Select Committee on Office of the Deputy Prime Minister: Housing, Planning, Local Government and the Regions Written Evidence

Supplementary memorandum by the Centre for Cities (RG 55(a))


  This full response follows our initial response of 19 January 2006.


  1.  Our response to the Committee's Inquiry is based on our City Leadership report, due to be launched on 24 February. This report sets out the economic case for financial devolution to England's cities and towns, using original research in Birmingham, Liverpool and Barnsley.

Cities matter

  2.  We argue that financial devolution should focus first of all on our biggest city-regions. England's largest urban areas contain the highest concentrations of economic activity in the country, and are drivers of the national economy. Large, well-connected urban areas offer the best opportunity to boost regional growth and narrow the productivity gap. Strong city-regions are key to improving wider regional performance and driving national economic growth.

  3.  Cities would make a stronger contribution to the national economy, if they had more revenue-raising powers and spending flexibilities. Greater financial autonomy would also improve their leadership. But devolution must be done at the appropriate scale. Urban areas perform better when administrative and economic areas match up. This suggests that city-regions are the right level for financial devolution over economic development.


  4.  Our report therefore concludes that economic development is best delivered at the city-regional level. Regions are too big, and many local authority districts are too small.

  5.  City-regions are both economic and political entities. They already exist as economic areas. But drawing political boundaries around these areas is difficult. They include a core city, as well as surrounding areas that have close economic relationships with that city. These relationships can be measured in a number of different ways, including labour markets, housing markets, retail catchment areas and business-to-business linkages.

  6.  If governance arrangements are imposed at a level that matches specific economic flows, then city-regions become political entities, with administrative boundaries that broadly reflect an economic area. Our definition of city-regions explicitly excludes small urban areas (eg Stoke-on-Trent), polycentric city networks (eg The Three Cities of Nottingham, Leicester and Derby) and shire counties (eg Kent). It also excludes some of the smaller so-called city-regions in the Northern Way.

Variable geometry

  7.  Financial devolution should be selective. It will require different models for different places. A one-size-fits-all approach will not work. We recommend "asymmetric devolution", with different places having different degrees of financial autonomy, proportionate to their economic importance.

  8.  Where local authority boundaries cover a functioning economic area, devolution should be to the local authority level. But in England's biggest urban areas, local authority boundaries have little relation to economic flows. Here, city-regional governance arrangements are required to maximise the effectiveness of devolution.

  9.  That is why we propose a priority focus on our biggest city-regions, with substantial new spending and revenue-raising powers for Greater Manchester and Greater Birmingham.

City-Region Contracts

  10.  We recommend City-Region Contracts for Greater Manchester and Greater Birmingham, with control over their own budgets for regeneration, transport and skills. This is over £600 million per year, for each city-region. These two city-regions should also have revenue-raising powers, for example through a 5% levy on business rates—hypothecated to specific transport projects.

  11.  City-Region Contracts must be selective. Only our two biggest city-regions are ready to try them out. Only they have the scale, tax base, maturity of joint working and business buy-in to take on radical financial devolution.

  12.  But over time, five other city-regions could follow—Liverpool, Newcastle, Leeds, Sheffield and Bristol. In the meantime, we recommend more modest financial flexibilities for smaller cities and towns. Economic Development Contracts within Local Area Agreements would give local authorities greater discretion over regeneration.


  13.  Radical financial autonomy for city-regions would require a step-change in accountability. We make the case for directly-elected city-regional mayors, scrutinised by boards of local authority leaders, business and community representatives.


  14.  In summary, the City Leadership report makes eight recommendations.

  15.  Radical devolution to Manchester and Birmingham city-regions:

    —  City-Region Contracts that devolve key economic development powers and budgets to city-regions, starting with Greater Manchester and Greater Birmingham. These would comprise £600 million of existing funding from Regional Development Agencies, Transport and Housing Boards, Passenger Transport Executives and the Learning and Skills Council.

    —  City-Regional Supplementary Business Rates, hypothecated to key city-regional infrastructure priorities. For example, the ability to levy up to 5% on the business rate would raise £35 million per year in Greater Birmingham, and cost small businesses less than £150 per year.

    —  City-Region Growth Incentive would re-focus LABGI (Local Authority Business Growth Incentive) at the city-regional level, allowing city-regions to retain increases in business rate revenue resulting from growth. This would promote cross-boundary collaboration and reward city-regions for growing their business base.

    —  Clear city-regional policy framework, with Whitehall departments, RDAs and other agencies sharing a common focus on city-regional growth.

  16.  More freedoms for all cities and towns:

    —  Economic Development Contracts within Local Area Agreements, giving local authorities greater discretion over economic development.

    —  Enabling greater take-up of existing powers, including prudential borrowing, Business Improvement Districts and user charging.

    —  Improving capacity and skills in local authorities, to further public-private co-operation and promote investment.

  17.  Our report will feed into the Lyons Inquiry, Local Government White Paper and Comprehensive Spending Review.

  18.  We will send copies of the report to the Committee, once it is published on 24 February. We would be very happy to deliver oral evidence to the Committee, if that were helpful.


  19.  Here are our responses to the Committee's issues.

The potential for increasing the accountability of decision-making at the regional and sub-regional level, and the need to simplify existing arrangements

  20.  England is one of the most centralised countries in the developed world. Major economic development decisions are taken by Whitehall and by unelected regional quangos, such as Regional Development Agencies. Greater financial autonomy to major city-regions over economic development would improve the performance and leadership of our major cities and their surrounding areas.

  21.  Scale matters. Economic development is best delivered at the city-regional level, not the regional or local level. City-regions are the best level for running functions such as transport, skills and regeneration. For economic development, therefore, decision-making and accountability should focus around city-regions.

  22.  The regional government experiment has failed. The "no" vote in the North East devolution referendum in November 2004 put an end to the prospect of accountable regional government in England. Further devolution to the regional level would be unwise, given the lack of accountability and the fact that regions are too large for economic development purposes.

  23.  There is a strong economic case for devolving certain funding streams to the city-regional level. This fits with the vision of "variable geometry", where different places have different degrees of autonomy. The priority should be to devolve regeneration, transport and skills funding to the two biggest city-regions in England—Greater Manchester and Greater Birmingham. This would require the two relevant RDAs (NWDA and AWM) and the relevant Learning & Skills Councils to cede control over regeneration and skills funding, for example.

  24.  For this to work, Greater Manchester and Greater Birmingham should consider the case for directly elected mayors in their city-regions. These would provide the greatest degree of accountability, visibility and strategic decision-making across existing local authority boundaries.

  25.  For Greater Manchester and Greater Birmingham, this would increase the accountability of decision-making and simplify existing arrangements.

The potential for devolution of powers from regional to local level

  26.  Financial devolution has so far been piecemeal and less than effective. Central government has taken some tentative steps on the road to financial devolution: the RDA single pot and regional funding allocations; Local Area Agreements, the Local Enterprise Growth Initiative (LEGI) and the Local Authority Business Growth Incentive (LABGI); Business Improvement Districts and prudential borrowing. These are all useful, but they lack ambition and their implementation is proving problematic.

  27.  City-regions are the most appropriate scale for devolving financial powers over economic development. Devolution should not focus on local authorities in isolation, since they are too small for economic development purposes. Real economic markets are bigger than local authority districts, and more closely match city-regions.

  28.  Devolution should focus first of all on Greater Manchester and Greater Birmingham, with other major city-regions to follow after that. As well as gaining control over funding for regeneration, transport and skills, city-regions should be able to raise their own revenues—for example, through a partial re-localisation of business rates (City-Regional Supplementary Business Rates). The revenues would be ring-fenced for investment in strategic infrastructure projects. This would encourage our biggest cities to work across boundaries with their surrounding smaller cities and towns.

  29.  City-regions make good economic sense, but they are a "hard sell" politically. Financial devolution to city-regions has downside as well as upside risks. And directly-elected city-regional mayors are bound to be controversial. But they offer significant potential benefits, such as effective delivery of devolved spending, strategic decision-making and real accountability.

The effectiveness of current arrangements for managing services at the various levels, and their inter-relationships

  30.  Our research backs up years of findings from the Audit Commission, that the current arrangements for public service delivery and economic development are too complex and involve too many layers of governance. Regeneration, for example, involves a bewildering array of agencies at every level of government—national, regional, sub-regional, local and neighbourhood. This is inefficient and ultimately hampers successful delivery.

  31.  Government needs to review what functions are best delivered at what level. Devolution of economic development functions offers opportunities to boost city performance, and also national performance. Regeneration, transport and skills would best be delivered at the city-regional level. Other levels of government should step back from these functions and allow city-regions to drive them forward. This will rationalise the fragmented, disjointed and dysfunctional landscape of current urban governance in England.

The potential for new arrangements, particularly the establishment of city regions

  32.  Our two biggest city-regions should gain significant new spending and revenue-raising powers and be run by directly-elected mayors.

  33.  City-Region Contracts should co-ordinate and devolve funding for regeneration, transport and skills. Contractual approaches have been adopted in other countries—in France, for example. They should be initiated in Greater Manchester and Greater Birmingham. They would allow these two city-regions to direct over £600 million of funding towards their own economic development priorities.

  34.  City-regions should also have some revenue-raising options. For example, the power to raise business rates by up to five per cent, with additional revenues hypothecated directly to strategic transport priorities. In Greater Birmingham, this Supplementary Business Rate would raise around £35 million per year. City-regions should also have a clear incentive to promote business growth. A City-Region Growth Incentive would refocus LABGI at a city-regional level, and allow city-regions to retain increases in business rate revenue resulting from growth, up to £200 million over five years.

  35.  Such radical financial devolution to city-regions would require a step-change in accountability. City-regional governance arrangements should be judged against four tests: democratic legitimacy, clarity and visibility, strategic vision and delivery.

  36.  We believe that a directly-elected city-regional mayor would meet all four of these tests. But directly-elected mayors are difficult. Existing local authority leaders, for example, strongly oppose the idea—not surprisingly. And it is not yet clear that voters would embrace the idea.

  37.  Several areas, including Greater Manchester and the West Midlands, have developed proposals for "Executive Boards" at conurbation level, composed of the leaders of existing local councils. Executive Boards would be a step in the right direction, and an improvement on existing cross-boundary collaboration. They could be put in place with relative speed, and might usefully serve as transitional vehicles on the way towards directly accountable city-regional entities. They could also perform a scrutiny role, in relation to a directly-elected mayor. But Executive Boards are not robust enough to take on the full range of financial powers that we propose.

  38.  Directly-elected Commissioners for regeneration, skills and transport are another route forward. They would be harder to implement than Executive Boards, but would offer a higher degree of accountability and transparency.

  39.  Overall, therefore, we favour directly-elected city-regional mayors as the best model for delivering successful financial devolution. But we fully understand the political difficulties.

The impact which new regional and sub-regional arrangements, such as the city regions, might have upon peripheral towns and cities

  40.  Up until recently, the focus on core cities has tended to exclude smaller cities and towns. City-regions embrace smaller cities and towns, not just core cities; and can help promote closer working between them. City-regions can also help peripheral cities and towns develop a better sense of their economic role. Barnsley, for example, is now thinking about this in relation to both Sheffield and Leeds, and stands to benefit from the growth of both. However, there is a need to prioritise policy around our largest cities, as they can make the biggest contribution to national and regional economies.

The desirability of closer inter-regional co-operation (as in the Northern Way) to tackle economic disparities

  41.  Closer inter-regional co-operation is not a top priority, and should not be the Northern Way's main objective. Rather than being driven by its three component RDAs, the Northern Way should be focused around its principal city-regions. However, the Northern Way's eight "city-regions" are not all city-regions, in our view. The Northern Way also risks losing momentum, because—almost two years since its establishment—it has failed to prioritise on key investment priorities in the North's most important cities.

  42.  To succeed, the Northern Way must recognise the primary importance of its biggest city-regions, especially Greater Manchester. Economic disparities between the North and the rest of the country would best be addressed by releasing the growth potential of the North's largest city-regions. Greater financial devolution would help achieve this.

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