Mission accepted: How the new Government can revive growth

Seven suggestions from Centre for Cities for what the new government should do to make an immediate difference and put policies in place to try and kick-start the UK’s flatlining economy

Briefing published on 11 July 2024

The challenges the new Government faces for economic growth as will be the case in a number of other policy areas both are large and will require a mix of things that can be done immediately and things that will require longer-term development. For it to make an immediate difference and put policies in place to try and revive the UK’s flatlining economy, here are seven suggestions from Centre for Cities for what it should do.

  1. Set the main goal – or mission – of economic policy to be to make the UK more prosperous than Germany, and use this to guide all Local Growth Plans

  2. Announce a British CHIPS Act for innovation in big cities

  3. To support growth, prioritise deepening devolution over the widening of it with further spending, transport and planning powers to big cities

  4. Make immediate improvements to the planning system, and start working on its long term replacement

  5. Consolidate economic development grants to a single or small number of pots

  6. Give local authorities more freedom over how they use their budgets

  7. Fix the business rates system

  8. Things to be wary of

1. Set the main goal – or mission – of economic policy to be to make the UK more prosperous than Germany, and use this to guide all Local Growth Plans

The problem

The UK has had no clear economic policy goal or strategy for many years. This has invariably made commentary on the economy too near-sighted, focusing on short term changes in growth while largely missing the large prosperity gaps between the UK and other developed countries. On an output per hour basis Germany is currently 13 per cent more productive than the UK.

And it means that the Government does not send a clear signal to either the private sector or other parts of the public sector about what it is trying to do, making the coordination of actions between these different actors more difficult.

The solution

The Government should set a national goal that all leading parties can support, so increasing the chance that this becomes a multi-parliament effort. That target should be to become more productive than Germany.

The proposed Local Growth Plans should then be set up to help achieve this national goal. In doing so it should make them more relevant to national Government and give them greater longevity. A major problem with previous requests for places to come up with growth plans is that they became irrelevant upon the changing of prime minister and so priorities – most Local Industrial Strategies requested in the May Government didn’t even get to publication.

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2. Announce a British CHIPS Act for innovation in big cities

The problem

The main reason why the UK trails the leaders of the G7 is because the UK’s largest cities outside of London such as Manchester and Glasgow trail well behind their G7 counterparts. The inherent benefits that big cities offer to knowledge-intensive businesses should make them some of the most productive places in an economy. This is true in the USA, France and Germany. It isn’t in the UK.

These cities are not attracting in cutting-edge business activity to the extent they should be. Policy in the past has tended to focus the UK’s problems through the lens of sectors. The actual issue is the lack of clustering of a range of different sectors within particular places.

The solution

Addressing this underperformance will require large scale investment from the public and private sector in specific places. To kickstart this, and signal a statement of intent, the UK should follow the USA’s lead[1] and create a 10-year, £15.9 billion package (much of which is within existing Budgets) to boost innovation in four places: Birmingham, Glasgow, Manchester and Leeds.

This should be made up of:

  • The allocation of a total of £1 billion of the annual £7 billion R&D uplift the last Government promised to increase spending outside of the Greater South East to be shared with the leading university in each of these cities.
  • A £500 million investment in each place to improve how attractive their city centres are to new economy and other high productivity businesses, funded from the Strategic Programmes budget (formerly the National Productivity Investment Fund).
  • The extension of the City Region Sustainable Transport Settlement beyond 2026/27 for a further five years for Greater Manchester, the West Midlands and West Yorkshire (an additional £2.9 billion), plus a similar commitment to Greater Glasgow.

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3. To support growth, prioritise deepening devolution over the widening of it with further spending, transport and planning powers to big cities

The problem

While great progress has been made in the creation of metro mayoral combined authorities in almost all of our big cities, this progress is very much incomplete. The UK remains the most centralised country in the G7. At just 5 per cent, less tax is collected locally than any other of these countries. And places have less control over overall public investment than any other G7 country too.[2]

Devolution is no guarantee of economic success. But better matching economic policy to the area that people live and work their lives over is likely to result in better policy outcomes.

While the Government has committed to widening devolution, from the perspective of economic growth, this should not come at the cost of deepening devolution in the places that already have deals in place. London and the UK’s largest cities account for an estimated 82 per cent of the total productivity gap with France and Germany.

The solution

In the short term the Government should deepen devolution by doing four things:

  1. Extending trailblazer deals to all existing large city mayoralties, with the emphasis being on creating single settlements to give the mayors maximum flexibility over how they spend their money over a period of time.
  2. Giving all large cities Transport for London style powers, such as over different modes of transport and investment.
  3. Following though on the manifesto commitment to give all metro mayors statutory spatial planning powers akin to the powers that have been held by the mayor of London last two decades, even if the mayors don’t want them. These powers are one of the most important tools a mayor can hold to bring about change in their area.
  4. Use the proposed Take Back Control Act as the legislation to make this happen. The scope of this bill should be deliberately focused though. A lesson from the Levelling Up and Regeneration Bill was that because it was so wide ranging it took a long time to pass, which delayed action. More detailed changes can always be made in a follow up bill.

By the end of this parliament, the Government should introduce fiscal devolution to bring places in the UK into line with their G7 peers. Starting with Greater London, Greater Manchester and the West Midlands, this means:

  • Reform and devolve council tax and business rates, which would cut council tax for 74 per cent of households, including a majority in every borough.
  • Allowing cities to keep a share of income tax they generate, with mayors agreeing funding settlements with the boroughs.

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4. Make immediate improvements to the planning system, and start working on its long-term replacement

The problem

Since 1947, the Town and Country Planning Act has severely reduced housebuilding in England, creating a UK-wide shortfall of 4.3 million houses compared to other Western European countries.

Planning reform to move to a flexible zoning system like other G7 countries is essential if we are to solve the housing crisis in the medium-long term, and the Government should start work on this immediately. But there are small changes that can be made to the current planning system to improve housebuilding in the short term.

The solution

The new Chancellor has announced a number of changes to the existing planning system as proposed by Centre for Cities. These include the reversing the most recent revisions to the NPPF and a change in how ministers interact with the planning system to take a more pro-development position.

The following further changes should be made to the existing planning system as a step towards a zoning system by:

  • Setting out what the NPPF should expect local plans to do. In particular it should require local authorities when creating a local plan to allocate land around railway stations that currently have, or the capacity to have, frequent services and transport infrastructure for development, with urban local authorities using Local Development Orders to allow for high- and mid-rise development on urban land. And it should include tighter penalties for authorities that don’t put a local plan in place so that failure to agree these plans acts as a block to development.
  • Setting out within the forthcoming Written Ministerial Statement that any application which reaches the Secretary of State’s desk that has been recommended for approval by officers will be approved by the Secretary of State; and stating that planning applications in Local Planning Authorities that do not have an up-to-date local plan in place should be given the greatest possible weight (a “builders’ remedy”).
  • Pressing on with the Permitted Development and Plan Making consultations underway before the election.
  • Publishing the new National Development Management Policies to have an expansive remit over local plan decision-making.
  • Sending a letter to the Mayor of London setting out an expectation that the new London Plan prioritises housebuilding and green belt release, and works together with industry to remove the most-costly restrictions to new development.
  • Include within the Kings Speech new primary legislation to overhaul the nutrient neutrality rules that disproportionately block the plan making process currently in dozens of authorities across England.
  • Reducing the minimum space standards from 37m2 to 25m2 (the amount of space the average private renter in London was actually able to rent in 2018).

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5. Consolidate economic development grants to a single or small number of pots

The problem

There has been a proliferation of pots of money from central Government over the last decade, many with short time scales and an opaque set of rules over how money will be allocated. None of these have been guided by a coherent national strategy, making them scattergun in their approach.

Many too have been allocated competitively. While there are merits to competition, this has created an industry out of bidding for money – costing officer time and generating consultancy fees. It has also created fragmented funding allocations, centralised decision making in Whitehall and made making long-term investment plans by local authorities difficult to do.

Delivery has also been a problem. There have been delays in money being released and spent.[3]

The solution

The new Government should simplify this process by:

  • Creating either a single or a small number of pots for funding economic development. A single pot would give the greatest freedom to local government over how to spend funding. Splitting them into different pots would give national Government more control over direction of spending. One approach for this would be to create separate city, towns and rural pots with different amounts of cash allocated to them and different priorities for how this is spent. If it implements the British CHIPS Act and deeper devolution it could also remove the largest cities from this pot completely.
  • Creating rolling 5-year funding rounds to increase certainty and reduce churn of grants.
  • Allocating this money non-competitively based on a national strategy that devolves decisions over what the funding is spent on to local government.
  • Giving money to the top tier of Government in each area to reduce the fragmentation of delivery within an area.
  • Requiring local authorities to set out their proposed investments as part of their Local Growth Plans. Central Government should assess these plans to give them the green light, then let local government go about delivering them, with reporting on spending, milestones, outputs and outcomes on a regular basis.

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6. Give local authorities more freedom over how they use their budgets

The problem

Local government finds itself in a financial straitjacket in terms of the constraints that central government puts on its spending, such as requiring budgets to be spent only in the service area they are allocated to (so money for transport can’t be spent on libraries for example) and for budgets to balance every year, so that spending can’t be delayed or brought forward depending on need. This has made navigating the cuts that local government has seen – the hardest hit of any Government department[4] – even more difficult.

The solution

  • Increase funding for local government. The Local Government Association has recommended that this be increased by £4 billion in the next two years alone.[5]
  • Follow through on the manifesto commitment to give local government flexibility to balance budgets across rolling four-year periods – the period between elections in those councils that have all out elections rather than annually.
  • Remove central Government restrictions on local sales, fees and charges. Doing this would allow local government to use its revenues for parking, planning and leisure centres – or congestion and air quality charges to support its priorities. This would give greater autonomy over £15 billion in revenues in England.[6]

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7. Fix the business rates system

The problem

Business rates is a poorly-designed tax which doesn’t adjust to reflect the economic realities faced by different places and does a poor job of incentivising growth. It should be reformed. Reforming the system should be done for these reasons, rather than for any notions that it may save the high street (as hinted at in the Labour manifesto). The struggles of the high street largely do not result from the business rates system.[7]

The solution

To address these issues, either through the reform of the existing system, or its replacement (assuming it will still levy a tax on the value of commercial property), the Government should start the following[8] with the aim of completing them by the end of the parliament:

  1. Move towards annual revaluations, as is done in the Netherlands. Infrequent revaluations mean that taxes do not match changes in the economic cycle, for example during a recession, and create cliff edges when revaluation finally does happen.
  2. Make the landlord take on at least 50 per cent of the business rates liability to discourage keeping headline rents at ‘book value’.
  3. Largely abolish the current system of reliefs, while maintaining current exemptions for exempted buildings and potentially other key areas of public policy such as community sports clubs and potentially nurseries. Local government could still maintain discretionary reliefs if it so chooses.
  4. Lift the cap on total business rates revenue. Unlike taxes such as income tax and VAT, currently the total amount of money raised by business rates is capped. Artificially constraining how much can be raised by the business rates system doesn’t incentivise local authorities to grow their economies.
  5. Implement a pooling system within mayoral combined authorities to align business rates to local economies. A city centre economy cannot grow without the contribution of workers who commute in from neighbouring authorities, and the system should recognise this. The Government should also allow these pools to retain 100 per cent of growth in business rates revenue to further incentivise authorities to encourage economic growth.

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Things to be wary of

There are also a number of things the Government should be careful not to become bogged down in or sidetracked by. Three of the biggest issues are:

  1. The false choice between cities and towns. This is a debate that is likely to surface again as it has during previous parliaments. But the evidence is clear. Towns and villages benefit from the prosperity that nearby cities generate. The issue for many struggling towns is that their nearby large cities are underperforming and so not generating enough prosperity for them to benefit from.
  2. Seeing the economy through the lens of sectors. The political appeal of talking about sectors is understandable as it is easy to communicate. But the reality is that the economy organises itself through place, not sector, with cutting-edge sectors clustering in cities and city centres in particular. And the ability of anyone to pick the growth sectors of the future is very limited.
  3. Unfunded mandates. Commitments to non-urban areas over things like bus franchising are a good example. Providing a franchised system in a rural environment will require huge subsidies because of the dispersed nature of communities and the large advantage this gives the car over the bus. There is a risk that large volumes of money and time are given over to this with very little return.

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Notes:

[1] US-style insofar as the CHIPS Act focused in part on innovation in particular places, rather than spreading funding across places.

[2] Breach A and Swinney P (2024), Climbing the Summit: Big cities in the UK and the G7, London: Centre for Cities

[3] House of Commons Committee of Public Accounts (2024), Levelling up funding to local government, London: The Stationery Office

[4]  Resolution Foundation (2024), Debt dramas: Putting the public finances in context ahead of general election 2024, London: Centre for Cities

[5] LGA (2024), LGA submission to the 2024/25 Provisional Local Government Finance Settlement, London: LGA

[6] Source: DLUHC, General Fund Revenue Account Outturn – RSX Service Expenditure Summary 2022-23

[7] Swinney P (2017), Is Amazon the big bad wolf of business rates, or the innocent party? London: Centre for Cities

[8] This reform should happen alongside developing plans for fiscal devolution, rather than instead of.

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