CORE CITIES, DELIVERING PLACE-BASED PRODUCTIVITY
Key Challenges and Priorities for Budget Statement 2016
SUMMARY AND OFFER
The ten Core Cities deliver 25% of the UK’s economy; when Core Cities do better the UK does better. This has been clearly recognised in the devolution policy of this and previous Governments and business leaders support the thrust of our proposals.
Yet Core Cities’ productivity overall is still low by international standards meaning the UK is missing out on at least an extra £66 billion GVA a year. Compared to their combined average, in Munich productivity is 88% higher; 80.7% higher in Frankfurt; 42.8% in Rotterdam and 26.7% in Barcelona. The gap between the Core Cities total average economic output and the average for the UK sits at £66 billion a year.
Despite austerity, the total spent across the public sector is not really reducing in Core Cities. Instead it is shifting from preventative services to those that deal with crisis, mainly health and welfare. That is contributing to a gap between total taxes raised across our cities and total public spending. Through a different approach Core Cities could close a public finance gap of £53 billion a year.
These two issues are linked. The dividing lines between social and economic policy need to be redrawn. Connecting more people to growth, bringing them out of dependency and into the labour market doesn’t just save the tax payer money, it boosts the productivity of city regions. ‘Social’ policy is not something we should look to once we have growth, it is a driver of growth and productivity.
Yet the way in which the total public resources are deployed across our cities is in most cases still too disjointed. There is a fundamental systemic failure where one bit of the system unwittingly undermines the efforts of another, meaning local and national aims are not achieved.
For example, Government’s aims to transform housing estates, whilst welcomed in principle, are under the current systems unlikely to produce lasting results, because the people and communities they are aimed at face complex challenges that can only be properly addressed at the local level. Better housing is a big part of this, but without a locally coordinated approach across health, learning and other support needs policies are likely to result in missed opportunities, increased service demands over the long term – costs up, productivity down and human potential wasted.
Skills and employment services are another example, where local systems have frequently failed to match needs of the local labour market and employers. Improving productivity relies on creating a ‘whole system’ integrated approach to 16-19 education, and adult skills and employment, with local co-commissioning addressing gaps in labour markets.
But the single most important factor in boosting the productivity of the UK’s cities is taking a ‘place-based’ approach. Improved performance relies on understanding the interaction of a complex set of ‘place-based’ factors and then asking “how can the total available public resources be best deployed to address these issues?” By building-in service alignment from the outset, this approach is much more likely to succeed.
Although elements of Government’s Productivity Plan ‘Fixing the Foundations’ and the Spending Review were welcomed by cities, so far this fundamental issue of unlocking Place Based Productivity remains unaddressed. Cities are left trying to bend inflexible out-dated systems to meet complex modern challenges, instead of building in alignment from the outset. Without change, the national programme for increased productivity and economic rebalancing is at risk.
There are therefore Six Key Challenges that Budget 2016 must address if we are to see productivity rise and the need for public spending fall, if life chances are to improve and the need for some services reduce.
1. Improving Land Use and Housing Supply
2. Tailoring Support for Business Growth, Science and Innovation
3. Strengthening Labour Markets to Drive Productivity
4. Increasing Life Chances, Connecting More People to Growth
5. Improved Infrastructure for Better Connected, More Sustainable Cities
6. Stable and Effective Investment
In Section 1 and 2 of our more detailed paper below, we set out a programme to address each of these challenges. We recognise that some will take time to achieve, whilst others can be quicker wins. What we would like to see in Budget 2016 is a commitment to undertake this programme, beginning with the following Four Priorities for the Budget Statement.
1. A Place-Based Productivity Review. Initiate a Joint Review with Core Cities – with Treasury and other Departments - to understand the interdependency of different departments’ and agencies’ spending on productivity within functioning labour markets, co-chaired with a Core Cities Cabinet Member, reporting back directly to the Chancellor to inform resource deployment decisions for the Autumn Statement.
2. Place-Based Productivity Programmes. Flowing from the above, devolved functions to city-regions aligning spending and incentives across social and economic policy areas within labour markets. The aim should be to drive productivity and improve life chances through distinctive policy responses based on local priorities, not one size fits all.
3. Collective Implementation of Devolution Deals. Embedding the process which has already begun for co-design, delivery and implementation of Devolution Deals in specific, common policy areas, between Whitehall and city officials.
4. Road map for future Devolution. Government and Cities to jointly identify how to take forward the proposals within Devolution Bids that have not yet been accepted and set this out in a roadmap across this and the next Parliament.
Core Cities have delivered time and again. They have driven up their productivity over recent decades and can do so again. They have managed significant budget reductions, yet made improvements and efficiencies in devolved services, for example Public Health. Where responsibility has been transferred in other areas, for example youth employment, local results have radically improved on national averages. And now our cities are taking even greater responsibility through Devolution Deals, for housing, health, and business support.
Successive Governments have gone some way to address these issues, but now is the time to go the extra mile, for our economy, for our society, for our future. Core Cities are not making calls only for more spending. What we want is the ability to direct existing spending differently.
Core Cities’ offer to the UK is to deliver the following.
· Drive up growth and productivity, supporting exports and high-growth sectors across 25% of the UK’s economy;
· Improve life chances through Public Sector Reform across 30% of the UK’s population base;
· Deliver a potential £66 billion per annum net gain to the economy;
· Close the £53 billion public finance gap between the total invested in all public services and the total raised from taxes across our cities; and
· Reduce early mortality and increase national resilience by addressing environmental as well as social and economic sustainability.
Section 1: What’s Not Working and Why
1. The current state of play
1.1. The Core Cities have very positive stories to tell. Over recent decades they have each turned around their economic fortunes, becoming by-words for vibrant, dynamic places to live, work and take leisure. Over the decade to 2009 some increased their productivity by 60%. Today they account for more of the national economy than London, and their growth trajectory is strong.
1.2. These cities have all proven they can deliver, dealing with budget reductions, improving devolved services like Public Health, and by working together as Core Cities across several parliaments they have also helped create significant shifts in national policy and legislation which benefit the whole of the UK.
1.3. Currently, the way different departments and agencies are tasked and incentivised unintentionally undermines efforts to achieve better results. For example[1], 124 funding streams have been identified for regeneration across 20 Government departments, amounting to £22 billion, of which only 25% could be accessed or influenced by local government directly, thereby limiting local economic and productivity impacts.
1.4. The UK must do more to unlock ‘Place-Based Productivity’, raising the game of its biggest urban areas so they can contribute more for their nations. This relies on a fundamental shift toward place-based policy and spending, aligning efforts at the right geographic level. For our cities, that is in most cases the city-region or Combined Authority level. Ultimately, we believe it is possible for all our cities to become financially self-sustaining (generating more in tax receipts than they spend on the totality of public services) in time for the completion of High Speed 2.
1.5. Devolution policy has recognised the well-evidenced link between greater local autonomy and more competitive cities. Successive governments have made strides in addressing this which have been strongly welcomed by Core Cities, although focused largely on responsibility for the delivery of specific functions, and some of the resources and powers that go with them, for example transport or skills, rather than wider local financial control.
1.6. Business Rates will be handed to local authorities, but this still amounts to a relatively small percentage of the local tax base (around 9%) in local control, and whilst the move toward four year budgeting is welcomed, the scope of these budgets is still relatively small compared to the challenges we seek to address.
1.7. Devolution Deals are increasingly focused upon the need to bring more people out of dependency through Public Sector Reform. We are making good progress, but need to go much further to fully realise the savings that can be made for tax payers, increasing productivity by bringing more people into the labour market by maintaining high quality public services.
2. The productivity gap
2.1. Although things are improving, by international standards the Core Cities largely underperform economically. In most developed countries second tier cities would be expected to outperform the national economy, but in the UK only London and Bristol do so, and removing London from the equation does not fully explain this difference. The gap between the Core Cities total average economic output and the average for the UK sits at around £66 billion a year. This is what could be realised for the nation’s balance sheet by all these cities just performing at the national average.
2.2. Productivity is also low. Compared to the combined average level of productivity per person across all the Core Cities: in Munich it is 88% higher; 80.7% higher in Frankfurt; 42.8% in Rotterdam and 26.7% in Barcelona. Government has recognised these issues in its Productivity Plan (ref), but there is more that cities and Government could do together to solve the ‘Productivity Puzzle’.
3. The public finance gap
3.1. The difference between total spending on all public services (police, councils, health, welfare etc.) and the total tax raised across all the Core Cities is around £53 billion a year. Despite austerity, our figures show that this level of spending is not really reducing in our cities. Instead it is shifting from services that are about prevention to those that deal with crisis, mainly health and welfare. The structural changes we propose, particularly going further with Public Sector Reform, begin to address this issue and close the gap, creating a stronger tax base whilst reducing public spending overall in a sustainable manner.
4. How Current Systems Can Undermine Policy Goals
4.1. Public services and agencies, and the way they are funded, tasked or incentivised can work not only against the interests of cities and their residents, but also of stated government policy. Although there are elements of the Spending Review that were welcomed by Core Cities, this lack of alignment has not been fully addressed. Current policies – for example to strengthen labour markets - cannot fully succeed, not because they are focusing on the wrong issues, but because there is a fundamental systemic failure where one bit of the system unwittingly undermines the efforts of another.
4.2. Housing is one example. Policy is designed to meet the needs of the South East, and presents challenges for Core Cities. Right to Buy and social rent reductions mean that housing delivery is much harder to achieve and targets may not be met. The focus on ownership and shared ownership will not of itself increase or speed up supply. Core Cities are pro-development and stalled sites within them are related brownfield and infrastructure challenges rather than blockages in the planning system.
4.3. But these challenges are compounded when housing policy is seen as a single, siloed issue, resulting in a domino effect in other areas like homelessness, education and health. For example there is strong evidence of the severe physical and mental health impacts on children due to increased numbers of families being housed in Bed and Breakfast[2], and of the ‘Bedroom Tax’[3]. Research has demonstrated that brain and biological development can be irreparably impaired by the age of 4 years where developmental needs are not met. That has a health impact, but also and educational attainment impact, reducing life chances, distancing people from the labour market and increasing associated service demand over the long term – costs go up, productivity down and human potential is wasted.
4.4. Government’s plans to replace troubled housing estates; the evidence demonstrates that design quality can have an impact on resident well-being and behaviour, but only to an extent, the limits of which are largely defined by access to jobs. Without a coordinated approach across health, learning and other support needs this policy is likely to result in a missed opportunity. By building-in service alignment from the outset, it is much more likely to succeed, and for no additional cost.
4.5. Social Care spending provides another example. The Better Care Fund total is increased in the CSR, although Social Care contract costs are likely to rise due to the Living Wage, and some providers have stated they will not tender for contracts at existing levels in the future.
4.6. But reductions in Social Care budgets overall will not nearly be matched by increases in Council Tax precepts for Core Cities, which may be difficult to achieve (and disproportionately impact on areas with lower Council Tax bases who are likely to also have higher Care costs). This effectively places an increased burden on NHS services, particularly the more reactive parts of NHS (e.g. A&E) where spending is harder to control. In addition, the timing for implementation of the Better Care Fund, intended to relieve some of these pressures, means that cities will be left with an even more significant financial gap until that is implemented.