02Supporting inclusive growth in UK cities

Cities face a number of challenges with regard to supporting more inclusive growth.

• Firstly, at a time when there is growing demand for services and investment, continued austerity means that local authority budgets are under unprecedented pressure.
• Secondly, it can be difficult to operationalise inclusive growth as it can have different meanings to different people and institutions, and encompasses a broad range of policy areas.
• Thirdly, cities are relatively restricted in their ability to integrate and align different investment streams for more effective, tailored intervention.
• Fourth, a range of different organisations contribute to the delivery of inclusive growth in cities but this activity is often fragmented and uncoordinated.

This section explores these challenges and sets out the implications for cities.

Pressures on local authority budgets

Many of the local policies that support inclusive growth are delivered through a mix of capital (investment in physical assets such as roads and buildings) and revenue expenditure (day-to-day management of services and operations). The two, in interaction with one another, support the development of the physical and social infrastructure required to achieve better outcomes for local businesses and communities.

Revenue spending (funded through business rates, government grant and council tax) by local authorities in England has fallen across all service areas as budgets have been squeezed. Councils’ revenue spending power fell by 26 per cent in real terms between 2009/10 and 2016/17, from £59 billion to £44 billion (excluding grants for education, police and fire services). Within this, funding from grants and retained business rates is 38 per cent lower than grant funding in 2009/10 and council tax revenues have fallen by 8 per cent.⁵ Draw down from council reserves has meant that local authorities’ total spending power has reduced by an average of 23 per cent over the last seven years. These cuts have been larger in more deprived parts of the country.⁶

In contrast, capital expenditure by local authorities in England increased. Capital spending can be funded by capital receipts, central grants, borrowing and finance, and minor sources such as the lottery. In 2015 prices, the amount of capital spending declined from £24.2 billion in 2009-10 to £19.8 billion in 2012/13, but has increased since then to £23.4 billion in 2016/17. Capital spending funded by borrowing followed a similar pattern, dipping from £5 billion to £4.4 billion before increasing to £6.8 billion in 2016/17.⁷ Minimising the revenue costs of servicing debt, which accounted for 7.8 per cent of revenue spend in 2014/15, is one of key challenges facing local authorities.⁸

Local authorities in Scotland and Wales have seen smaller but still significant reductions in spending power. Between 2009/10 and 2016/17, the overall cut to council revenues in Scotland was 8.5 per cent (or 10.3 per cent if education funding is stripped out) and in Wales was 9.6 per cent.⁹ Northern Ireland’s system of funding local government is very different to the rest of the United Kingdom, and is not covered in this report.¹⁰

The removal of EU funding also poses a challenge to certain local authorities. While the Government has guaranteed to replace the funds, the UK’s exit from the EU opens up a potential funding gap of £8.4 billion for local authorities based on the last six-year allocation.¹¹ While accounting for a relatively small proportion of total spending on local economic development, it is an important source of funding for inclusive growth policies.

Making inclusive growth work in practice

Inclusive growth is a broad concept that means different things to different people and places, which can make it difficult to operationalise. All inclusive growth strategies need to connect economic and social policy, seeing one as a driver of the other. But variation in socio-economic outcomes across different cities demands a variety of policy responses from local government. Employment and skills policies will play a fundamental role in supporting business growth and better outcomes across the distribution in all cities, helping to support those out of work to access opportunities and those in work into better jobs and higher wages.

But the appropriate scale and nature of intervention relative to other policies is likely to vary between cities. From a built environment perspective, in Sunderland, a policy to develop Grade A office space in the city centre, cross-subsidised by the private sale of high-quality apartments on the seafront is an appropriate policy response to the particular challenge of weak private demand in the local economy. But similar policies in Cambridge, while likely to have a greater impact on local and national growth, are unlikely to be felt by local residents at the lower end of the income distribution. This is because more high quality jobs, not matched by a commensurate increase in housing supply can reduce the disposable income and quality of life of those in private rented accommodation.¹²

Ability to integrate and align relevant investment streams

Due to budget silos and short-term funding cycles, services tend not to be joined-up in a way that best addresses the needs of communities, particularly individuals and households with complex needs. Community Budgets were introduced by the 2010-2015 Coalition Government in an attempt to shift the focus of spending on to people and places through an outcome-based approach, and demonstrated the potential of place-based public sector reform to deliver improved outcomes. But more substantial and systemic reform to existing delivery models is required to enable cities to integrate and align relevant investment streams over the long term.

Fragmentation among investors and delivery agencies

Difficulties in defining inclusive growth are compounded by fragmentation between the range of organisations funding and delivering inclusive growth interventions in a city. In any one city there will be multiple organisations funding and delivering interventions that have an impact on socio-economic outcomes. These include: different departments within local authorities; national departments and agencies; education and training providers; foundations and community-based organisations; and the private sector. These interventions can be complementary, act in isolation, or work against each other.

Many firms’ activities in a city pursue inclusive growth. This activity is done not only out of civic duty but also in the interests of good business: a better educated young population, a more pleasant city to live in, and greater demand in the local economy are good for cities and firms. A mental health charity focused on ensuring that people have the support to look after themselves independently, and find and keep a job, is good not only for a person’s wellbeing but also the local economy. There are numerous different actors supporting inclusive growth in a city, whether conscious of their position in the wider system or not.

Cities have an important role to play in coordinating different organisations, providing strategic oversight and aligning investment for maximum impact.

Implications for cities

It is in this context that cities are exploring alternative funding and financing options. For example, the West Midlands Combined Authority (WMCA) has established a ‘Funding for Growth’ commission to explore all the options available to them, and Bristol Mayor Marvin Rees is working with partners to establish a series of ‘civic-led, business-focused Strategic City Funds’ to support the city’s inclusive growth strategy. Both involve attempts to raise revenue and coordinate existing spend. The London Finance Commission convened international experts to explore ways to improve the capital’s fiscal position and made a number of calls for fiscal devolution.

It is increasingly important that city and combined authorities find ways to increase revenues, leverage returns on their investment, encourage investment from other stakeholders, and coordinate spend of organisations within cities. While these innovations cannot make up for the cuts in national government funding,  restrictions on increasing council tax or lack of wider public service reform,¹³ policy innovations can make cities more attractive for private investment and/or help populations with particular needs.

The next section explores the options available to city and combined authorities.