Powerhouse or power failure?

Although they are being promoted as a route towards more even regional development, the government’s devolution plans risk dividing the UK even further. Rachel Laurence and Adrian Bua of the New Economics Foundation introduce this special issue of Red Pepper
February 2016


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‘Attract a business, and you attract more money. Regenerate a high street, and you’ll reap the benefits. Grow your area, and you’ll grow your revenue too.‘ With these words in Manchester last October, George Osborne triumphantly unveiled his plans for the acceleration of a ‘devolution revolution’ aiming to rebalance the UK’s economy by fostering greater growth outside London.

A couple of weeks previously, in a rather chilly church hall three miles north of the Manchester Central Convention Complex at which Osborne had spoken, a handful of Salford locals examined their own local economic development plan, emerging on post-it notes on the table in front of them in a workshop with the New Economics Foundation. Regenerating their high street was top of the agenda – boarded up shop fronts and a handful of takeaways don’t make for much economic opportunity for the local residents. But it is tricky to attract businesses to regenerate this particular patch of high street. No one in the area has much disposable income, most of the shops are unused and the new development of luxury and student flats being completed up the road is going to be connected directly with the city centre via a new shopping mall.

Despite a degree of cynicism from those involved in past regeneration efforts – whether within the council, or from the local housing association and local community development organisations – there was a clear, dogged hope that, somewhere in this talk of a ‘Northern Powerhouse’, a better future could be carved out for the people of this particular estate in Salford. But the odds were looking decidedly unfavourable, as the group talked through the current development plans in the city. New jobs emerging in the city centre were felt to be out of reach of local people’s skills, experience and public transport connections. Footfall to the area itself by non-residents is restricted largely to those dropping their cars off at the car wash, which sits on the main road that slices through the estate and provides one of the main arteries out to the north of the city.

Similar conversations will be taking place throughout the UK since the 2015 spending review confirmed the direction of travel of recent plans for regional devolution. The Northern Powerhouse agenda is pioneered by the Manchester devolution deal (‘Devo Manc’) and looks to be rolled out elsewhere through further regional deals as well as the Cities and Devolution Bill.

It is by no means the first time that a UK government has committed to a ‘rebalancing’ of the economy. This was a strong theme in preceding New Labour and Conservative-Lib Dem governments. However, the current devolution deals have more radical ambitions than their predecessors. Although the extent of devolution differs by deal, a more strategic economic role is on offer to local areas than in previous decentralisation initiatives – with greater influence over spending on skills and learning, housing, transport and health and social care. There is also a commitment to devolve revenue-raising capacity through the local retention of business rates and freedom to vary council tax rates.

Thus, these developments are presented by the government as the progenitor of a more localist Britain, which also promises to deliver significantly reduced regional inequalities in economic performance and a shift away from the current model of economic development that is so reliant on growth in the south east.

The New Economics Foundation has long supported the principle of ‘subsidiarity’. Rather than ‘local by default’, this invites a critical consideration of the appropriate scale at which functions should be carried out, as well as the relationship between tiers of governance. And underlying any question about how the economy should be structured at a local and regional level, of course, is the broader question about what it is that we want that economy to deliver.

Exacerbating inequality

The idea of decentralising power, and moving towards more regionalised powers for economic planning and strategy, appears to open up exciting and positive new possibilities to democratise and rebalance our economy, and to build more resilience, equality and subsidiarity into it. However, devolution – both in and of itself as a concept, and more specifically in the current form emerging with the city devolution deals – presents significant risks. One obvious example is the substantial disadvantage faced by deprived areas in making the most of new powers to raise council tax and retain business rates. Cheap homes and considerable difficulties in attracting new businesses mean they have little to gain from these measures, as our Salford group identified swiftly. Compounded by the fact that local government has been the biggest loser in public spending cuts, the Northern Powerhouse seems more of a recipe to exacerbate, rather than overcome, regional and local inequalities. For this reason, some critics of the policy have referred to the initiative as the ‘Northern Poorhouse’.

Another risk is the way devolution deals demand that regional government justifies its greater access to powers and investment through embedding and reinforcing the prevailing, central government-led, approach to regional economic development. The outcomes against which regions’ devolution proposals are judged are set entirely by central, not regional or local, government, let alone citizens. Thus the process of awarding devolved powers to areas reinforces the success of those regional economic development strategies that most conform to the current central government approach to regional growth.

It is crucial, amidst the current devolution debate, to make the case for an approach to political and economic decentralisation that empowers local regions to devise development strategies that tackle inequalities in wealth and power, respect environmental limits, contribute to carbon reduction and generate opportunities for the development of diverse, balanced and resilient local economies. Of the current approach to devolution we should ask whether it contributes to this agenda or risks doing the opposite. And what should devolution look like for it to be a force for good?

As things stand, the main stated aim of the devolution agenda is to rebalance the UK economy by boosting growth outside London. It is argued that greater local control will lead to more inward investment. Coupled with increased investment in transport infrastructure – to be co-ordinated by the recently-established partnership Transport for the North – this will deliver stronger regional growth, and close the regional output gap, making an increased contribution to the national purse. In the government’s own terms, the deals are also supposed to secure ‘better use of local authority assets to unlock resources to be invested in growth’, ‘commitments to pro-growth reforms’ and ‘greater influence over key levers affecting local growth and freedoms and flexibilities’.

The underlying logic is that UK regions outside the south west have been economic laggards that should, and can, ‘pull their own weight’. ‘Peripheral’ economic areas that depend on national forms of wealth distribution can be eliminated by developing localised competitive advantages, building on economic specialisms, and generating agglomeration effects. Growth is by far the main outcome sought. Underlying this logic is, of course, the assumption that regional growth, once secured in this way, will lead to greater local prosperity.

In their efforts to win powers through the devolution process, local authorities are driven to put forward economic priorities that align with central government’s approach to growth. If they resist this pressure, they risk being awarded fewer powers and less substantial resources. Thus, in the government’s devolution drive the focus on GVA (gross value added) growth has so far been definitive, and this ambition is reflected both in the stated aims of devolution as well as the processes through which devolution deals are being negotiated.

Reasons for doubt

There are a series of reasons to doubt the claim that devolution, as currently pursued, can achieve the aim of boosting regional growth and closing the output gap. Research in other devolved areas has suggested that, in a low-growth environment, and in a context where cuts to benefits can be expected to reduce consumer demand in peripheral areas that are more reliant on welfare, closing regional output disparities is highly unrealistic, if not outright unachievable. This would at the very least require an industrial policy, which is nigh-on non-existent, and a shift away from an economic model that continues to focus on London‑centric finance and service industries.

In fact, London is often touted as an exemplar of what devolution and agglomeration effects can achieve – the argument being that similar results can be expected in other regions across the country. However, the London example is problematic because the capital’s economic success relative to other areas is arguably a result of national economic policy such as de-industrialisation and the deregulation of finance, rather than devolution per se. Moreover, in becoming the ‘powerhouse’ of the UK economy, London has benefited disproportionately from infrastructure investments over the past decade. Despite all the rhetoric, this gap is set to widen, with plans to spend £2,600 per head on transport in London compared to £380 in the north.

It seems that devolution will deliver a policy straitjacket that turns public authorities into agents for the implementation of spending cuts

The London example is also more fundamentally problematic in that it suggests that a city economy such as London’s is, without mitigation, successful and desirable in the first place. London had a GVA growth increase of 15.4%, compared with 6.9% in the other 11 UK regions between 2007 and 2012, and its share of UK output now stands at 22.2%. But it also has the highest child poverty rates in the country, an unemployment rate among women of 30.7%, almost double that of men’s at 15.6% – a wider gender gap in that rate than in any other UK region – and a housing market that offers tantalising investment opportunities for national and international financial elites but is unaffordable to most of its own population. Is this really the type of regional or city economy we think is going to deliver greater equality, reduced poverty, better jobs or business sector resilience in other places?

The problems faced by the London economy speak directly to the failure of ‘trickle down’ economics. In economic development a rising tide does not necessarily lift all boats – some can, and do, sink. Increased inequalities within regions can be expected from an approach that seeks aggregate growth at all costs, and does precious little to protect those at the bottom.

Reinforcing uneven development

Moreover, devolution as currently pursued is also likely to lead to an accentuation of inequalities between regions. Mirroring the logic that prioritises the development of local competitive advantages, devolution deals are rolled out on a case-by-case basis – with the terms of each deal reflecting different patterns of need, ambition and competency. There is nothing wrong with this in itself; localisation needs to be sensitive to context. However, varying abilities to capitalise upon the opportunities opened up by devolution are compounded by the phasing out of national processes for wealth distribution, leading to a recipe for the entrenchment, rather than attenuation, of these regional differences. We can expect uneven development to be reinforced by the current approach to devolution.

This issue is particularly stark when one considers that increased powers to raise revenue locally are miles away from compensating for the cuts being made in central financing, and plans to devolve power over raising revenue are not matched by freedom over spending. For example, a new power to raise council tax by up to 2% is accompanied by a requirement that the increased revenue must be spent on adult social care, and spending on business rates is subject to veto and approval from business elites. It seems that devolution will deliver a policy straitjacket that turns public authorities into agents for the implementation of spending cuts, rather than institutions that are empowered to develop and implement economic strategies of sufficient scale to close the gap between centre and periphery.

At NEF we have long argued that economic growth should not be the primary goal sought by economic development, but rather understood as one of a number of potential means to an end in pursuit of a broader range of social and environmental outcomes. The Stiglitz, Sen and Fitoussi commission on economic performance and social progress recommended that measures of wellbeing and quality of life should take centre stage, and recent work by NEF has called for five headline success measures covering employment quality, wellbeing, environment, fairness and health.

Strategies to decentralise power ought to facilitate a shift in the drivers for regional and local economic development. But this can only happen if devolved economic strategies are designed explicitly around the outcomes specifically needed by an area, as determined by those who live, work or run businesses within that area’s economy. Devolved units should be given the power, and support, to be able to craft context-sensitive economic and social development strategies that can meet the needs of its citizens, and improve their lives. Crucially, this may or may not involve growth. It is certainly likely to involve different types and speeds of growth in different regions, and in different sectors within those different regions, and may involve very different accompanying priorities for investment in infrastructure, skills, training or businesses support in different regions.

Gentrification and dormitory towns

A focus on attracting economically active and highly skilled new residents into a declining area is all too often at the core of the regional and local economic plans. There is little or no sense of how to avoid the creation either of a parallel economy that excludes and displaces existing residents (the ‘gentrification’ effect) or of ‘dormitory’ towns or suburbs in which those earning higher wages do not in fact participate in any local economy at all.

The community economic development project in Salford is struggling with the fall-out from precisely this, in the sense that their area sits between a part of town being rebuilt as a ‘dormitory’ suburb, from which residents are expected to connect into the city centre for jobs and shopping, entirely bypassing the estate in between. The group is puzzling out how to attract some of those wealthier new residents into their patch to shop, and stimulate a revival of their high street. They are contending not only with the lack of existing footfall to or through the area, but with the plans for a large scale shopping mall close by, as well as the vibrant inner-city offer of Manchester.

But city and regional economic plans do not have to go this way – at best ignoring or displacing economically disadvantaged people and areas as they focus simply on attracting new kinds of people and businesses, and at worst locking them even more definitively out of the available economic development opportunities. Instead, we could be using the devolution process to embed measures and processes to proactively balance our local and regional economies to connect new high-growth economic sectors and wealthier demographic groups much more effectively with low-growth sectors and low-wage, low-skilled demographic groups within and around some of the core cities currently rolling out devolution deals.

Growth alternatives

Setting up devolution deals based primarily on a requirement for growth, and very little else, neither incentivises innovations nor facilitates existing approaches that do this effectively. These might, for example, include channelling public and private sector procurement more effectively through small and medium scale local enterprise, as many local areas are already trying to do (Preston and Sandwell are just two examples). It might be done through basing economic development priorities firmly on existing local and regional assets, rather than focusing on attracting new high-growth sectors to an area. Again, a strong argument is being made in many areas to do this, one example being Sheffield.

And inasmuch as it is useful to attract new sectors in to an area, this might be done within a wider objective to maximise local assets and opportunities to decarbonise – for example, as areas around Hull are doing currently with the emerging offshore wind sector. There are, in fact, a great number of tried and tested approaches to a much more sustainable, better-distributed approach to local growth, even within the relatively mainstream world of regeneration and regional development.

Beyond these, there are a vast number of more radical emerging innovative alternative economic approaches flourishing across the UK – such as, for example, the community land trust movement, the community energy sector, or the long-established local development trust approach. A devolution process that was geared up to stimulate, facilitate and build on this kind of innovation in new, social and environmentally driven and, crucially, community-led economic development, could perhaps really facilitate the kind of dynamic, decentralised, democratised economy necessary for sustainable and equitable social, environmental and wellbeing outcomes.

So our interest in engaging with the current devolution process is twofold: how can we build on the exciting opportunity it seems to offer to test, trial and consolidate much more progressive and equitable regional approaches to economic development? And how can we best avoid this process doing the opposite – exacerbating regional inequalities, or embedding the kinds of priorities within regional economic strategies that make it even more difficult to pursue social, environmental and wellbeing outcomes?

The articles in this special issue explore these questions in more depth. The ‘devolution debate’ is arguably one of the principal political lenses in the UK through which we are examining questions of how the economy functions for the people and planet. For those interested in systemic alternatives to our current economic paradigm, it will be crucial to find some answers to these questions as the devolution agenda unfolds.


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Democracy takes a hit as local politicians play dirty against anti-cuts campaigners, write Sarah Cheverton and Tom Sykes

'How can you decant people from estates then make deals with developers to build luxury apartments?’

Andrew Dolan spoke with Amina Gichinga of Take Back the City about doing politics differently and righting Labour's wrongs in London

Solidarity with Rojava: 3K in 31 Days

Plan C are fundraising £3000 to help rebuild Kobane after ISIS attacks and to support the political revolution in Rojava, writes Paul Higgins

Conventional wisdom: our chance to redraw the British state

Jeremy Corbyn has said that he wants to organise a constitutional convention. We should seize the opportunity, writes Dan Hind

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