Britain’s cities face huge economic challenges - but new powers to help them meet the task are now there for the taking. The coming year will be crucial in determining how far Britain goes down the path of devolution, and cities themselves hold many of the keys.

The recent Pre-Budget Report marked another important step towards greater devolution for cities, with Alastair Darling giving the go-ahead to business rate supplements – and paving the way for greater devolution.

It’s clear from the research we’ve conducted over the last two years that the political context in which cities operate is key to their economic success. And if we look at current evidence, it becomes clear that Britain’s much-heralded urban economic renaissance is far from finished. Our report on Two-Track Cities showed that many cities are coping with the challenges of globalisation – but others are struggling to keep up. Those in the second category include several of those usually held up as beacons of regeneration, many of whom have huge pockets of ingrained deprivation and worklessness. In Liverpool, for example, nearly one in three adults has no qualifications. Over 12% of Birmingham’s working age population is claiming benefits. And London’s residents have a lower employment rate than any other region.

We held events to discuss urban issues at all three party conferences, and heard renewed commitments from all three parties on how they plan to give new powers to Britain’s cities. Now that Gordon Brown has a clear run into 2009, and with so much cross-party consensus, more powerful cities should soon be within reach. There's new momentum to devolve financial powers back to cities too, in the form of business rate supplements, first proposed by us and Sir Michael Lyons.

Business rate supplements could deliver significant benefits – for example, a 2p supplement would make a big dent in the funding gaps for Manchester’s tram extension (Metrolink III), Birmingham’s New Street station, and a new fast bus network for Leeds. They will first be used across London, to help fund Crossrail. Other cities can then go for their own supplement, if city and business leaders work together to agree clear infrastructure investment priorities.

So what can cities do now to make sure business rate supplements become a stepping stone towards wider devolution? It’s vital that cities and businesses make a success of their new powers and build up more mutual trust. If they do this, not only will their local economy grow - but more powers are likely to come their way too.

Some councils are leading the way, working effectively across borough boundaries and taking a strategic view of building their economies across entire city-regions. Manchester, for example, has maximised its economic impact by effectively building a Greater Manchester brand through close collaboration with its nine neighbouring councils. Greater Manchester and AGMA represent an increasingly attractive option for international companies, such as the Bank of New York.

Strong and consistent city leadership, in the form of the Richard Leese and Howard Bernstein double act, has steered Manchester’s turnaround. But many other cities lack such a stable political and managerial environment – and may need elected city- or city-region mayors to deliver similar results. Mayors offer strategic leadership and strong accountability, and should take responsibility for housing, skills, planning and transport – just as Ken Livingstone has in London.

And elected mayors are back on the agenda (again), with Michael Heseltine’s Conservative Cities Taskforce likely to recommend their introduction this autumn. Manchester might not need an elected Mayor, but other cities seeking to replicate its success could benefit.

It’s time for the new Prime Minister to be even bolder, and help all our towns and cities rise to the economic challenges of the decade ahead. It’s also time for local politicians to make the most of the opportunities they now have. We’re looking forward to working with city leaders, businesses and central government to find practical ways to help to make more powerful and successful cities a reality.