded to realise this? How can the UK breakour default mode of centralisation and benefitthe economy as a whole?

City-led devolution has risen up the UKpolitical agenda rapidly in recent months.

In June , the Wales Billwent into theHouse of Lords and will enter the committeestage in October, shortly after the result ofthe Scottish referendum on independenceon the thof September. The latter, inparticular, has prompted discussion aboutthe English question and, whilst largelyignoring that constitutional can of worms,senior figures in each of the main politicalparties in Westminster have committed to

champion city-led devolution in some guise.

Devolving power from Whitehall to ourtowns and cities is essential to generatethe new jobs we need. Cities and townsthat come together with local businesseswill be given historic new powers overtransport, housing, skills and economicdevelopment And towns and citieswill be given clear incentives too:by being able to share in the proceeds

of growth in their area.Leader of the Opposition, Ed Miliband (April )

local leaders and businesses needa much bigger say in where publicinvestment in their areas should betargeted in the futureNobody knowsmore about what local economiesneed than the people who actually liveand work day in and day out in thecommunities themselves.Deputy Prime Minister, Nick Clegg (July )

The democratic arguments in favourof decentralisation and devolution (see,for example, Institute for Public PolicyResearch (IPPR) ())are strong andtimely in our age of chronically low voter

turnout. Political engagement and devolutionare tightly related, creating a virtuouscircle of taxation powers, accountabilityand political engagement at the local level.With the most recent electoral turnout ataround only percent, local democracyis in desperate need of revival, and genuine

devolution would give significant impetus.The City Growth Commission recognises

the importance of accountability andthe relationship between a thriving localdemocracy and its effective use of publicfinance in pursuit of inclusive andsustainable economic growth. Already, percent of UK GDP is generatedby city-regions, this proportion willincrease significantly as city populations

continue to rise disproportionately

andknowledge-intensive industries clusterin and around city-centres. For economicreasons, we therefore argue that our politicalinstitutions of policymaking, regulation

and financial management should be

reconfigured away from central government

towards metros.This economic argument has gained

traction domestically over recent months.The Chancellor of the Exchequer dedicated

two speeches to realising the potentialof the Northern Powerhouse by improvingconnectivity between northern cities tomagnify agglomeration effects, heightenproductivity and create more jobs.Citing OECD analysis, he accepted:

there is a powerful correlationbetween the size of a city and theproductivity of its inhabitants. Thetop cities in the world contain

just percent of global populationbut create percent of global GDP.Over recent decades economists haveexplored all the different reasons whycities raise their residents productivity:specialisation is greater, competitionand 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).


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and innovation spread faster. Crucially,cities are also where clusters of successfulindustry are created like the financialservices cluster in London, or the digitaleconomy of Californias Silicon Valley.Chancellor of the Exchequer, George Osborne (June )

The Communities and Local Government(CLG) Select Committee has also putforward its case for devolution in England,with the link to economic growth a centralpillar of the argument:

fiscal devolution as part ofa package of wider decentralisation would encourage greatereconomic growth across England.

The Government has, through its ownbusiness rates retention scheme, acceptedthe logic behind this. Putting a widerrange of tax and borrowing powers intothe hands of local politicians simplyextends this logic Cities and theirwider regions have the most potential todrive growth.CLG Select Committee Report (July )

This report was soon followed by a draft

Independence forLocal Government Bill,proposed by Graham Allen, a respectedbackbench MP. The London Mayor,London Councils and Core Cities alsopublished a statement of progress againstthe London Finance Commissions detailedreport of .The concepts of fiscaldecentralisation and city-led devolutionare increasingly being considered as vitalif we are to put the UK economy on moreproductive, sustainable footing.

The more control local governmentshave over the revenue they raise, theeasier it is for the public to hold themaccountable for delivering results, whichhelps make governments more innovativeand effective. Across the world, city

leaders are tackling the biggest challengeswe face from fighting poverty toaddressing climate change with boldnew ideas. But doing so requires money.Empowering cities to invest in their ownfutures not only makes them stronger,it makes their nations stronger, too.Michael Bloomberg, Mayor of New York City ()

Crucially, metros are the right scale forconvening the powers and expertise required

to appropriately drive social, environmental

and economic change within an area. Theycreate opportunities for difficult politicaldecisions to be made in support of growth decisions that single local authorities mightotherwise not be able to take (e.g. building

on Green Belt land). As shown by therecent One North proposal on transportconnectivity between five northern cities,

they also provide the scale needed to workwith other cities in the UK to lead and shapestrategic infrastructure investment.

Together, these political advantages meancity-regions have sufficient critical massto compete on the world stage against otherleading metro economies. But to achieve thispotential, metros need greater freedoms and

flexibilities individually and collectively to make strategic decisions in the long-terminterest of their populations and the widereconomic sustainability of the UK as a whole.

Making the shift from centralisationto city-led growthHistory has firmly shaped the nature andextent of centralisation in UK governance.The legacy of Beveridges universal welfarestate has embedded public expectationsof centrally determined and, more recently,centrally guaranteed minimum servicestandards. This has gradually erodedpower and accountability away from localareas and created a vicious cycle of everdiminishing capability. Without sufficientinfluence 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).


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and with ever declining grant funding, localgovernments incentive to invest in capabilityis eroded. Central government then has littleincentive to devolve power and financialresponsibility to those local areas.

Many of the messages of decentralisationand devolution are not new. Talk of the need

to move away from the UKs highly centralisedsystem has been around for decades. Whatappears to be new is the degree to whichcentral government is starting to take heed ofthis talk and put it into action. For example,the Localism Actof brought somefurther flexibility to the Greater LondonAuthority (GLA) enabling it to determinehow to spend housing and transport funding,and allowed for the creation of City Deals

tailored arrangements between individualcity-regions and central government aimedat providing targeted grants and greaterflexibility

Yet these actions were only a tentative stepin the right direction. The same Localism Actintroduced greater restrictions on council tax,the only tax fully retained by local authorities.The City Deals, and their successor GrowthDeals, were a deeply centralised process inwhich cities homework was marked by

Whitehall officials and city-led strategiesfor growth were reduced to funding specificprojects. Far from Lord Heseltines singlepot,the Local Growth Fund deals werereduced to a competitive funding bid model,with relatively small local projects given thegreen light by central government. Too often,cities feel like there are two steps forwardand one back, promised policy initiativesget turned into Whitehall processes thathave a tendency to revert to a centralisingdefault mode.

Despite this, the move by the CoalitionGovernment to support the models of EarnBack, Gain Share and greater flexibility forother specific projects, e.g. West Yorkshireplus Transport Fund, is welcome. Anythingthat moves the UK slightly further away from

its highly centralist system of governanceis a step in the right direction. The UK isthe most centrally-controlled system ofpublic finance of any major OECD country,with sub-national government taxationaccounting for only . percent of GDP,compared to percent in France and, at the

top of the scale, percent for Sweden.That limited control over taxation means

that, compared to their counterparts in otherdeveloped nations, UK cities disproportion-ately rely on central government funding.The centre dictates how, what and when cen-tral government funding and revenue shouldbe spent and generated, without due regardto local need and economic conditions. Suchdependence on central government arguably

puts UK city-regions at a disadvantage inrelation to our international competitors.Instead, metros rely on an outdated systemthat restricts innovation and integratedinvestment, constraining the ability of localleaders to support the specific requirementsof businesses and individuals within theirwider city-regions.

There has been a long-term trend ofUK people wanting Scandinavian-stylehigh-quality public services but with

low American-style taxes.Yet withoutsignificant public service reform (includinggreater data-driven, outcomes-focusedpolicy-making), expectations on the quantityand quality of public services will have tobe restrained. The ever-declining pot ofpublic funds and ever-rising need for servicesto support the UKs ageing populationmean that a large gap is opening up, mostnoticeably at the local level, where muchof the effects are felt the gap betweenexpenditure and funding is expected towiden to .bn by /.

Reform is needed to enable city-regionsto manage their budgets more strategicallybetween services and over time. This willallow greater investment in economicdevelopment 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 percentCLG Select Committee (2014).32. Ipsos MORI (2012).33. Local Government Association (2014).


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helping to manage down the demand forwelfare. The most ambitious metros areeager to play their part in driving local andnational economic growth, and becomingfinancially self-sustainable. For example,new HM Treasury analysis shows thatif the northern cities of the UK were able

to grow at the same rate projected forthe whole of the UK, it would add bnin nominal terms to the northern economy,benefiting these cities and UK growthas a whole.

Realising this projection of economicuplift will require central government andcity-regions to find a new understanding,where both share the risks and responsibilitiesof reducing the deficit, managing down publicsector net debt and making decisions in thebest interests of metros and the UK economy

as a whole. While Detroit, for example, isoften used as acase against decentralisation,much can be learned from this citys decline(see Detroit a case against decentralisation).An ambitious package of fiscal devolution

DETROIT A CASE AGAINST DECENTRALISATION?

Throughout the first half of the 20th

century, Detroit had emerged as a major

national automotive manufacturingcentre, growing to a population of 1.85

million by 1950, the 5th largest city in

the U.S.. By 2008, the citys population

had more than halved in size and in July

2013 the city filed for bankruptcy. At an

estimated $1820bn debt, it represented

the largest municipal bankruptcy filing

in U.S. history.

Ineffective and unaccountable local

leadership was a significant factor inDetroits decline. Compounded by global

economic shifts in manufacturing towards

Asian producers as well as deep social

problems of racial segregation, the city

experienced a stark hollowing out of

its inner city. This further eroded the tax

base and exacerbated levels of poverty.

Today, one third of Detroits citizens live in

poverty; median family income is about half

the U.S. average and in 2008, the city had

one of the highest murder rates in America.

Reliant on its single industry, and

heavily influenced by the wishes of

major employers General Motors and

Ford, local investment decisions were

made to the detriment of wider public

transport, amenities, infrastructure and

skills, undermining the citys growth

over the long run.

Detroits twentieth-century growth

brought hundreds of thousands of less-

well-educated workers to vast factories,which became fortresses apart from

the city and the world. While industrial

diversity, entrepreneurship, and education

lead to innovation, the Detroit model led

to urban decline. The age of the industrial

city is over, at least in the West.

Edward Glaeser, Triumph of the city

(2013)35

WHAT LESSONS CAN WE LEARN FROM THIS?

Despite a directly elected mayor and

the appointment of an emergency

fiscal manager in 2013, Detroit

failed to rectify its economic and

financial woes. Whatever the structure

of governance and leadership,

accountability mechanisms need

to be transparent and robust;

Large cities often have the advantage

of a diverse, resilient sectoral

base. This enables dual-skilled

households to move into the area,

with a reasonable promise of gainful

employment in different sectors,

creating a virtuous circle of investment,

job creation and high productivity.

Without economic diversity, growth

is unlikely to be sustainable in the

face of external shocks.

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


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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).

measures of the type described in this report canbe ground-breaking and doesnt need to end inproblems for HM Treasury; if they are daringenough, all three major parties have the abilityto effect radical change.

Embracing the postcode lottery

An innate challenge for city-led growthand decentralisation is the postcode lotterycritique. Coined only in the s, the termcaptures a deeper expectation among theBritish public that the role of the (central) Stateis to ensure equality of opportunity and accessto public services and welfare.

City Growth Commissioner, Tony Travers,argues that this expectation emerged in thes because with the advent of Keynesianeconomics, the Beveridge report and theeconomic depression... there was a shift in thebalance of control away from local governmentand towards the centre.Subsequent policyshifts in response to, and anticipation of,irresponsible local authority tax-and-spendtactics have entrenched a political culture inwhich local and regional disparity is resolvedby redistributing and ringfencing locally-raised revenues. The UKs political economyhas created a default mode of centralisation

as a safeguard for equality.As a result, a common argument levied

against decentralisation and city devolutionis that it will exacerbate inequality betweenplaces and constrain the ability of centralgovernment to redistribute accordingly. Indeed,this mightbe the case and more than onewitness at the Commissions formal evidencehearings made this point.

However, the centralised efforts toredistribute resources and minimise variationin local outcomes had been ineffective.For example, Professor Alan Hardingof the Heseltine Institute at the Universityof Liverpool Management School noted manyplaces that were poor years ago are stillpoor now as cities policy to the extent itexists beyond the collection of other decisionsimpacting at the metro level hasnt madea lot of difference. What, he asked, explains

why those policies do not work better thanthey could or should?

The answer lies in the fact that city-regionsare not uniform in their economic activity,social productivity or needs. Centrallydetermined policy, lacking local informationand coordination, relies on the mere hope

that one size fits all. Metro-led devolutionand decision-making would enable integratedinvestment and pooled place-based budgeting forthe benefit of the city centre and its surroundingeconomic area. With the right fiscal and financialflexibilities, metros could be sufficient in scale,ambition and reach to raise and redistributerevenue within their own areas.

This is already starting to happen in someareas that are setting up business-rate pools,

spreading the gains from places within the city-region that have a higher tax base and growthpotential to those where the strain on publicresources is greater. Over time, however,effective economic development should allowan increase in the proportion of revenue tobe reinvested in productive forms of capital,enabling the welcome rise some argue of postcode choice.

It is not the case that devolution removes theneed for redistribution entirely. The City Growth

Commission makes clear that central governmentwill still be dominant in setting and administeringtaxes where there is a clear argument fornational rates to avoid undue complexity orperverse cross-border behaviours (e.g. incometax, corporation tax or VAT). Similarly, localgovernment finance will still need to be allocatedfrom central coffers for places that do nothave the administrative capacity or economicbasis for financial (let alone fiscal) self-sufficiency.

However, those metros that have the leader-ship, financial management and accountabilitystructures to administer a devolved city-region,should be freed to drive investment, job creationand inclusive, sustainable growth. Collaborationbetween metros and with greater metro rep-resentation in national decision-making forums,will also serve to ensure for the first time our urban powerhouses can enhance the UKsgrowth potential.


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20

People have different views about the ideal

society. For each of these statements, please

tell me which one comes closest to your ideal.

JAN 2006 APR 2009 JUN 2012

% % %

a) A society which emphasises the social

and collective provision of welfare

48 47 41

b) A society where individuals are

encouraged to look after themselves

46 49 42

c) No opinion 6 4 17

Total 100 100 100

THE UK PUBLIC WANTS SCANDINAVIAN PUBLICSERVICES BUT AMERICAN TAXES

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

Tax set at each level of

government as a % of GDP

LOCAL

GOVT

STATE/

REGIONAL

GOVT

LOCAL +

STATE/

REGIONAL

CENTRAL

GOVT

SOCIAL

SECURITYTOTAL

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

CENTRALISATION OF UK TAX AND SPENDING

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

41. Ipsos MORI interviewed a representative sample of 1,011 adults aged 18+ across Great Britain. Interviews were conducted bytelephone 9th to 11th June 2012. Data are weighted to match the profile of the population. Where percentages do not sum to 100 thismay be due to computer rounding, the exclusion of dont know categories, or multiple answers. Responses for 2006 and 2009 fromIpsos MORI for 2020 Public Services (2011).

42. Travers, Professor, T. for the Local Government Association (2012). Giving evidence to the CLG Select Committee, Professor Traversadded even if the 50% of business rates that local authorities have retained since April 2013 were included, the figure would only riseto perhaps 2.5 percent Communities and Local Government Select Committee (2014).

43. OECD (Downloaded August 2014).


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21

63% OF TOTAL LOCAL GOVERNMENT INCOMERECEIVED IN 201213 WAS IN THE FORM OF CENTRAL

GOVERNMENT GRANTS, WITH COUNCIL TAX RECEIPTSMAKING UP 17% OF TOTAL INCOME 44

Source: Department for Communities and Local Government (2014)

-1

0

202021 203031 204041 205051 206061

1

2

3

4

5

Health and long term care Education TotalPensions

%GDP

%GDP

RISING PRESSURE OF ANAGEING POPULATION

Source: HM Treasury (2014)45

44. Department for Communities and Local Government (2014). Note AEF stands for Aggregate External Finance45. HM Treasury (2014).

Revenue Support Grant

Redistributed non-domestic rates

Specific grants inside AEF

Other grants

Council tax

Other income (including capital receipts)

Charges for services (including rents)


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22

192030S 194050S 195060S 196070S

1948 Local Government Actgave

unringfencedcentral grant to local

authorities on thebasis of need. Aim

of equalisation throughredistribution.

Local authorities increasingly reliant

on grants as rates revenue diminishes

as rates revaluationrepeatedly stalled.

1958 Local GovernmentActaimed

to increase local independence by

enlarging local tax base and

emphasising general rather

than specific grants.

1925 Rating and Valuation Actbrought different local authorityrates into one single rate.

Local authorities still responsiblefor recalculations

Burden of local tax increasinglyfalls onto domestic ratepayer.

As early as 1870, Goschen Reportexpressed mounting concernas to fragmentation of localwelfare institutions.

Rationalisation of local structures via1888 Local Government Act. Provisionnot regulated until mid 1930s.

Central state as the guarantor ofuniversal access to services of thehighest quality based on need

Services mostly funded by generaltaxation;

Delivered primarily by the state by 1950 electricity, gas, localhospitals, major trunk road all undercentral control.

LOCALGOVERNMENTFINANCE

PUBLICSERVICES

BEVERIDGE REPORT(1942) FOR UNIVERSALSTANDARDS

INDUSTRIALISATIONBRINGS PROSPERITY

AND INEQUALITY

VARIATION CREATES

INCENTIVE FOR CENTRALISATION

EQUALISATION DRIVESLOCAL GOVERNMENT

FINANCE REFORM

TIMELINEOFC

ENTRALISATION


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197080S 198090S 19902000S 20002010S 2010 ONWARDS

DEVOLUTION AND

REGIONAL DEVELOPMENT Centre controls profligate local

authorities by effectively cappingrates (1984).

Poll tax introduced in Scotland(1989) and England and Wales (1990).Backfires on central government,although local authorities set flat rate.

Council Tax introduced 1993 based on1991 valuation never updated.

New Labour creates DevolvedAdministrations in Scotlandand Wales (1998), granting limited

fiscal, spending and other policy powers. 8 Regional Development Agencies

in England (1998) awarded (total) 1.82.3bn single pot funding per year. Greater London given devolved powers

under2000 Local Government Act,which also gave all local authoritiesresponsibility for economic, socialand environmental well-being.

Launched under Major andaccelerated by Blair, NPM seeks toembed increased information, choice,clear standards, user consultation,and greater accessibility to moreresponsive services.

New Localism undermined byconcerns of postcode lottery andgovernment response of targetsand national minimum standards.

Academies and Foundation Trusthospitals designed to improve localfreedom and accountability

Coalition abolishes RDAs in 2010,creating Local Enterprise Partnerships(LEPs) with increasing responsibility.

Trigger referendum in Localism Act2011for Council Tax increases above 2%.

28 City Deals for largest/fastestgrowing cities followed by GrowthDeals and Single Local GrowthFund allocation in July 2014.

Central deficit budget cuts hit localgovernment hardest, with fall of 1/3over the course of Parliament. Leavesnon-statutory services (e.g. housing,planning) particularly exposed.

Policy and regulation increasinglycentralised (e.g. school curriculum,hospital inspection).

New Homes Bonus, CommunityInfrastructure Levy and BusinessRate Retention designed to enableand reward growth, but often inlieu of other funds.

CITY DEALS FORSOME, GROWTH DEALS

FOR ALL

NEW PUBLICMANAGEMENT (NPM) DRIVES

SERVICE REFORM

PROMISES OFDEVOLVED POWER

FALL SHORT

CENTRAL-LOCAL

RELATIONS AT LOWEST EBB

By end of mid 70s water supply,sewerage, local health services undercentral control.Internal markets first introduced, withcontestability and CompulsoryCompetitive Tendering and privatiza-tion (e.g. British Telecom in 1984 andBritish Gas in 1986).

CENTRAL CONTROL OFSERVICES TIGHTENS

UNDER RISE OFMONETARISM

23


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2. THE ROADMAP

TO DEVOLUTION

The RSA City Growth Commissionsupports the conclusions of the LondonFinance Commission and CLG SelectCommittee reports,similarly arguingfor greater autonomy, decentralisation

and devolution. However, the Commissionhas aimed to go further, advocating moreambitious devolution for city-regions ableto shoulder the burden of fiscal and financialrisk. These metros, which would be fewin number to start with, would be grantedDevolved Status.

Achieving Devolved Status will dependupon metros demonstrating robustgovernance and accountability structures,visionary leadership and the economic

growth potential to ride the difficultstorms of decentralisation and devolution.We believe the focus on the metro scaleis vital here to realise the economicbenefits of such bold reform.

In order for decentralisation anddevolution to be meaningful and sustainable,both national and city-level governmentswould need to adapt to new boundariesand spheres of influence. This joint effortwould enable a move from dependenceto collaboration, for greater growthfor the UK as a whole.

City-regional devolution needs tobe a processthrough which the UKsmajor metros can benefit from newpowers and flexibilities that matchtheir ambition and capability. It meanscentral government will have to make aconscious shift to realise its own rhetoric.The Local Growth Deals announced in

July , for example, were initiallyintended to enable single-pot financingof strategic economic priorities agreedby LEPs and local authorities. By the timethey had been through the Whitehall

machine, they amounted to little morethan central government approval ofspecific local projects that happenedto align with ministerial priorities. Suchveiled centralised localism needs to stop.

As a first step, we advocate the creationof an independent City-Region DevolutionCommittee. This Committee would takedecision-making outside of the immediatepolitical- and Whitehall arena and allowfor an open, transparent and independent

assessment of metros readiness fordevolution.

Securing greater autonomyTo be granted Devolved Status metroswill need to demonstrate they are able totake on the risks associated with devolution.The diagram below illustrates a frameworkby which metros could be assessed on theirsuitability for devolution. It demonstratesthat a combination of capabilities and eco-nomic strength is needed to ensure cities havethe administrative capacity to mitigate andmanage downside risk, as well as maximiseeconomic opportunities. As metros areable to generate and increasingly rely upontheir own revenues, so too must they beable to cope with volatility of revenue fromdevolved taxes over the business cycle.

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


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INDEPENDENT CITY-REGION DEVOLUTION COMMITTEE

An independent City-Region

Devolution Committee would evaluate

metro applications for Devolved

Status. A standard set of criteria

would be devised by the Committeeregarding capability, governance

and economic potential, against

which bids will be assessed in

an open and transparent manner.

The independent Committee would

make recommendations as to whether

individual metros should proceed

to negotiating the specifics of their

Devolved Status with central government.

To ensure continued effectiveness

of governance and a continued drivefor growth, metros Devolved Status

should be reviewed at least every five

years, enabling Combined Authorities

to propose and bid for new powers,

and for new metros to achieve

Devolved Status when they are able.

DEVOLVED STATUSVENN DIAGRAM

25


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26

Capability in Governance and a proventrack recordA robust, accountable model of governanceis needed for effective collaboration betweenlocal authorities to ensure decisionscan be taken in the best interest of the city-region. The Combined Authority model

demonstrates great potential in deliveringthis strong and stable structure, enablingplaces to cooperate along boundariesthey identify with and align relevant LEPboundaries accordingly.

However, there might be other resilientforms of governance that metros chooseto adopt, with varying degrees of formalityand flexibility. For example, Londoncould see the development of groups of

boroughs with the creation of sub-cityregional Combined Authorities, setting anddelivering strategic priorities within theirboundaries while working within London-wide devolution and the overarching mayoralstructure of the GLA, to deliver a strongstrategic vision for growth across the capital.

To support this process, metrogovernments may also consider theapplicability of introducing an electedor non-elected mayor or chief executive

into their model of strong, stablegovernance. The Chancellor has publicallyadvocated elected mayors, with HMTreasury seeing them as an indicatorof good governance. While many benefitscan abound from the introduction of amayor (e.g. visible leadership domesticallyand abroad), this is unlikely to be applicableto all metros and metros should be free todecide if, when and how the metro shouldbe led, with the aid of a public referendumif a metro so chooses.

Growth potential and economic successIn order to weather the volatility anddownside risks that come with devolution,metros will need to demonstrate theireconomic success as well as their futuregrowth potential. Growth promotion ina city means putting strategic plans in place

to support, promote and encourage thecreation of innovative and successful clustersacross sectors, connecting people with highquality transport infrastructure, enablinginformation flows and attracting talentfrom across the country and globally.

Together with a long-term commitmentto education, skills development andpublic health delivery, each tailored to meetthe current and future needs of the citys

population, creating future growth potentialrequires the promotion of sustainable,inclusive growth. The Commission heardfrom several cities about their concernregarding economic and social inequality

a problem that puts additional strainon public services and welfare, alreadyunder pressure from increased demandand diminishing resources.

As a result, economic growth meansmore than simply increasing Gross Value

Added (GVA) and boosting headlineGross Domestic Product (GDP). To avoidspiralling costs, whether from welfare andpublic services or adaptation to climatechange (e.g. flood defences), the distributionof the proceeds of growth across the city-region will need to enable increased socialproductivity and promote environmentalsustainability over the long-term.

(.. )


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3. RECOMMENDATIONS

The City Growth Commission makes a boldeconomic case for the UKs major metrosto be given the opportunity to receive, at aminimum, greater flexibility about how theypool and spend revenue streams, and, for

the most mature metro political economies,devolved fiscal powers. These powers willenable city-regions to make more effective,integrated decisions for their functionaleconomic areas, allowing for redistributionwithin city-regions and investment for amore prosperous future.

For any metro granted Devolved Status,central government must relinquish controlas soon as is practical. Other cities notgranted this status should be assisted to

take on greater autonomy over the longerterm, while they continue to operate underthe current system until such time as theyare ready and wish to apply for furtherdecentralisation and devolution.

With that in mind, we advocate a seriesof recommendations for cities and centralgovernment. Some should be appliedacross the board, while others will needto be implemented in consideration ofindividual metros suitability for fiscaldevolution:1. Reform across the board: asks of central

government

2. Reform across the board: asks of metros

3. Policy and financial decentralisation

for leading metros

4. Devolution to Devolved Status metros

1. Reform across the board:asks of central government

1.1 Tax reform

The Mirrlees Reviewwas the most

comprehensive analysis of the UK taxsystem in decades. This review calledfor a modernisation and streamliningof the system to create a progressiveand economically efficient UK taxenvironment. We propose the MirrleesReviewbe revisited in light of movestowards greater decentralisation anddevolution to consider how taxes andthe tax base might more closely reflectthe modern UK economy.

Those taxes most likely to bedevolved (e.g. property taxes forDevolved Status metros) would undergoa dual process of evaluationratherthan a long, drawn-out national reviewunder the tax reform rubric, to befollowed, only then, by considerationfor devolution. We would not wish to seetax reform used as an excuse for delayingdevolution to cities.

1.2 Constitutional reform

Fiscal devolution and decentralisationare ultimately about constitutionalchange in the distribution of powerand accountability within the UK.The UKs unwritten constitution hasallowed for flexibility and adaptability,but it has been a one-way street towardsgreater centralisation since the Local Government Act, with notable

47. Mirrlees Review (2011).


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EARN BACK

This Greater Manchester inspired reform,

agreed as part of the City Deal in 2012,

was the first of its kind in the UK. It aimed

to mirror the way in which a city would

approach growth investment under tax

localisation, without any actual change

in tax structure. It links a locally funded

step change in infrastructure investment

to a payment by results revenue formula

agreed with HM Treasury. This revenue

formula provided Greater Manchester

with a share of the tax proceeds HM

Treasury would gain as a result of growth

generated by locally funded investment.

After protracted and difficult negotiations,

an initial formula was agreed in 2013.

Recognising the innovative nature of

the Earn Back mechanism a reviewprocess was included in the agreement

to allow for further development and

improvements over time.

Three similar propositions are in play

across Glasgow, Leeds (West Yorkshire

plus York) and Greater Cambridge.

Combined, the metros covered by these

propositions are home to just under 7

million people, with combined economies

of more than 130bn in annual GrossValue Added (GVA).

The governments position on this,

and future models, is not wholly clear,

with proposals for these models finally

agreed, but arguably from the cities

point of view, much diminished from their

initial proposals. Part of the issue lies

with a lack of a mechanism or metrics

in the Office of Budget Responsibility

(OBR) that would allow HM Treasury to

take account of the additional revenues it

would receive if it were paying out under

an Earn Back-type formula. The implicit

assumption is that any additional growth

in one place simply substitutes for the

same amount of growth elsewhere; there

are no overall productivity gains and no

increases in labour market participation,

and therefore no net national increasein GDP or net additional tax revenues.

This leaves only costs on the scorecard

which, according to current accounting

rules, can appear more than once up-

front capital spend by the city, addition

to national debt due to city borrowing,

and the payments to city over time.

The government is ill-equipped to

engage with cities on the current and

forecast linkages between investment

and growth.

borrowing outside of the traditionalsystem not strong enough. For thosemetros and local authorities, the LGAhave devised a municipal bonds market

to allow them to access individually orcollectively bond finance at a competitiverate. This could be a cost effective finance

avenue for many metros.

3.4 Retaining the proceeds of growth

Leading metros should be free to explorenew and emerging models of retaining ashare of the upside of growth (and take oncommensurate downside risk). Negotiatedwith central government under a positivepresumption in favour of these formsof payment by results models, such as

Tax Incremental Financing or GreaterManchesters Earn Back.

a. Greater flexibility over the use of TaxIncrement Financing (TIF)where beneficial,to enable local authorities and cities touse a range of mechanisms to supportinfrastructure investment and economic

development, based on reinvesting aproportion of an areas future business rates.

b. Models similar to Earn Back and GainShare:While Earn Back-type models havebecome increasingly popular with threeother propositions now in train, HMTreasury seems to have reached the limitof its appetite to negotiate such dealswhile still proving the concept. However,some metros that currently have an Earn

54. Local Government Association (2014)

31


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33

Metros would therefore be free to moveaway from the uniform business rate.

The recently reformed scheme ofbusiness rate retention, tariff and top-upallows local areas to retain percentof their business rate revenue, which isthen supplemented or tariffed depending

on a central government assessment ofthe areas funding requirement and therevenue collected. Full devolution ofbusiness rates to metros with DevolvedStatus would require reform to thiscurrent system. For example, if Londonwere granted full devolution, theExchequer would lose an estimated million in excessive growth tariffs eachyear. A corresponding reduction in central

government core grant to those areaswith Devolved Status would be requiredto supplement this loss of revenue.

Any reform or rate change would alsorequire engagement with the businesscommunity. The Crossrail supplementdemonstrates that businesses are willingto accept an increased rate rise, andcontribute towards investment, if theycan see the genuine benefit to themas a business. We recommend that the

LEPs in each metro leverage their role asbusiness engagers to work with BusinessImprovement Districts (BIDs) and otherbusiness organisations to aggregate thebusiness voice, testing proposals beforethey are put into practice;

b. Revalue and set council tax bands: citieswith Devolved Status should be ableto flex and reform council tax, includingrevaluing and upgrading bands as they

see fit (in accordance with ValuationOffice regulations);

c. Other taxes or subsidies: metrosshould have greater flexibility tocreate and fully retain new specifictaxes that reflect the needs of the cityeconomy and are mindful of the local

impacts on markets and behaviour.By negotiation with HM Treasury,these might include hotel taxes,environment/sustainability taxes anda local sir passenger duty tax or subsidy.

4.2 Greater flexibility over the use

of capital reserves

Throughout the Commissions inquirywe have heard from cities that the level

and inflexibility of siloed funding streamsis the key barrier to achieving theirambitions. One such inflexibility is overthe use of capital reserves/receipts of saleof capital assets for revenue expenditure,a process known as capitalisation ofrevenue expenditure.

Currently capital reserves/receiptscannot be used for revenue spending(although proceeds can be used to fundinfrastructure investments) as HM Treasury

believes allowing for this flexibility wouldfuel excess spending. We recommend therestrictions be lifted to allow DevolvedStatus metros to leverage their assets andpool these resources to support growth-promoting activity, within the bounds of thePrudential Code. This would put the UK inline with other OECD countries which havemore flexible controls over the use of localauthority capital reserves.

. / , ,


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