Cities guru calls for more fiscal freedom

25 Apr 14

Increased fiscal devolution to cities is a ‘necessity’ to boost the growth rate of the UK, a leading economist examining plans to increase the powers of municipalities has told Public Finance.

By Richard Johnstone | 28 April 2014

Increased fiscal devolution to cities is a ‘necessity’ to boost the growth rate of the UK, a leading economist examining plans to increase the powers of municipalities has told Public Finance.

Increased fiscal devolution to cities is a 'necessity' to boost the growth rate of the UK, a leading economist examining plans to increase the powers of municipalities has told Public Finance

 

Jim O’Neill, the chair of the City Growth Commission established to develop a devolution blueprint for urban areas, said that granting city authorities fiscal powers must be ‘top of the agenda’.

The commission, which was established by the Royal Society of Arts, is set to publish its report this autumn, in time for its recommendations to feed into party manifestos ahead of the general election. Since being formed last October, it has completed a call for evidence and held five evidence sessions to examine the role of ‘metro areas’ in the UK economy.

O’Neill – who when chief economist at Goldman Sachs coined the term Bric to describe the shared growth prospects of Brazil, Russia, India and China – said cities would be key to future economic expansion. ‘My premise is that we can think of a few interventions for the 15 metro areas as we define them that can boost the national economy’s growth trends,’ he added.

Speaking to PF at the halfway point of the project, O’Neill said he wanted to challenge what he described as the Treasury’s view that growth in cities was a zero-sum game, with gains in one area likely to be offset by lower activity elsewhere.  ‘It’s challenging the central premise of how, from what I can see, much of central government has approached this – that if you help one region it’s got to be paid for at somebody else’s expense – which I think is the wrong approach.’ Critical to resetting this balance will be increasing the fiscal powers available to cities, he said.

‘Some sort of fiscal devolution to at least some of those areas that are well organised seems to be a necessity, but not necessarily sufficient, for the core premise – that if you undertake interventions in various important national regions, the national growth trend of the UK will be raised.’

This was likely to take the form of a recommendation to give cites greater ability to retain or influence their own tax take. ‘At the core of it is cities having some basic ability to raise and retain income themselves,’ he said. 

Although the commission had yet to decide what taxes or income streams might be considered for localisation, the issue was of ‘fundamental importance’, he said. ‘I’m very aware, not least of having lived in New York, about how you can have cities in one country having a very different practice with respect to their own local taxes. I think it’s something we’re going to consider.’

Recommendations for increased financial freedoms were likely to include an examination of how extra sources of capital funding could be made available to municipalities. 

‘The whole idea of cities doing their own bond financing for projects – why would that not be something that should be given more serious consideration?’ he asked. ‘It would seem to be definitely part of the possible more open-minded, exciting future.’ 

Other elements likely to feature in the commission’s final report include reforms to the powers of city authorities and universities to get more graduates to stay in the cities where they studied. 

Infrastructure will also feature prominently, as O’Neill said it was ‘central to the thesis’ that large agglomerations were likely to generate more economic growth, so infrastructure was needed to ensure cities were connected to each other.

He told PF that the controversial High Speed 2 rail network should be built from the north first to create high-speed and high-frequency services between northern and Midland cities. 

O’Neill admitted that he initially thought the rationale for the line was ‘iffy’, but now believed the chance to cut journey times between cities across England could be ‘truly incredible’ if construction began from the north.

He hoped to meet Sir David Higgins, the chair of the government-backed company undertaking the project, to make the case that the first phase of the line should prioritise improved journey times between more cities.

‘If you can dramatically reduce the time for a train between Liverpool, Manchester, Leeds, Birmingham, Sheffield, Nottingham – to take six – that would strike me as effectively creating a broad urban conglomeration which is easily another London,’ he said.

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