Article

Time for dynamic devolution
Jessica Studdert, published in The MJ, 13 July, 2016

The EU referendum result has created uncertainty over the future of devolution for a distracted Whitehall. But far from falling down the agenda, this process must now enter a bigger and bolder phase to address the challenges laid bare by the vote to Brexit.

The local economies built on cheap and low skilled labour are not improving living standards for many. This has fed an increasing sense of disconnect in communities that feel left behind.

Our cities, towns and shires need to be given stronger powers to secure future resilience that better connects local people and their economies to the opportunities of globalisation.

In the New Local Government Network (NLGN) report, Smarter Not Harder: How devolution can make places more productive, we argue that local leaders need a clearer role in driving not just growth, but the kind of higher value growth that can help reverse our country’s international status as a productivity laggard.

The UK’s output per hour, historically poor internationally, fell off a cliff after the 2008 recession and has never recovered. This matters because future prosperity and rising living standards rely on productivity growth.

National analyses of this ‘puzzle’ often neglect the spatial dimension, although productivity challenges do vary from place to place.

Analysis in our report identifies GVA gaps by local enterprise partnsership area. These are composed of different balances between skills gaps, low performance of key dominant local sectors, or constraints to worker mobility through transport or housing.

Some policy levers that have the greatest influence over productivity – skills, innovation, infrastructure and connectivity – are being devolved to greater or lesser extents.

Yet local areas’ ability to respond effectively to the particular challenges of their productivity gap remains constrained by central fiscal and policy control.

So the next phase of devolution needs a sharper focus on devolving control over a range of financial and policy levers to drive higher value, productive growth.

More radical fiscal devolution than has yet been imagined is required to incentivise productivity growth. City and county regions should take control over a third of corporation tax generated in their area.

Devolving a share of the revenue stream generated by business profits would give local government a direct financial stake in the productivity of their local economies for the first time.

The chancellor has recently announced he intends to reduce the rate from 20% to 15%. This is the ideal time to also address how it is invested for maximum impact.

The plans for business rates retention by 2020 was a good first step towards greater fiscal autonomy.

But business rates are levied on the estimated market rental value of a premises, so they take no account of the value of output.

As a single devolved revenue stream they will not be a sufficient basis for future local economic growth strategies. By the end of the decade, councils will find it more financially rewarding to permit large, out of town retail and wholesale developments dominated by low wage, low skill employment than to support the less space intensive clustering of innovative businesses with high growth potential.

Profitability is the closest proxy in the tax system to productivity. So creating a stronger link between local governance and productive business activity would create a robust incentive for local governments to invest in measures that support productivity gains.

This would mean a direct provision for in-work upskilling, targeted sector specific business support to start up and scale up, and focus on investment in innovation to develop comparative advantage.

It would also bring us in line with our more productive international peers – France, Germany and the US – who each give their municipal leaders a stake in growing business activity through their local fiscal systems.

Business rates localisation itself should be ‘productivity-proofed’, including by enabling areas to adapt them to incentivise sector-specific growth supporting local productivity strategies.

The proposed additional 2% ‘infrastructure premium’ for directly elected mayors should be replaced with a ‘productivity premium’ to enable investment where the productivity gains would be greatest, for example in skills.

Based on greater fiscal autonomy, policy levers should be strengthened through future devolution supporting local productivity plans.

To develop and allocate human capital more effectively, single local accountability over the entire skills and employment system needs to better connect these pipelines into identified local labour market requirements.

National innovation policy has the potential to become much more place-based. For example, existing innovation-related funding streams should be aligned into city and county innovation funds, around which local partners can better plan investment and supply chains.

Future housing and transport project pipelines should be designed to unlock identified productivity barriers in a place which reduce business access to market and worker mobility.

The next phase of devolution needs to shift away from a general approach to growth based on low value volume expansion to a sharper focus on localising the tools to drive productivity growth and raising business performance.

This will contribute to building more resilient places in the future, better able to access to the opportunities and prosperity of the globalised world.


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