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£12 billion. That’s the amount of bad debt the US city of Detroit had when it filed for bankruptcy this week—roughly equal to the yearly revenue spending of Manchester, Newcastle and Leeds combined. So, how does a city get itself into that position?
Industrial decline and population loss are the root causes of the problem. In its heyday in the 1950s, the Detroit area had the highest median income and highest rate of home ownership of any major US city. But today, as the BBC’s report states, “Detroit has faced decades of problems linked to declining industry. Public services are nearing collapse and about 70,000 properties lie abandoned.”
Compared to UK cities, US city budgets are more susceptible to local economic downturns, because more of their revenue comes from local sources. US cities raise commercial and residential property taxes as well as local sales taxes, and they receive funds from state sales and income taxes. In Detroit, local sources accounted for roughly 60 per cent of its budget in 2010. This compares with only 36 per cent from local sources for Manchester today.
Detroit’s budget was particularly vulnerable because the economy was centred on the auto industry. It accounted for 225,000 jobs in 2000. But the continued exodus of auto manufacturing to production centres across the globe meant the city’s tax base quickly dwindled, and employment in the industry fell to 82,000 by 2009. In turn, municipal income tax fell by one-third over the same period. As businesses and more highly-skilled workers left, the demand for public services from those left behind outstripped the funding to provide them.
Over time, lack of new funding streams also reduced capital investment in the city. Dealing with the 78,000 abandoned and blighted buildings, maintaining roads and investing in economic development required funds the city did not have. Instead, high unemployment and crime rates led to increased need for policing and social services at the expense of long-term growth investments.
Many factors such as political corruption and scandals, ill-thought out development schemes (as seen in Roger and Me), labour politics and globalisation among others have compounded the challenges Detroit faces.
So where does this leave us? UK cities have been calling for greater devolution and more control over their budgets, but Detroit provides a salutary reminder of the pitfalls associated with a more decentralised funding and political system. That said, we should also remember that Detroit is the exception rather than the rule; the wider experiences of cities in the US (so powerfully laid out in the Brooking’s recent Metro Revolution report) is a positive one, where financially-empowered cities are at the heart of reinvigorating the US economy. Detroit’s experiences should serve as a cautionary tale for the UK rather than an excuse to stall the progress of devolution.
Senior Consultant, City Economics at Arup
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