Boosting regions beyond the M25 could benefit the UK economy as a whole

Richard Threlfall

Have you noticed, over the past few months, a certain pattern to government announcements? It started on 13 June when Birmingham, Derby, Doncaster and Manchester were shortlisted as locations for the new National College for High Speed Rail, Skills and Enterprise. On 23 June the chancellor and prime minister popped up to Manchester to talk excitedly about HS3, linking our northern cities.  On 3 July it was the turn of Glasgow, with £1.3bn suddenly available to invest in infrastructure, and on 7 July there was another £1bn for Leeds. On 21 July Birmingham was announced as the new headquarters for HS2. Meanwhile, the Labour Party, on 1 July, issued a report (Mending the Fractured State) by Lord Adonis suggesting greater devolution of powers to cities and regions.

Cynics may observe, it is not unusual in the run-up to an election for our political parties to suddenly gain a heightened awareness of the geographic extent of the UK. John Prescott drily opined that HS3 was less about growth in the north than votes in the north. But my sense is that there is substance to the growing political consensus that the UK’s regions need more autonomy that will endure. If followed through, it has significant repercussions for UK construction, by turning city regions into major clients.

The interest in our regions reflects a real problem. Over the past decade the economic centre of gravity of the country has moved relentlessly south. According to the Office for National Statistics, in 1999, 31.9% of UK output came from London and the South-east. By 2009 it was 35%. By 2011 it was 36.6%. These are substantial shifts in a short time frame, and there seems little prospect of them reversing soon.

In part this is the story of the success of London. So attractive has the capital become, that its population is growing by 100,000 a year, equivalent to grafting onto it each year a town the size of Wigan or Woking. Total employment has risen so fast that it is already at the level that the 2010 London Plan predicted it would get to in 2024. And London sucks in talent from round the world, with 38% of its population foreign born compared with an average of 8% across the rest of the UK’s cities.

Cities such as Manchester arguably function much better than Whitehall, with a joined-up approach towards transport, housing and regeneration

The imbalance in the economy caused by the rate of growth of London is, however, strongly exacerbated by the intellectually inconsistent combination of the UK’s highly centralised fiscal system and Treasury management that is obstinately blind to any form of central planning or sense of place.

Compared with other countries, the buying power in the hands of UK local government is pointlessly small. Local taxation in the UK raises around 2%of GDP compared with nearly 10% in the US, 15% in Canada and over 20% in Germany. The OECD average is also nearly 10%.

A centralised fiscal system works if by taking all buying power into the centre, the centre then takes responsibility for allocation on the basis that it invests in the overall best economic growth. But the UK doesn’t do that. Rather than seeking to buy growth the Treasury regards its role as limiting spend. It is no coincidence that the tri-annual punch-up between Treasury and government departments is called the Spending Review.

Treasury sits at the heart of a deeply ingrained, institutional and cultural Whitehall convention that cash is king and growth is a happy side effect. Money trickles out through lengthy, costly and emotionally draining bidding processes for a small share of the pots of money dangled by central government in front of financially increasingly desperate regions.

What we need instead is substantive devolution of funding. The London Financing Commission report of May 2013 (Raising the Capital) proposed devolution of property taxes. London would clearly gain substantially, but other regions are keen, too - in proportionate terms they would gain much more buying power than they have today.

Also required is reform at a local level. Party politics has served the UK’s biggest cities badly over past decades, hampering any attempt at reform and draining public trust. But whether by increasing political maturity or necessity of austerity, it is clear that has changed. Across the country the hatchets of political and regional factions are being buried under the umbrellas of combined authorities, with Manchester leading the way.

It also requires visionary local leadership. Recent years have seen the emergence of stronger and better leadership in our cities, focused on economic growth, institutional reform and quality of life. Cities such as Manchester arguably function much better than Whitehall, with a joined-up approach towards transport, housing and regeneration.

If the UK only punches on the world stage with the weight of London, we squander all the potential of our other cities. It is time we freed our regions to thrive.

Richard Threlfall is head of infrastructure, building and construction at KPMG