09 February 2007
Most policies are made at a national level and do not reflect England's true economic geography, which is at city or council level. Local optimisation means there must be more local decision-making
Economic policy isn't the special preserve of organisations such as the Treasury and the Bank of England. Indeed, more and more players are now shining a spotlight on the economic role of local councils. Why?
The argument starts with objectives. The top economic aim of successive governments has been to boost growth, productivity and competitiveness. But they have also wanted prosperity to benefit the whole country, not just privileged bits. The Treasury has a target to close the productivity gap between London and the English regions, putting that on a level with price stability and sound public finances.
So far, that objective has had limited traction. London is a great global city. It is booming and long may it prosper. But the capital is so big — its economy worth a fifth of gross domestic product — that its prosperity has flattered the national data.
After the longest period of growth the country has seen, the rest of England isn't doing as well as it should. On some measures, the regions have fallen behind: in 2002, the Northeast's output per hour was 81% of London's; by 2004, it was 79%.
This isn't just about comparisons between London and the rest of England. Of the largest English cities apart from the capital, Bristol scores best in the European league table — but in thirty-fourth place. Most of our cities — a century ago the powerhouses of the industrialised world — now languish at the bottom of the table.
In terms of output per head, places such as Manchester and Birmingham are beaten not only by Frankfurt and Munich, but by Bordeaux and Verona. England's economy is unusual in being a capital city one-trick-pony.
But there is in the UK — or rather, since Scottish and Welsh devolution, in England — a drastic gap between the way policy is made and the way the economy works.
Start with the economy. There is, of course, a national economy. Many companies have a national footprint. Some workers are completely mobile. A uniform set of national policies suits them. But the vast majority of agents and transactions aren't like that.
Seventy-eight per cent of journeys to work take less than 40 minutes. Seventy per cent of house moves are over less than 20 miles. New research carried out for the Local Government Association shows in detail that the English economy is the aggregate of many small-scale local economies.
The research mapped areas where three-quarters of workers live in the area they work in, or where three-quarters of local demand for a good or service can be met by firms in the area. It looked at labour and housing markets, and markets for six main categories of goods and services.
It shows that for most of those key aspects, England works on an economic geography that has about 50 or 60 areas (for some services, there are about 20). That fits the map of industrial clusters, transport and economic performance data, too.
Now think about how policy and funding decisions that affect the real economy are actually taken. The system is overwhelmingly centralised.
If any governance structure fits the sub-regional map this research produces, it would be councils or groups of councils at the level of cities and counties. But they have only limited powers to take decisions about transport, infrastructure, housing and skills, and none at all over crucial areas for labour markets such as welfare-to-work policies.
Many are ambitious to lead the drive for growth in their local economy; but for now, their powers do not match their commitment to helping local businesses thrive.
Some decisions about planning and funding are taken by regional assemblies and regional development agencies — although one of the findings of the research is that today's regional boundaries bear little relationship to economic patterns. Most big decisions for local economies are taken centrally, from the Treasury approving investment cases for trams, to training for workers being driven by the Learning and Skills Council's national targets.
If these are the facts, then the difficulties of helping the regions to catch up on London have a blindingly obvious explanation. National decision-making cannot deliver what economists call local optimisation.
If the right decisions for the prosperity of Leeds or Bristol or West Cumbria are ever going to be taken, they need to be taken locally. And that — unsurprisingly — is how economic governance works in those higher-performing European cities.
This evidence is crucial backup for the conviction politics of localism. Politicians of all parties agree that — in Chancellor Gordon Brown's words: 'Local councils, not Whitehall, should have more power over the things that matter to their community… from economic regeneration to public transport.'
As the government takes decisions about to how to make that real, the map of England's sub-regional economy must determine the architecture of devolution.
Paul Raynes is programme director, regeneration and transport, at the Local Government Association. The LGA published Prosperous communities II: vive la dévolution! on February 5
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