Passing the buck without the bucks

Prime minister David Cameron and chancellor George Osborne hosting a roundtable in Manchester last year on how to build a ‘northern powerhouse’.

The current hyperbole associated with devolution in England intimates that enhanced territorial governance and localism is bound up with, and dependent on, fiscal decentralisation.

The current emphasis on the ‘northern powerhouse’ and the entrepreneurial Devo-Manc would have us believe that a degree of locational independence will be the catalyst for economic resilience and the impetus for spatial rebalancing throughout England. It is hardly possible to pick up a government policy document or city future think piece, without some reference to more localised power and control of local finance.

A research project that I am conducting with Paul Greenhalgh at Northumbria University offers a timely perspective in relation to fiscal decentralisation, in particular the potential impact of the government’s business rate retention strategy, which was introduced in 2013. The research scrutinises the rhetoric of the strategy and its stated role in fiscal independence. The belated English interest in devolution presents a rare opportunity for new ways of working. Yet, our findings suggest the current arguments in favour of fiscal decentralisation and spatial rebalancing are hollow words when distilled against the variegated economic geography in England. Rather than ameliorating spatial inequality, the business rate retention strategy potentially exacerbates uneven development. Consequently, our findings suggest that the centralised national economy could be replaced by an equally divisive city based one, where a minority of locations are dealt all of the aces while the rest get a raw deal.

Reflecting this situation, the former leader of Newcastle Council, Lord Jeremy Beecham argues that business rate retention strategy could result in a case of: ‘Passing the buck, without the bucks.’ (Newcastle Evening Chronicle, 28 March 2015)

The business rate retention strategy replaced the centrally determined formula grant funding mechanism for local authorities. It allows local areas to retain 50% of business rate income and an additional 50% of any new business rate income (Manchester has recently been awarded 100% retention privileges by chancellor George Osborne). The stated central policy drivers are localism and economic growth, totems that will receive even more emphasis as local authorities are increasingly expected to stand on their own two feet amid more swingeing public sector cuts and fiscal prudence. Yet, due to its arcane workings, the new system has received relatively little attention (next to the slightly better known tax increment financing, new development deals and enterprise zones), which has let it fly under the radar with little scrutiny.

‘The minority of locations where market conditions are conducive to new development, those with buoyant rental market structures, have a distinct advantage over the rest. It is no coincidence that it is these locations, mainly central London, the core cities and the metros, that have been at the forefront of championing and lobbying for fiscal decentralisation’

Our central finding is the business rate retention strategy is not driven by a desire to tackle inequality or to narrow the gap between rich and poor. This is because the success or failure of the strategy is bound up with the economics of commercial real estate development, which is spatially selective. Investment in new commercial real estate development is expected to underwrite the funding of public services and urban regeneration in the absence of central government grant. This is because the strategy is hung upon the national business rates model, which is a tax on commercial business premises. The only way an authority can create growth (in order to pay for welfare and infrastructure needs) is to expand its business rate base and the only way this can happen is through the construction or conversion of new business floor space. This means that the minority of locations where market conditions are conducive to new development, those with buoyant rental market structures, have a distinct advantage over the rest.

It is no coincidence that it is these locations, mainly central London, the core cities and the metros, that have been at the forefront of championing and lobbying for fiscal decentralisation. Those most vocal have been a select group of special interest groups such as the London Finance Group, the City Growth Commission. Republica and, perhaps most prominently, the Core Cities Group and its Modern Charter for Local Freedom. Yet, there is a real risk that rather than heralding a new era of federalised equity these groups and the areas they represent could end up being more reminiscent of feudal barons who resent and want to break free from the arbitrary whim of central government in order to exploit their wealth at the expense of those less fortunate.

This has serious implications for the life chances of people in contrasting locations. How will those local authorities that cannot demonstrate economically viable commercial real estate development fund their future public welfare needs? How can we make sure that the aces in the pack are more evenly dealt? There is no easy answer!

However, we propose a number of considerations:

Firstly, it is not appropriate to introduce new urban finance processes without them being subject to some kind of practitioner and intellectual oversight. The speed with which fiscal decentralisation is taking place makes it imperative to understand its implications for the funding of welfare provision, economic development and urban regeneration. It is therefore important to empirically monitor, evaluate and review new tools of urban finance in order to expose the uneven geographical distribution, impact and consequences of fiscal decentralisation and contemporary methods of urban finance.

Second, there is considerable tension between the notion of fiscal devolution and equal redistribution and how both concepts might be reconciled. This is because business rate retention, in certain locations, is about the amount of money coming into a location, rather than what could be generated in that location, a consequence of the variability in geographical tax base in terms of quantity and the concomitant ability for that tax base to expand.

Third, amid the clamour for more local power there must also be an engagement with the textures of locally specific commercial real estate markets. This is because our analysis of the business rate retention strategy in England proves that fiscal decentralisation is bound up with the relative structures of locally specific commercial real estate markets and the interlinked ability to both attract and justify investment in commercial real estate development. Simply put, it is a little churlish to devolve power (and blame) to locations that cannot wield it.