Fulfilling the potential of every area

The English economy does not exist in any meaningful sense – it comprises city regions, county economies and sub-regional labour markets. It is characterised by wide disparities: between thriving tourist areas and struggling seaside towns, between emerging tech hubs and former industrial areas, and between a finance-dominated capital with a devolved administration and other major cities with different sectors who increasingly seek similar rights to self-determination.

In this context of significant geographical imbalances, a purely centre-led growth strategy will not be sufficient to meet the scale of the overall challenge. Different areas have particular industrial histories, sector specialisms, natural resources, current capacities and future opportunities. By devolving some of the levers to boost and sustain growth to local areas, there would be greater potential for local government, who understand their specific situation, to work with businesses to ensure every area can reach its full economic potential.

The Conservative ideology framing the government’s macro-approach to the economy can be simply put: private sector equals good; public sector equals bad. This illogic is the guiding principle underpinning their austerity drive, whereby if they are not explicitly cutting the public sector, they are seeking to inject the ‘principles’ of the private sector into it. However, Labour should not fall into the trap of adopting a reverse psychology of private bad, public good.

In this regard, Ed Miliband’s intention to build a more ‘responsible capitalism’ charts a welcome, more nuanced approach. It is predicated on the understanding that the private sector can and should recognise social obligations beyond shareholder bottom line, while those who govern can and should demand more from the business world for the benefit of all.

Despite the government’s cuts to local government funding of over 40 per cent, many Labour councils are supporting their local businesses to kick-start growth and create jobs in different ways. Their approaches demonstrate the benefits of local leadership, which can secure more productive value for local areas from growth, since they have better local knowledge and a direct stake in securing positive outcomes for their residents.

Councils already use various models to help businesses access finance and shape the development of their local economy. For example, Calderdale council has been working to diversify its local economy away from a traditional reliance on financial services and manufacturing, creating a fund to invest in small projects to stimulate the economy. This has created 150 new businesses, over 500 jobs and attracted £3 million of private sector investment.

Councils can use the strength of their balance sheets to secure investment, as evidenced by the prudential borrowing of Wolverhampton, along with South Staffordshire and Staffordshire councils, to leverage a £400 million private sector investment in the Jaguar Land Rover low emissions engine plant. They can work proactively to attract new investment, such as Sunderland city council’s direct talks with the Lear Corporation, which convinced them to locate a new manufacturing plant in the area, bringing 300 jobs. And they can ensure new investment secures maximum benefit for their areas, as with Durham county council’s partnership approach to coordinate local resources around a new Hitachi production facility and R&D base, which will allow local small businesses to establish or grow in the ensuing supply chain.

An indication of how a more responsible capitalism might work in practice is already being pioneered by many Labour councils, who use their buying power to secure more community responsibility from local companies. Liverpool city council’s procurement board, for example, ensures all decisions have a positive impact on jobs and skills within the city. Sandwell council includes community benefit clauses in major public contracts to ensure that job and apprenticeship offers are made to local residents. Preston city council is exploring how local public bodies such as health and education institutions can keep a greater proportion of spend in the local economy supporting local businesses and co-operatives, in the process creating more local ownership of wealth and opportunity. And at time of writing, 53 Labour councils are committed to being living wage employers, setting a strong local example and supporting demand in local economies.

These cases demonstrate the appetite and capacity of local government to drive growth and work with business to ensure community benefits. Yet this is happening despite the ideological constraints of the current government, and the institutional constraints of a centralised system led from Whitehall that hampers local initiative and creates perverse incentives.

The current national-led approach to unemployment demonstrates these restraints. There are 35 national skills and employment schemes, spanning 13 different age ranges, while youth unemployment stands at 20 per cent. The logic of skills funding encourages further and higher education institutions to be accountable to Whitehall departments rather than to their areas. This leads to a situation in which skills provision is detached from local employers’ labour requirements: LGA research found that in one year 94,000 people completed hair and beauty courses despite there being just 18,000 new jobs in the sector.

Devolving skills and apprenticeship budgets could build a greater shared endeavour between local government, business and educational institutions, better blending local economies and social objectives. Skills provision would be better aligned with local labour market requirements and so have more of an impact on job outcomes, whilst also driving longer-term local economic productivity and sector development. LGA calculations based on the evidence of what councils are already doing show that a localised approach could achieve savings of £1.25bn a year and cut youth unemployment by 20 per cent in three years.

The long-term unemployed are also being failed by a centre-led approach and there is evidence that those furthest from the labour market can be better supported by locally-sensitive approaches. In Manchester just 2.8 per cent of the Department for Work and Pensions’ jobcentre plus referrals recorded sustainable job outcomes last year. The council is now developing a new delivery model with prime providers, which will integrate support with other local services so that it can address issues which may be barriers to work – such as health problems or childcare support. This could contribute to our understanding of how accountability to local place, rather than to the Whitehall hierarchy, can better meet the whole range of people’s needs, which often don’t fit within service silos as designed at the centre.

A more coordinated approach between national and local infrastructure planning can maximise value, where currently the vehicle for investment is the institution – Network Rail, Highways Agency or broadband – rather than the place itself. Local government’s net asset base of £250bn could be used more effectively to invest in community goods – as the cross-party LGA has argued, freeing councils from Treasury restrictions would create headroom to invest in local infrastructure while still complying with financial regulations. For example, removing the cap on the amount councils can borrow for housing would allow them to deliver 60,000 new homes in five years and unlock £20bn of wider economic impact.

The institutional architecture in 2015 will be much changed from that in 2010. Regional development agencies have been replaced with new sub-regional structures, local enterprise partnerships (LEPs) and combined authorities. Although the loss of regional investment vehicles was certainly felt, the old regional boundaries seemed to make more sense from the centre that in the localities themselves. New sub-regional structures are more likely to be better aligned to functional economic areas – including labour markets and journey to work areas.

Bringing together councils, businesses and other local stakeholders – like education institutions and trade unions – to deliver economic growth through LEPs makes sense in principle as part of a modern industrial strategy. But they are failing in practice to achieve anywhere near their full potential. Such will be the urgency to drive and sustain growth, it would be difficult to simply turn back the clock or start another top-down structural overhaul of sub-regional architecture. There are presently concerns over the democratic accountability and financial transparency of LEPs, which could be resolved by strengthening the role of local authorities as delivery partners, and there remain issues of geographical inconsistency, whereby in some places LEP boundaries are not aligned to local economic functional realities.

Once they are all fit for purpose, LEPs would make better vehicles for funding top-sliced from Whitehall departments, as outlined by Michael Heseltine’s recent growth review. This set out an approach to devolving economic power which would give local areas more resources and tools to drive growth. The main mechanism to achieve this is a single, unringfenced local growth pot comprised of growth-related funding from Whitehall Departments. However the Government has thus far failed to match this ambition – while Heseltine identified between £58 and £70 billion of funding streams that could be devolved, the Spending Round earlier this year confirmed that the single local growth fund would comprise only a fraction of this at £2bn. This comparatively small sum reflects the nervousness of the centre at truly letting go of the reigns, but there is a risk that while actions fail to match rhetoric the measures will simply amount to passing the buck for lack of growth rather than genuinely enabling local areas to drive it.

The other aspect of sub-regional architecture that will be increasingly important is in relation to city regions. The combined authority model was pioneered by Greater Manchester, and other city regions are pursuing similar collaborations. City deals have created a new model through which the centre and local areas agree priorities around growth – skills, transport, infrastructure and trade – then the former devolves the funding and lets the latter get on with delivering it. The Greater Manchester city deal’s ‘earn-back’ principle, whereby the authorities’ investment in growth can be earned back from the Treasury as the proceeds of growth are realised, is a potential model for better incentivising and rewarding local growth that could be developed and extended.

There are many areas Labour can explore to drive sustainable growth, such as how existing plans for regional investment banks might share risk with local government to secure infrastructure investment, or how the business rates system could be reformed to better incentivise actual business growth rather than just the growth of business premises.

Of course, there remains a role for national government to set out a growth strategy with clear ambition and leadership. Within this, however, the flexibility to adapt investment and initiative to local needs will provide the greatest potential for all parts of our imbalanced economy to develop effectively and sustainably, for the benefit of everyone.