Inclusive growth review considers case for prudential borrowing reform

22 Sep 16

A major review of government’s devolution and economic policy has proposed revisions to the prudential borrowing code for local authorities, as part of increased devolved powers intended to lead to more inclusive growth.

Transport will be part of the mayor’s remit, and better transport will make people more able to seize economic opportunities

Manchester is among the areas of England to have seen devolution deals so far. Photo: Shutterstock

 

The RSA’s Inclusive Growth Commission was formed in May to consider how to make cities and towns across the UK more economically inclusive, to enable more people to contribute to, and benefit from, local growth. It found that more government funding was needed for social and capital projects.

The group is chaired by Stephanie Flanders, chief market strategist for Britain and Europe at JP Morgan and former economics editor at the BBC. Other commissioners include CIPFA chief executive Rob Whiteman, Joseph Rowntree Foundation chief executive Julia Unwin and Naomi Eisenstadt, a former anti-poverty adviser to the Scottish Government.

Highlighting Theresa May’s pledge to make “Britain a country that works for everyone”, the commission’s interim report stated that the government needed to set out more ‘grown-up’ devolution deals at the Autumn Statement on 23 November. Such deals should devolve social policy, and should provide more funding for social and capital projects, in particular for smaller towns and cities overlooked by existing devolution settlements, as well as the major metro centres.

In the likely reset of government finances in the forthcoming Autumn Statement, the report said chancellor Philip Hammond must ensure local authorities benefits from any changes to public spending, so that civic leaders can invest in projects which best promote local inclusive growth.

Deals should include devolution of funding for social and capital projects in order to get beyond what the commission called the current “confetti of initiatives”. Cities and city regions should also join up their own policy programmes in areas such as childcare and even the minimum wage and employee conditions, as well as transport, skills and employment. This should lead to a place-based Spending Review before 2020.

As places are able to run more of their own affairs, “it also makes sense to find ways in which they might be able to expand the resources available to them”, the report stated.

“Here the role of central government is then to explore how places might borrow and pay off debt within a revised prudential borrowing code. Combined authorities with appropriate accountability mechanisms and multi-year financial settlements could be given opportunity to trial greater headroom flexibility, as long as they guaranteed to stay within the agreed fiscal envelope over a three to ten year period as appropriate.”

The review also called on policymakers to look for new ways to give localities a financial return from local growth, building on the experience of Tax Incremental Finance schemes. Although the report stated that full business rates retention might start to do this, on its own it was likely to be insufficient. Also, it could be too risky for many local authorities, unless complemented by wider fiscal devolution to let places fully capture the returns from greater and more inclusive growth. “There is plenty of scope for innovation and pilot schemes in this area, for example, with a tourism/hotel tax or local allocation of national income tax, VAT or corporation tax revenue streams.”

It was also crucial that the government set out details about how it planned to fill the gap left by European Structural and Investment Funds when these sources of funding are no longer available. This could include allowing hypothecated borrowing based on the prudential code to deliver increases in affordable housing and public service reforms. Among the examples in the report was an early intervention programme in housing, health and welfare, which could be raised from local housing revenue accounts and repaid through future savings.

The group will continue to develop thinking in this area, ahead of its full report published in the spring, including considering the ‘prudential code’ for investments in prevention being developed by CIPFA and Public Health England.

In its review of the UK’s economy, the commission identified a £190bn ‘inclusivity gap’, which represents the gap between the lowest growth areas in the UK and the national average. According to an analysis by New Economy, if each area in the UK met the national average in economic gross value added, there would be a £191.5bn boost to the economy.

Flanders said the current economic system in the UK, as well as other advanced countries, was simply not delivering for a large chunk of the population.

“Theresa May seemed to grasp that fundamental reality in her first speech as prime minister, committing to ‘build a country that works for everyone’,” she stated. “But to achieve this, we need a concrete strategy for delivering inclusive growth. This report explores how policy would need to change – not just in Whitehall but across the country. We would like to see the chancellor make serious commitments to this agenda in the Autumn Statement in November.”

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