Posted by Peter O’Brien, 11th July 2014

There has been flurry of activity recently in local and regional economic development policy. In the last month, the Chancellor of the Exchequer, George Osborne, has spoken about High Speed 3 (HS3) investment in the north of England, Lord Adonis has published his Growth Review, the Deputy Prime Minister, Nick Clegg, has launched a Northern Futures Project, the Coalition Government has allocated Local Growth Fund resources, the Labour Party has published a report on a ‘New English Deal’ for local government, and the Communities and Local Government (CLG) Select Committee has set out the conclusions and recommendations of its Inquiry on Fiscal Devolution to Cities and City Regions. CURDS submitted written evidence to the Inquiry, and in February this year CURDS Director, Professor Andy Pike, gave oral evidence to the Committee.

The CLG Select Committee Inquiry has particular resonance for work that CURDS is undertaking on the governance and regulation of urban infrastructure funding and finance, as part of the national EPSRC and ESRC-funded iBUILD infrastructure project. Through an empirical exploration of the City Deals process, we are examining how cities and city regions are able to raise and deploy public funding (i.e. revenue), alongside private finance (i.e. capital), in order to invest in infrastructure assets and systems.

Following an exploration of some of the complex and wide-ranging matters relating to local government funding and finance, economic development, governance and macro-economic fiscal policy, the Select Committee comes out strongly in favour of fiscal devolution to cities and city regions in England, with greater local control over business rates, stamp duty, council tax and income tax recommended. Beyond the headlines, there are four inter-related issues in the Committee’s Report that are worth initial consideration, and which reflect some of the questions CURDS raised in its evidence to the Inquiry and that are being posed in the iBUILD project.

First, the Select Committee argues that fiscal devolution and decentralisation of spending should form part of an integrated approach to local and regional policy. Alongside the continued need for equalisation and specific measures designed to address spatial disparities, fiscal devolution alone may not be sufficient. Instead, the bigger prize for cities and city regions may rest in their ability to shape and deliver reformed public services and expenditure in line with local needs, and to plan and secure agreement for how any subsequent efficiency gains and savings could be retained by local areas.

Second, by calling for fiscal powers to be devolved to groups of local authorities, covering a recognisable and functional economic area, which are able to demonstrate collaborative activity, the Select Committee suggests that fiscal devolution may not be appropriate for all places at the same time. This would build upon the existing asymmetric framework of devolution in the UK, a model that also exists in other countries, such as Spain. The likelihood, therefore, is that not all places in England will get the powers and resources they want. The London Finance Commission reached a similar set of conclusions last year.

Third, the Committee advocates that strong, locally agreed governance models will be needed if Government is to devolve fiscal powers to cities and city regions. Although the Committee eschews being prescriptive about specific governance typologies, it is increasingly apparent that the Coalition, as well as the Labour Party, see Combined Authorities as a form of sub-national governance they have confidence in. However, it is early days for the Combined Authorities and it will be important to see how effectively they work and add value to the decision-making and policy development and delivery processes.

Finally, the Select Committee suggests that Central Government should establish a general framework within which fiscal devolution can take place. This raises one of the critical points in the Committee’s Report, amplified by current deficit reduction policies, and which could either make or break fiscal devolution and related attempts to develop innovative approaches to the funding and financing of local economic development and infrastructure investment. This centres on how official national accountancy rules on public expenditure are unable to accommodate additional growth and expenditure (including investment) in one locality without calculating it as displacement and contributing to overall public expenditure and public debt. The Committee concludes that a mechanism is needed that differentiates investment expenditure as opposed to day-to-day spending, and at the same time recognises that certain places can grow but not necessarily at the expense of somewhere else (in the UK). What seems like a minor technical issue has, in fact, become a major stumbling block for some cities and city regions that have been seeking to secure greater fiscal freedoms and flexibilities through the City Deals process.

Giving evidence to the Select Committee, the Cities Minister, Greg Clark, urged the Committee to look at how the current “conventions did not allow for the association of growth and revenue with particular places”. One suspects that unless this matter is resolved then any effort to introduce substantial fiscal devolution to cities and city regions in England will stall.