The UK’s cities could become engines of its economy – if they are given the right powers

Ed Miliband’s speech in Birmingham last month on devolution was a sign of how far cities have moved up the agenda across the political spectrum. But why are politicians focusing more and more on cities? The simple answer is growth, and more importantly growth outside London. If we want to ‘rebalance the economy’, be ‘all in it together’, and live in ‘one nation’, then we must do more to support cities to do better.

In an era of increasingly sophisticated technology, from smartphones to Skype, many predicted that cities would become less important. In fact, the opposite has happened – cities have become more important than ever.

Around the world, cities are the engines of national economies. Today, more than half the world’s population lives in cities and, every year, 60 million new people join them – and it is mainly because of the economic benefits. Having so many people living together means cities offer the best places to exchange ideas, which is critical in economies where knowledge and innovation are the main drivers of growth. It also means people can access the widest variety of jobs, leisure activities and social opportunities.

Cities also act as business incubators and growth accelerators, offering businesses the chance to find the skills they need – having a bigger pool of employees to draw on increases businesses’ chances of finding the right people with the exact skills they need to grow – and to access the largest number of clients and customers. Despite advances in information technology and web conferencing, nothing yet has come close to matching the effectiveness of building relationships and trust face to face, so firms still want to be as close to their clients as possible and vice versa.

Cities also offer businesses the opportunity to keep up to date with competitors: proximity to competitors is often a great advantage. It not only deepens the well of talented and trained staff locally available but being close to your rivals also helps you to keep an eye on what they are doing and stay up to date with any advances.

These are what economic geographers term ‘the economies of agglomeration’, and ever-increasing global competition and the growing importance of knowledge-intensive jobs and sectors will only reinforce the importance of cities.

In the United Kingdom there is growing consensus among politicians that not only does the future growth of the economy depend upon cities, but that they are also vital to a whole host of other big policy questions that will dominate the 2015 general election. From creating more and better jobs (cities are home to over 70 per cent of highly skilled jobs), reducing welfare dependency (nearly three-quarters of housing benefit is spent in urban areas) to tackling inequality (over four-fifths of deprived neighbourhoods are located in cities), cities will be vital to the UK’s growth.

But there are big challenges that must be resolved if urban areas are to fulfil their potential. First, there are the pressures of growth. As more and more people arrive in cities to live and work in close proximity, demands on trains, buses, housing, office space, schools, hospitals and the environment increase. If cities do not respond, they will begin to suffer from congestion, rocketing house prices and rents, poorer public services, a deteriorating natural environment, and, ultimately, this will affect economic growth too.

Second, there are the challenges of underperformance. While London and most of the smaller cities within its economic orbit are growing strongly, seven out of the eight largest English cities – Birmingham, Leeds, Liverpool, Manchester, Newcastle, Nottingham and Sheffield – perform below the national average across a range of economic indicators, including employment, skills and new business starts. Only Bristol outperforms the average. This is in stark contrast to countries such as Germany where big cities’ growth outpaces the national average.

There is no single answer to improving the performance of UK cities: what is right for Manchester will not work in Middlesbrough and a one-size-fits-all solution will not work. Yet, despite the economic and social benefits the UK would reap from improving cities’ performance, UK cities – unlike almost all their international counterparts – do not have the adequate powers, funding or geographic scope to deal with the particular issues that face them. If cities are to fulfil their potential, the next government will have to introduce some big policy changes to support urban areas to thrive in the years ahead.

First, UK cities need the powers and freedoms to take the big decisions on local transport, housing and skills, over the geography of the ‘real’ economy. Successful city economies need efficient transport, skilled workers, quality housing, good public space and amenities. But city economies do not stop at local authority boundaries and 50 per cent of commuters live and work in different local authorities. Most UK cities continue to suffer from the highly fragmented system of local government in this country, which means that their governance does not operate at the scale at which most people live their lives and the local economy operates. And, even where cities develop governance at the level of the ‘real’ economy, city leaders have very few powers to make it easier for people to find work or access services. Even the powers that London enjoys are limited compared to global counterparts. Ensuring that budgets and strategies to organise and deliver planning, transport, housing and skills work at the ‘city-region’ level could make a big difference to jobs and investment across the country.

Second, cities need more control over the money they spend. Like the rest of local government, cities have little control over how to spend the funding they receive from central government. This means that cities cannot focus money on the specific local and regional challenges they face. Even if a city knows and can prove that the best way to reduce worklessness is to spend money on one thing rather than another, this is not allowed.

The UK continues to be one of the most centralised developed countries in the world. In 2009 local government was able to raise just 17 per cent of its income from local taxation compared to an Organisation for Economic Cooperation and Development average of 55 per cent. By way of comparison, the level of taxes controlled locally or regionally is about 10 times greater in Canada, seven times more in Sweden, and nearly six times more in Germany.

The principles underpinning Michael Heseltine’s single local growth fund are capable of putting cities in the driving seat, but the reality is that the fund as currently conceived is both too small, and constrained by central government departments. If cities are to respond to growing pressures on services, and forthcoming budget cuts, more must be done to ensure they can direct funding where it is needed most to achieve nationally desirable outcomes.

Third, cities need more scope to try new ways of providing services and be allowed to retain returns from savings and growth. Currently, the risks of innovating rest locally but savings go straight to central government, so cities have few incentives to implement new approaches to growth or service delivery.

To give a tangible example, the Association of Greater Manchester Authorities has shown that its Troubled Families initiative is likely to result in £110m of cashable savings. Local partners are investing 67 per cent of the upfront costs and yet they only retain 20 per cent of the savings – the rest go straight back to central government. This reduces both the money and the incentive to invest in similarly successful initiatives that could deliver better results and save more money in the future.

If cities could retain some of the economic and financial gains that come from reducing welfare dependency, increasing the number of jobs locally or increasing the supply and improving the quality of housing, then we would see more building and greater growth.

Next May, half of the key marginal contests will be fought in cities. Addressing the issues which affect the daily lives of city-dwellers could go a long way to deciding the vote. Miliband’s speech showed that Labour is thinking hard in this area, but the challenge of ensuring major UK cities reach their potential is significant. Realising the potential of our cities and the people who live and work in them will require radical policy reform.

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Alexandra Jones is chief executive of Centre for Cities

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Alexandra Jones will be speaking at this year’s Progress annual conference. Click here to book your place

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Photo: ehkimme