copy the linklink copied!3. Making the governance of UK Core Cities work for people, places and productivity

This chapter focuses on the role of governance in building the framework conditions that are necessary to enhance productivity in Core Cities. First, it provides an overview of the current governance of Core Cities against a backdrop of asymmetric devolution in the UK. Second, it discusses the capacity of Core Cities to achieve policy goals that are critical for productivity, notably in terms of skills, transport and climate action. Finally, it proposes ways forward to make governance work for people, places and productivity in the Core Cities.

    

The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law.

copy the linklink copied!Introduction

Core Cities are home to more than 25% of the population and generate around 22% of gross value added (GVA) in the United Kingdom (UK). Getting their governance right is, therefore, a critical step towards enhancing national productivity. This chapter focuses on the role of governance in building the framework conditions that are necessary to enhance productivity in Core Cities. First, it provides an overview of the current governance of Core Cities against a backdrop of asymmetric devolution in the UK. Second, it discusses the capacity of Core Cities to achieve policy goals that are critical for productivity, notably in terms of skills, transport and climate action. Finally, it proposes ways forward to make governance work for people, places and productivity in the Core Cities.

copy the linklink copied!Core Cities encapsulate the opportunities and challenges of the process of devolution adopted in the UK

Core Cities have navigated a fast-changing governance landscape

The governance and policy landscape of the last 40 years in the United Kingdom – one of the most centralised countries in the OECD area prior to recent reforms – has seen a vast range of reforms, projects and funding schemes in a context of crisis and budget consolidation measures. Core Cities have therefore had to navigate new rules, limited and decreased funding regimes, particularly in relation to the UK austerity programme, and potentially conflicting priorities over time. In a 2019 submission to the UK2070 Commission, Martin et al. have highlighted that since 1971:

… [subnational] governance arrangements and policies have been subject to frequent restructuring. Moreover, the territorial focus of subnational economic development policy has changed frequently from regionalism to localism, back to regionalism, then localism and most recently to city-regionalism (Martin et al., 2019[1]).

A major step began with the creation of the “devolved nations” in Scotland, Wales and Northern Ireland. Referendums were held in Scotland and Wales in 1997; in Northern Ireland, devolution was a key element of the Belfast (Good Friday) Agreement and was supported in a referendum in 1998. As a result of this asymmetric devolution process, the three devolved nations obtained their government and their own elected assembly: the Scottish Parliament, the National Assembly for Wales and the Northern Ireland Assembly (Box 3.1). In England, there was initially a plan to devolve some political powers to four elected regional assemblies but the plan was abandoned following the rejection at the first referendum held in one of the proposed regions (North East of England) in 2004. The asymmetric devolution process also means that local government structures, powers and relative resources differ across the four nations.

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Box 3.1. An asymmetric devolution process across the four nations of the UK

Asymmetric devolution: “Reserved” powers and “devolved” powers

Administrative devolution entered a new phase when Scotland, Wales and Northern Ireland obtained their own elected assembly and government in 1999. As each devolution act was arranged independently, the powers of the three devolved bodies vary in nature and scope. Devolution in the UK is therefore characterised by “asymmetry” that continues to evolve. This is due to the underlying history and respective political influences of the four nations of the UK.

The central distinction within the devolution space is between “reserved” and “devolved” powers:

  • “Reserved” powers are those that remain at the level of the UK Parliament (mainly: the constitution, defence and national security, foreign policy, immigration and citizenship, and tax policy).

  • “Devolved” powers are those which have been passed from the UK Parliament to one of the devolved legislatures. In Northern Ireland, the term “transferred” is used instead of “devolved”. The Northern Ireland Assembly can, in principle, also legislate in respect of “reserved” matters, subject to various consents but has not yet done so to any significant degree. “Excepted” matters are those retained by the UK Parliament indefinitely and apply solely to Northern Ireland.

Varying degrees of “devolved” powers were given to the Northern Irish and Welsh Assemblies, and the Scottish Parliament. Key areas where powers are fully or almost devolved to the devolved nations include: education, housing, communities and local government, environment, food and rural affairs, health and social care, culture and sport, justice and policing (except Wales). Areas that are partially devolved include transport, business, energy (Northern Ireland only), and social security and employment (Scotland only). On fiscal devolution, the devolved nations have varying degrees of powers, for example, local property taxes are fully/almost devolved and income tax is partially devolved in Scotland and Wales. Some policy areas are devolved to one devolved legislature but reserved elsewhere (e.g. policing is devolved in Northern Ireland and Scotland, but reserved in Wales).

The devolved institutions in Scotland and Wales have taken on greater powers over time, whereas devolution in Northern Ireland was suspended several times over the course of the 20th century.

  • Scotland has full legislative powers over a wide range of matters, i.e. all issues except those reserved to the UK Parliament. The Scotland Act 2012 devolved further tax and borrowing powers to the Scottish Parliament. Following the 2014 referendum, the UK Parliament passed the Scotland Act 2016, which set out amendments to the Scotland Act 1998 and devolved further powers to Scotland, in areas such as taxation, welfare and elections to the Scottish Parliament.

  • The National Assembly for Wales has a more limited range of legislative powers than the Scottish Parliament, i.e. mainly on secondary legislation. However, a referendum held in March 2010 enhanced its primary law-making powers. The National Assembly can now legislate without having to consult the UK Parliament in devolved areas. The Wales Act 2014 and the Wales Act 2017 devolved taxation and borrowing powers to the Welsh Government and the National Assembly for Wales.

  • There are significant complexities that are specific to Northern Ireland. Devolution was restored in 2007. The Northern Ireland Assembly is directly elected for a four-year term and appoints the Northern Ireland Executive, led by a First Minister and deputy First Minister.

Local government structures in the four nations

Local governments are governed by the three devolved nations and by the UK Government in the case of England. The system of local government is therefore also asymmetric: the organisation, responsibilities and finances, as well as territorial and decentralisation reforms, differ from one nation to another.

In England, Scotland and Wales, local governments are responsible for social care and provide some aspect of transport, housing and education. They are also in charge of a range of neighbourhood services including libraries, leisure and cultural services, consumer protection, environmental health services, planning, economic development, emergency planning and waste collection.

  • In England, the current structure results from continuous territorial reforms. The two-level system still in place in some rural areas is disappearing and counties are gradually being replaced by “unitary authorities”. However, the structure remains complex, with county councils, the Greater London Authority, and 8 combined authorities at the upper-tier and over 300 unitary and district councils at the lower tier. Some councils share powers with a combined authority in areas such as economic development, education and skills, planning and public health. In addition, the local government system in London comprises 32 London Boroughs and 1 sui generis authority, the City of London Corporation.

  • In Scotland, the current structure of local government is based on 32 council areas, as well as around 1 200 community councils, which are voluntary organisations set up by statute by the local authority and run by local residents to act on behalf of their area. Local Community Planning Partnerships, formal alliances between local authorities and other public bodies, are required by Scottish Government to produce plans to tackle local challenges and improve local outcomes, with a particular focus on reducing inequalities, by working with local communities and businesses. The development of Regional Partnerships in Scotland emerged from the Scottish Government’s Enterprise and Skills Review in 2017. The approach is explicitly pragmatic and non-prescriptive; however, it identifies key requirements for regional partnerships – encouraging the development of regional economic partnership arrangements, which are self-assembled around the bespoke requirements of particular regions, and establishing inclusive growth as a priority. Regional Partnerships build on the strengths of City Deal partners to collaborate beyond the delivery of the City Deal Programme. They bring together key players from the public and private sector to establish a partnership that reflects local economic circumstances, shared policy priorities and existing governance arrangements.

  • In Wales, there are 22 “principal” local government areas at the municipal level, each of which has a locally elected council. Municipalities are further divided into 735 community areas for which there may be a community council.

    • The Well-being of Future Generations (Wales) Act 2015 provides for the statutory establishment of partnerships within local authority areas known as public services boards, which involve representation from public sector partners including local authorities, Local health boards, police, fire and rescue authorities, Natural Resources Wales, probation services, Welsh Government and the third sector. They must undertake well-being assessments and produce a well-being plan during each municipal term.

    • There are no formal city-regional governments in Wales. Joint committees have however been established at a subnational level in Wales, bringing together local authority representatives, to manage funding and decision-making relating to City Deals and Growth Deals with the UK Government, which includes the additional involvement of the Welsh Government.

    • The Local Government and Elections (Wales) Bill, published in November 2019, proposes the establishment of Corporate Joint Committees (CJCs) that will be “bodies corporate” formed from the membership of principal councils, established in statute and able to directly employ staff, hold assets and manage funding. They will exercise the functions vested in them. They are a new form of governance body, comprised of the democratic leadership of local authorities in its area, rather than committees in the traditional sense. The bill will require local authorities to establish CJCs for four areas where there are already regional mechanisms in place – transport, strategic planning, economic development and improving education. This provides an opportunity to develop a new model of regional government in Wales.

  • Local government in Northern Ireland is more limited. Northern Ireland carried out an important local government reform that reduced the number of district councils from 26 to 11, effective as of April 2015. Councils provide some neighbourhood services such as waste collection and street cleaning. However, they are not responsible for education, libraries or social care.

Note: Further information on devolved and reserved matters across the UK parliaments can be found at https://www.parliament.uk/about/how/role/devolved/.

Source: Author’s elaboration, drawing partly on OECD/UCLG (2019[2]), 2019 Report of the World Observatory on Subnational Government Finance and Investment – Country Profiles.

Core Cities were at the forefront of the devolution debate, making the case for greater autonomy as a means to contribute to national growth. Local leadership across Core Cities adopted a bottom-up approach to develop more collaborative governance agendas, leverage discretionary funding to reshape the economy and change the nature of the conversation with national government (OECD, 2013[3]; 2015[4]). The economic performance of the Core Cities was lagging behind that of second-tier cities across Europe and it was widely accepted that, without increased powers and resources, the cities would struggle to catch up with their counterparts (ODPM, 2006[5]).

By the end of the 2000s, devolution was underway and a new governance and delivery framework was taking shape (HM Government, 2011[6]; Heseltine, 2012[7]). By 2010, this had evolved into an explicit localism agenda and new calls for greater autonomy and increased powers for local areas to drive locally relevant outcomes and growth (HM Government, 2011[6]; Heseltine, 2012[7]; Liverpool JMU, 2012[8]; RSA, 2014[9]). In 2011, the UK Government committed to the devolution of decision-making powers from central government control to individuals and communities through the Localism Act 2011. The act decentralised new responsibilities (housing, social protection, health) and resources (localisation of Council Tax, business rates retention as of 2013, grants reform) to Core Cities. During its passage through parliament, the Core Cities lobbied for the Core Cities Amendment to allow for bespoke arrangements relevant to the needs and potential of each of the Core Cities (HM Government, 2011[6]).

This was followed by the Cities and Local Government Devolution Act 2016, which allowed for greater devolution of powers to combined authorities (which have housing, transport, planning and policing powers) and introduced directly elected mayors in England. The concept of pooling strategic competencies at the scale of combined authorities is aligned with the overall trend of metropolitan governance reforms that gained traction across OECD countries since the 1990s, and particularly against the backdrop of the 2008 financial crisis, as a way to achieve economies of scale and improve policy co-ordination.

Core Cities have grappled with an asymmetric and deal-driven process

The asymmetric approach adopted in the UK has created some geographical misalignment, which may not be optimal over the longer term (Lupton et al., 2018[10]). Core Cities find themselves in a complex, often overlapping geography of deals and partnerships (Figure 3.1):

  • City Deals concern individual cities and the geography is determined by the city and the scope of the proposal. City Deals aim to build on existing economic assets to unlock the potential of drivers of long-term growth in cities. They require collaboration across participating local authorities, which helps create more robust local leadership platforms and build some degree of resilience into the local development system (OECD, 2015[4]). This approach allows Core Cities to develop investment portfolios, which can be used to stimulate growth and investment across other parts of the city-region. They align with subsequent Devolution Deals and Growth Deals and serve to inform investment priorities of the combined authorities (see below). City Deals have been replicated in other OECD countries. For example, Australia adopted the City Deal approach in 2019, and 9 deals have been agreed to date, to be operational over 10-20 years. The Netherlands introduced City Deals in 2015 but, unlike the UK model, they do not rely on central funding and they can operate over shorter periods. Dutch City Deals are vehicles for co-operation, which allow stakeholders to pool resources to work together outside of standard operating procedures.

  • Devolution Deals with combined authorities can cover different geographies, which do not consistently align with City Deals. The Cities and Local Government Devolution Act 2016 allows for the creation of mayoral combined authorities in England.1 All combined authorities that exist around Core Cities except Leeds are currently mayoral combined authorities (Bristol, Birmingham, Liverpool, Manchester, Newcastle and Sheffield). While combined authorities can have different structures, they are grounded in full collaboration between participating local authorities, pooling of powers and resources, which has meant ceding up powers from the local authorities to draw resources and powers down from central government to the combined authority. In the decades preceding devolution, Core Cities engaged in multi-agency and sector partnerships to deliver a range of local growth initiatives, which created a platform from which new governance arrangements could emerge.

  • In addition, Local Enterprise Partnerships (LEPs), which were established to enable local growth following the demise of regional development agencies (RDAs), do not consistently align with either City Deal or combined authority geographies, and more than one LEP can operate across a given area (Lupton et al., 2018[10]). LEPs are strategic partnerships between business and local authorities to help shape local economic priorities and to lead economic growth in local areas. While LEPs were initially established with no public funding, a landmark review No Stone Unturned (Heseltine, 2012[7]) in 2012 recommended that LEPs be resourced by the national government. In 2014, the government announced a series of Growth Deals with each of the 39 LEPs, through which it allocated GBP 6.3 billion. This budget allocation increased to GBP 7.3 billion in 2015 and GBP 9.1 billion in 2017. Growth Deals represent the most significant source of funding to LEPs, with GBP 12 billion over the 2015-21 period. LEPs also have a strategic direction for GBP 5.3 billion of European Union (EU) structural and investment funding until 2020. There are currently 38 LEPs, which operate over different and sometimes overlapping geographies with different funding allocations. In 2018, 20 LEPs had overlapping boundaries, which the government recognised may weaken their impact and accountability and committed to addressing the issue (National Audit Office, 2019[11]). Some LEPs rely on local authorities for staff and expertise at a time when local authorities have been cutting expenditure in economic development as a means of absorbing funding cuts. In England, local authority spending on economic development decreased from GBP 1.01 million in 2010/11 to 0.36 million in 2017/8.2 The economic development ecosystem is, therefore, weakened as expertise and resources are stretched.

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Figure 3.1. Boundaries of combined authorities, LEPs and FUAs
Figure 3.1. Boundaries of combined authorities, LEPs and FUAs

Note: This map shows the boundaries of combined authorities, Local Economic Partnerships and functional urban areas (see Box 1.1 for the OECD definition).

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Table 3.1. English Core Cities, combined authorities, City Deals, Devolution Deals and LEPs

City Deals

Devolution Deals

Core City

City Deal partners

Highlights

from City Deal

Combined authority/

City-region

Devolution Deal

Local Enterprise Partnership

Birmingham

Birmingham, Bromsgrove, Cannock Chase, East Staffordshire, Lichfield, Redditch, Solihull, Tamworth, Wyre Forest

Skills for Growth Compact Housing and mixed-use development on public land.

Build on Birmingham’s leading position in life sciences.

Green deal programme.

Greater Birmingham/ West Midlands

Local Industrial Strategy Trailblazer

Birmingham, Coventry, Dudley, Sandwell, Solihull, Walsall, Wolverhampton

Greater Birmingham and Solihull

Black Country Coventry and Warwickshire

Bristol

Bath and North East Somerset, City of Bristol, North Somerset, South Gloucestershire

Economic Development Fund.

100% retention of business rates.

10-year Transport Fund.

Bus Rapid Transit network.

People and Skills Programme.

City Growth Hub.

Bristol/ West of England

Bath and North East Somerset, City of Bristol, South Gloucestershire

West of England

North Somerset is part of the LEP but not the combined authority

Leeds

Barnsley, Bradford, Calderdale,

Craven, Harrogate, Kirklees, Leeds,

Selby, Wakefield, York

Accelerate output growth to an average 2.6% per year to 2030.

Create 60 000 new jobs by 2016.

Reduction in city-region carbon emissions.

Leeds/ West

Yorkshire

Bradford, Calderdale, Kirklees,

Leeds, Wakefield

Leeds City-Region

Liverpool

Halton, Knowsley, Liverpool,

Sefton, St. Helens, Wirral

Low carbon red tape pilot.

River Mersey cleanest river in an urban setting by 2045.

Transport investment fund.

Single investment pot of public and private funding Mayoral Development Corporation.

Skills/Apprenticeships.

Liverpool

No change

Liverpool

City-Region

(LEP and combined authority aligned

Manchester

Bolton, Bury, Manchester, Oldham,

Rochdale, Salford, Stockport,

Tameside, Trafford, Wigan

Earn back tax revenues from infrastructure investment.

Investment Framework, Housing Investment Fund.

Skills/Apprenticeship Hub.

Low Carbon Hub.

Health and Social Care.

Greater

Manchester

Local Industrial Strategy Trailblazer

No change

Greater Manchester

(LEP and combined authority aligned)

Nottingham

Nottingham

Venture Capital Fund.

Generation Y Fund.

Technology Grant Fund, “21st-century infrastructure” through transport, digital connectivity and a Green Deal.

Nottingham

Yet to be agreed

Derby, Derbyshire, Nottingham, Nottinghamshire

Newcastle

Newcastle upon Tyne, Gateshead

Accelerated Development Zone (ADZ) for Newcastle and Gateshead.

Secure private sector investment in the marine and offshore sector.

Super-connected broadband infrastructure.

Low carbon Pioneer City.

Newcastle/

North of Tyne

Newcastle,

North Tyneside and Northumberland

North East

Sheffield

Barnsley, Bassetlaw, Bolsover,

Chesterfield, Derbyshire Dales,

Doncaster, North East Derbyshire,

Rotherham, Sheffield

GBP 700 million Sheffield City-Region Investment Fund (SCRIF).

GBP 72 million three-year plan to train 2 000 employees and 4 000 apprenticeships.

10-year Transport Fund allocated to the City-Region by Government in July 2013.

Advanced Manufacturing and Nuclear Research Centres.

Sheffield

Barnsley, Doncaster, Rotherham,

Sheffield

Sheffield City-Region

The Devolved Administrations of Northern Ireland, Wales and Scotland work with the Core Cities of Belfast, Cardiff and Glasgow.

Belfast

Antrim and Newtownabbey, Ards and North Down, Belfast, Lisburn and Castlereagh, Mid and East Antrim and Newry, Mourne and Down, working in partnership with Queen’s University Belfast and Ulster University, Belfast Metropolitan College and Northern Regional College, South Eastern Regional College and the Southern Regional College.

Funding for the City Deal will come from the UK Government (GBP 350 million), the NI Executive (GBP 350 million), the 6 councils GBP 100 million) and Queens and Ulster Universities (GBP 50 million).

The deal is organised around four pillars: innovation and digital, tourism led regeneration, infrastructure and employability and skills. The deal aims to create 20 000 “new and better” jobs over its lifetime and will operate alongside a 10-year programme of inclusive growth.

Growth Framework.

2015 Review of Public Administration – Consolidation of 26 councils to 11.

Extended powers over planning, economic development and tourism.

Regional Development Strategy 2035 – spatial strategy to strengthen Belfast as regional economic driver and Londonderry as principal North West city.

Belfast Region City Deal.

Cardiff

Blaenau Gwent; Bridgend; Caerphilly; Cardiff; Merthyr Tydfil; Monmouthshire; Newport; Rhondda Cynon Taf; Torfaen; and Vale of Glamorgan

GBP 1.2 billion, the programme aims to deliver up to 25 000 new jobs and leverage an additional GBP 4 billion of private sector investment.

UK and Welsh Government are contributing GBP 500 million to the Capital City-Region Investment Fund respectively, while the 10 local authorities will contribute a minimum of GBP 120 million over the 20-year duration of the fund.

GBP 734 million of the investment will fund the proposed Metro network for South East Wales. GBP 38 million for the world’s first cluster for compound semiconductors.

Growth Framework.

2015 Well-Being of Future Generations Act

Cardiff Capital Region GBP 1.2 billion City Deal.

Swansea Bay City Deal.

Enterprise Zones.

Glasgow

East Dunbartonshire, East Renfrewshire, Glasgow, Inverclyde, North Lanarkshire, Renfrewshire, South Lanarkshire,

West Dunbartonshire

GBP 1.3 billion, UK and Scottish Governments will each give the city-region GBP 500 million in grant funding, and the local authorities will borrow a further GBP 130 million.

GBP 9 million – Working Matters scheme for individuals who are on health-related benefits will work with 4 000 people, assisting at least 600 into sustained work.

GBP 15 million Youth Gateway – integrated employment programme (aged 16-24) will work with 15 000 people over the next 3 years, helping 5 000 into sustained work.

GBP 0.6 million In Work Progression pilot.

GBP 16 million Imaging Centre of Excellence.

GBP 4 million MediCity.

GBP 4 million Centre for Business Incubation and Development.

Growth Framework.

2011 Agenda for Cities.

2014 National Planning Framework.

Scottish Cities Alliance: partnership of 7 cities and Scottish Government to attract investment, supported by a GBP 7 million Cities Investment Fund.

Contributing GBP 500 million contribution to the GBP 1.13 billion Glasgow City-Region City Deal Infrastructure Investment Fund over 20 years.

Five other City Deals.

Regional Growth Deals.

Community wealth building (Glasgow Procurement Collaboration Group).

2017 legislation to support the establishment of the Scottish National Investment Bank.

Inclusive Growth.

The United Kingdom is not the only OECD country that opted for asymmetric decentralisation (Box 3.2). Decentralisation occurs in an asymmetric way when governments at the same subnational level are given different political, administrative or fiscal powers (OECD, 2019[12]). While asymmetric arrangements happened mostly at a regional level between the 1950s and the 1970s, the present trend seems to apply asymmetric decentralisation to large cities and specific local governments. There can be political, economic or administrative motives for asymmetric decentralisation (Bird and Ebel, 2006[13]). The advantages of asymmetric decentralisation are that it allows for tailored frameworks and explicit place-based policies. By allowing for experimentation, it can lead to greater innovation and more targeted local responses (OECD, 2019[12]). For example, this has been the case in Sweden, where reforms began in the 1990s with the counties leading a new agenda of bottom-up regionalisation as a gradual and experimental process (a laboratory of regionalisation). The success of the “experiment” meant that in 2019, reforms were formalised and extended to cover all counties (OECD, 2019[14]). In France, 23 metropolises have been granted greater powers and responsibilities. In Italy, 14 metropolitan cities have been established to administer large urban areas. In the Czech Republic, a selected number of municipalities perform central government delegated functions on behalf of smaller surrounding municipalities. However, asymmetric decentralisation can create a number of challenges, including high co-ordination costs if the system is overly complex; the potential for disparities in capacity; and it can lead to unequal treatment of subnational governments and citizens. These are important factors for the United Kingdom to consider as it advances the devolution agenda and seeks to rebalance the economy to promote growth across all Core Cities.

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Box 3.2. Asymmetric decentralisation in OECD countries

Asymmetric decentralisation occurs if governments at the same subnational government level have different political, administrative or fiscal powers. It is based on the belief that a “one size fits all” approach is not necessarily the most appropriate way to organise decentralisation policies and multi-level governance systems.

Political asymmetric decentralisation refers to situations where some regions or subnational governments have been given political self-rule that deviates from the norm or average assignment. Administrative asymmetry means that the allocation of responsibilities differs for the same category of subnational governments. It often aims at taking the different capacities of subnational governments into account. Asymmetric fiscal arrangements consist of a wide variety of measures, including special spending responsibilities, revenue bases or taxation rights, differential treatment in the transfer system, and differentiated fiscal rules, including borrowing rules.

Motives for symmetric decentralisation are diverse: political, social and economic. There may be historical, cultural and/or ethnic reasons for the special treatment of some regions or subnational governments. The aim can be to safeguard the unity of a nation-state. It may also be motivated by economic reasons, to take into account the diversity of local government in terms of scale and capacities within countries and to address efficiency considerations.

Asymmetric decentralisation is often applied at three different scales: regional (state/region/province), metropolitan and local. At the regional level, asymmetry is often a basic characteristic of the federal or quasi-federal countries (Canada, Spain), but not all federal countries are asymmetric (Austria, Germany, Switzerland, the United States). In unitary states, symmetry is often one of the basic principles of the state, motivated by equity and integration of different parts of the country. However, some unitary states have strong elements of asymmetry, in particular, to recognise a different status to territories having strong history and identity (Italy, which has 15 regions with ordinary status and 5 with a special status) as well as peripheral territories such as outermost regions, islands, outlying regions (France with Corsica and the outermost regions, Portugal with Azores and Madeira, Finland with Åland Island). Asymmetric decentralisation is increasing in unitary countries, based on new motives, notably metropolitan governance (France, Italy, Japan, Korea, Turkey, etc.) or asymmetric administrative decentralisation, to give more responsibilities to cities or regions with greater capacities, including capital cities (the Czech Republic, Hungary, Norway, etc.).

Asymmetric decentralisation can, however, be risky if it is too complex and lacks transparency and clarity. It can risk blurring accountability lines and raising co-ordination costs of multi-level governance. It can increase disparities, inequalities and heterogeneity in service provision across regions and cities, contrary to the aim of reaching national goals for universal service levels and quality standards. In fine, it can question national unity.

To make the most of asymmetric decentralisation arrangements, it is thus necessary to set up effective vertical and horizontal co-ordination mechanisms and equalisation systems. Asymmetric decentralisation approaches should be based on dialogue, transparency and agreements between all main stakeholders, and be part of a broader strategy of territorial development. In addition, the way asymmetric responsibilities are allocated should be explicit, mutually understood and clear for all actors.

Source: OECD (2019[12]), Making Decentralisation Work: A Handbook for Policy-Makers, https://dx.doi.org/10.1787/g2g9faa7-en; Allain-Dupré, D., I. Chatry and A. Moisio (2019[15]), “Asymmetric Decentralisation: Policy Implications in Colombia”, https://www.oecd.org/countries/colombia/Asymmetric_decentralisation_Colombia.pdf.

Despite recent fiscal measures, Core Cities have limited fiscal powers

While the fiscal framework of local councils varies across the four nations of the UK (England, Scotland, Wales and Northern Ireland), local governments generally lack control over their finances and have a limited level of fiscal autonomy in terms of revenues, spending and borrowing.

Revenues

In terms of revenues, local governments are highly dependent on central/devolved government transfers and have limited resources coming from taxation or other sources (user charges, fees, income from assets). Recent reforms, especially in England, have reinforced local taxation autonomy but, despite these new measures, most local governments face funding gaps to finance local public services. Such gaps have been exacerbated by major cuts in grants. In the UK, the share of grants and subsidies in total subnational government revenues3 (67%) is significantly higher than in the OECD, where it amounted to 37% in the OECD35 and 49% in the OECD unitary countries (OECD26) in 2016 (Figure 3.2). In contrast, the share of tax revenues in total subnational government revenues is significantly smaller: 16% in the UK vs. 45% in the OECD35 and 39% in the OECD26 (OECD, 2019[12]).

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Figure 3.2. The structure of subnational government revenue across countries, %, 2016
Figure 3.2. The structure of subnational government revenue across countries, %, 2016

Note: Tax revenues in this figure exclude revenues from social security contributions, which are included in the OECD definition of taxes. OECD26 and OECD9 respectively refer to unitary countries and federal countries. For the UK, the subnational government sector does not include the accounts of the three devolved nations (included in central government accounts).

Source: Based on OECD (2018[16]), Subnational Governments in OECD Countries: Key Data, http://dx.doi.org/10.1787/region-data-en.

In addition, as of 2016, the shares of UK subnational government tax revenues in gross domestic product (GDP) (1.6%) and in general government tax revenues (5.8%) are well below the OECD averages (7.1% of GDP and 31.9% of public tax revenues) and below the OECD average for unitary countries (4.7% and 19.8% respectively) (Figure 3.3) (OECD, 2018[16]). It is important to note that tax revenues reported in OECD countries encompass both shared taxes and own-source taxes, which makes it more difficult to assess the actual level of tax autonomy. In many OECD countries, tax revenues partly come from national taxes such as personal income tax, corporate income tax or VAT, which are then shared between central and subnational governments according to distribution criteria. In general, subnational governments have very limited power on shared taxes, whereas they have some leeway over rates and/or bases of own-source taxes.

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Figure 3.3. Subnational government tax revenues as a share of GDP and public tax revenues in the OECD countries, 2016
Figure 3.3. Subnational government tax revenues as a share of GDP and public tax revenues in the OECD countries, 2016

Note: Tax revenues in this figure exclude revenues from social security contributions, which are included in the OECD definition of taxes. Please see Section A2 of the OECD Interpretative Guide for further information. OECD26 and OECD9 respectively refer to unitary countries and federal countries. For the UK, the subnational government sector does not include the accounts of the three devolved nations (included in central government accounts).

Source: Based on OECD (2018[16]), Subnational Governments in OECD Countries: Key Data, http://dx.doi.org/10.1787/region-data-en.

Finally, not only are tax revenues limited but they are also concentrated on a very limited number of taxes, which constitutes an additional constraint. In England, Scotland and Wales, local governments are mainly funded through two property taxes: one raised on households (Council Tax) and the other on businesses (business rates). In Northern Ireland, these taxes are called domestic and non-domestic district rates. Altogether, these property taxes accounted for 1.6% of GDP, 16.2% of total subnational revenue and 99% of local government tax revenues in the UK.

The tax autonomy of local governments over these taxes is restricted, despite recent reforms. Recently, local government taxing power has been reinforced, in particular in England through the Localisation of Local Council Tax Support (LCTS), the Business Rates Retention Schemes (BRRS) and some additional measures, in particular in favour of combined authorities (Box 3.3). However, subnational government control over these two taxes remains constrained and current fiscal measures are considered to inadequately serve the needs of UK Core Cities (Centre for Cities, 2017[17]; Metro Dynamics, 2016[18]). For example, although English local councils are free to alter the rate of Council Tax, they must hold a local referendum if they wish to raise it above a cap set by the UK Government. Tax bases and mandatory exemptions and discounts are also determined by the UK Government. Council Tax has not been re-evaluated since 1992, and even though local authorities are allowed to raise tax levels to fund social care, demands on adult social care in the Core Cities are such that it is failing to alleviate funding challenges (Local Government Association, 2019[19]). As far as business rates are concerned, councils have some control over business rates policy and revenues in their areas. For example, they may grant discretionary reliefs to some taxpayers, reducing their business rates bills by up to 100%. But in practice, this power has been little used: discretionary reliefs amounted to just 0.4% of the gross business rates yield in 2017-18, compared with 9.3% for mandatory business rates reliefs imposed by the UK government. Likewise, councils have the possibility to levy a “business rate supplement” to finance economic development but this power has only been used once (to help fund the development of Crossrail in London), in particular, because such an increase must be approved by taxpayers (Amin-Smith, Harris and Phillips, 2019[20]). As a result, business rates neither allow local authorities the flexibility to design taxation in ways to meet local needs, nor do they create a level playing field. In 2015-16, a third of all business rates were raised in only 23 local authorities. While 7 of these local authorities were Core Cities4, 11 were in London (Centre for Cities, 2017[17]). Business rates were just over GBP 23 billion, half of which was retained by local councils and the rest remitted to the national government.

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Box 3.3. Recent reforms in local government taxation in the United Kingdom

In England, Scotland and Wales, local councils are funded by Council Tax and business rates, which are both two recurrent property taxes on households and businesses. In Scotland, local authorities also receive the General Revenue Grant from the Scottish Government. Council Tax is a property tax paid by the resident, based on his or her situation, income level and the market value of the property. Business rates are levied on non-residential properties. Local governments in England and Wales receive a share of these business rates. The receipts of business rates are pooled and then redistributed by the UK government in England or the devolved nations on a per capita basis. In Scotland, although all business rates collected by local authorities are retained by them, any increase or decrease is offset by a decrease or increase in the General Revenue Grant.

Until 2013, the structure of local funding in England, Scotland, Wales and Northern Ireland was relatively similar but has become more divergent ever since then.

In England, the Local Government Finance Act 2012 introduced major changes in the English system. Local government taxing power increased in 2013 through the Localisation of the Council Tax Support Scheme (LCTS), the Business Rates Retention Scheme (BRRS) and some measures targeted at combined authorities:

  • The 2012 financial reform abolished the National Council Tax Benefit Scheme and introduced a Local Council Tax Support Scheme (LCTS). Local councils in England were then responsible for designing their own tax support schemes for the active population – though they are obliged to provide a centrally determined (and largely protected) level of support for pensioners. Thereby, in 2016, 152 local authorities with responsibilities for providing social care services could, for the first time, raise additional funding through the Council Tax precept.

  • When the BRRS was introduced in 2013-14, the proportion of the real-terms change in business rates revenues kept by the councils was up to 50%. However, since April 2017, the government has been piloting 100% retention of real-terms changes in business rates revenues in a number of areas of England and 100% business rates retention pilots in Devolution Deal areas will continue in 2020/21.

  • Mayors of combined authorities have the ability to levy a GBP 0.02p supplement to fund new infrastructure projects, subject to agreement from the business representatives of Local Enterprise Partnerships.

In Scotland, Council Tax support is delivered by local authorities but through a national scheme (Council Tax Reduction Scheme). The Scottish Government has made changes to the Council Tax Multiplier. In the 2019/20 budget, the Scottish Government made commitments to consulting on the introduction of a transient visitor levy and agreeing on the introduction of a workplace parking levy. There is also a commitment to devolving Non-Domestic Rates (business rates) and Empty Property Relief to local authorities.

In Northern Ireland, councils are legally required to set domestic and non-domestic district rates. Due to the creation of new councils in 2015, a District Rate Subsidy has been introduced for a four-year period for those ratepayers most affected by significant rises in their rates bill.

Source: (OECD/UCLG, 2019[2]; Amin-Smith, Harris and Phillips, 2019[20]). OECD/UCLG (2019[2]), 2019 Report of the World Observatory on Subnational Government Finance and Investment – Country Profiles; Amin-Smith, N., T. Harris and D. Phillips (2019[20]), Taking Control: Which Taxes Could be Devolved to English Local Government?, Institute for Fiscal Studies.

This fiscal devolution has led to a modest increase in fiscal autonomy in the UK but has not been as ambitious as fiscal reforms conducted in Belgium, the Czech Republic, Italy, Poland or Spain over the last 20 years (Figure 3.4).

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Figure 3.4. Decentralising or recentralising trends in the OECD over the 1995-2016 period
Changes in subnational government tax revenue as a % of GDP and as a % of public tax revenue between 1995 and 2016
Figure 3.4. Decentralising or recentralising trends in the OECD over the 1995-2016 period

Note: Mexico: 2003-16; Iceland 1998-2016; Japan: 2005-16. No data for Australia, Chile and Turkey due to lack of time-series. OECD30 average is unweighted and does not include Australia, Chile, Iceland, Japan, Mexico and Turkey. For the UK, the subnational government sector does not include the accounts of the three devolved nations (included in central government accounts).

Source: OECD (2019[12]), Making Decentralisation Work: A Handbook for Policy-Makers, https://dx.doi.org/10.1787/g2g9faa7-en.; OECD calculations based on OECD National Accounts. Data accessed on 9 October 2018.

Many OECD countries face challenges when it comes to aligning responsibilities and revenues, as subnational expenditure generally exceeds subnational own-source revenues (tax and non-tax revenues such as user charges, fees and revenues from assets), indicating a vertical fiscal gap that is filled by transfers and subsidies. To assess the level of vertical fiscal imbalances, it is possible to use a proxy by comparing the share of subnational tax revenues in public tax revenues and the share of subnational expenditure in total public expenditure (OECD, 2019[12]).

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Figure 3.5. The United Kingdom has a high vertical fiscal imbalance among OECD countries, 2016
Figure 3.5. The United Kingdom has a high vertical fiscal imbalance among OECD countries, 2016

Note: Australia and Chile: estimates from International Monetary Fund (IMF) Government Finance Statistics. 2015 data for Mexico, New Zealand. For the UK, the subnational government sector does not include the accounts of the three devolved nations (included in central government accounts).

Source: OECD based on OECD (2018[16]), Subnational Governments in OECD Countries: Key Data, http://dx.doi.org/10.1787/region-data-en.

At the municipal level, it is also possible to compare the vertical fiscal gap across OECD countries, measured in Figure 3.6 as transfers received by municipalities as a share of municipal total revenues. There are considerable differences between countries in terms of the vertical fiscal gap at the municipal level. In Estonia and Malta, over 80% of municipal sector spending is financed with central government transfers and in Bulgaria, the Netherlands and the United Kingdom, the share is above 65%. The situation is completely different for example in the Czech Republic, New Zealand and Sweden, where less than 20% of municipal spending is financed with central government transfers.

Besides tax revenues, the system of grants is particularly complex and comprises a large share of ring-fenced, silo-based and short-term grants (Metro Dynamics, 2016[18]), especially in England (Box 3.4). This limits the ability of local governments to manage these transfers and constrains their spending and investment decisions. In addition, local governments have suffered from significant cuts in grants, in the context of austerity measures.

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Figure 3.6. Vertical fiscal gap in OECD countries, 2017
Figure 3.6. Vertical fiscal gap in OECD countries, 2017

Note by Turkey: The information in this document with reference to “Cyprus” relates to the southern part of the Island. There is no single authority representing both Turkish and Greek Cypriot people on the Island. Turkey recognises the Turkish Republic of Northern Cyprus (TRNC). Until a lasting and equitable solution is found within the context of the United Nations, Turkey shall preserve its position concerning the “Cyprus issue”.

Note by all the European Union Member States of the OECD and the European Union: The Republic of Cyprus is recognised by all members of the United Nations with the exception of Turkey. The information in this document relates to the area under the effective control of the Government of the Republic of Cyprus.

Source: OECD (forthcoming[21]), “Uncovering the unknown: Spending indicators on municipal decision-making authority”, CFE/RDPC(2019)19, OECD, Paris.

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Box 3.4. The local government grant systems in the United Kingdom

At the local level, grants and subsidies are by far the main source of revenues for local governments. They differ a lot – and increasingly – across England, Scotland, Wales and Northern Ireland. There are more or less flexibility and autonomy to manage grants depending on the nations.

In England, the main grants (excluding the housing grant) are referred to collectively as Aggregate External Finance (AEF). AEF includes the Revenue Support Grant (distribution of RSG recently changed; it is now based on the main resources available to councils) and certain specific grants (distributed by individual government departments, such as the Dedicated Schools Grant, the Pupil Premium Grant, the Local Council Tax Support Grant and the Public Health Grant). From 2011/12, a new “un-ringfenced” general grant called the Local Services Support Grant was set up to group previous earmarked grants. From 2013/14, the Business Rates Retention Scheme replaced the Formula Grant, which was used to redistribute business rates.

In Scotland, the Scottish Government provides a block grant to councils that makes up approximately 86% of their revenue. The grant is broken down into three constituent parts: the General Revenue Grant (previously known as Revenue Support Grant), the Non-Domestic Rates Income and Specific Grants to be used for specific services such as the Pupil Equity Fund, early learning and childcare, and criminal justice support. This arrangement was updated in 2011 and gave councils greater control over their budgets. However, while in Scotland the devolved government ended ringfencing of local budgets (agreed with local authorities in 2007), the Scottish Government subsequently provided additional grants that were conditional on certain indicators (e.g. class sizes). Ringfencing is therefore gradually creeping back as national policy priorities are introduced to local government.

In Wales, the Revenue Support Grant – non-earmarked – is allocated to councils by the Welsh Government according to a population-based formula. In addition, earmarked transfers are allocated from the Welsh Government for particular objectives (e.g. sustainable transport and education).

In Northern Ireland, transfers to councils include the “De-rating” Grant (compensating for the loss of income from de-rated properties), the Rates Support Grant (for councils with greater expenditure needs than revenues), and the Transferred Functions Grant, which supports the functions that were transferred as part of local government reform to district councils.

Source: OECD/UCLG (2019[2]), 2019 Report of the World Observatory on Subnational Government Finance and Investment – Country Profiles.

Spending

Subnational government expenditure in the United Kingdom (without expenditure from the 3 devolved administrations) represents 10% of GDP and 24.2% of public expenditure, which is lower than the OECD on average (16.2% of GDP and 40.4% of public expenditure). They are, however, more in line with the average of OECD unitary countries (9.2% of GDP and 28.7% of public expenditure).

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Figure 3.7. Subnational expenditure as a share of GDP and public expenditure in OECD countries, 2016
Figure 3.7. Subnational expenditure as a share of GDP and public expenditure in OECD countries, 2016

Note: 2015 data for New Zealand, Mexico and Turkey. IMF data for Australia and Chile. For the UK, the subnational government sector does not include the accounts of the three devolved nations (included in central government accounts).

Source: Based on OECD (2018[16]), Subnational Governments in OECD Countries: Key Data, http://dx.doi.org/10.1787/region-data-en.

Local government spending in the UK is dominated by 2 spending areas, which together account for more than 60% of total local government expenditure in 2016: social protection and education. The share of social protection expenditure in local expenditure is particularly high in the UK compared to the OECD average (36% vs. 14%). Adult social care registered the highest increase among local spending items since 2015. The share of education expenditure is on par with OECD levels (24.6% vs. 4.8%). Social protection and education also account by far for the largest shares of GDP, at 3.4% of GDP and 2.4% of GDP in 2017 respectively (whereas the next largest items, economic affairs and transport, account for only 0.9% of GDP, and public order and safety for 0.8% of GDP). The share of social protection and particularly education has decreased since the crisis. Lower education spending is a consequence of the ongoing change in the status of local authority schools to centrally-funded academies. Spending related to economic affairs and transport has also decreased in relation to GDP, as well as those of housing and community amenities.

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Figure 3.8. Local government spending by category in the UK, as % of GDP, 2000-17
Figure 3.8. Local government spending by category in the UK, as % of GDP, 2000-17

Source: Author’s elaboration based on OECD National Accounts.

This share of subnational government expenditure in public expenditure by category also reflects the distribution of competencies across levels of government in the UK, although some key functions may not mobilise significant funding (such as strategic planning, community and local development, etc.). Local governments in the UK spend a larger share than OECD average on public order and safety, general public services and social protection. In contrast, they spend a lower share than OECD average on the environment, education, recreation, culture and religion, economic affairs/transports, and particularly health (only 3% of total subnational public spending).

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Figure 3.9. Subnational expenditure as a share of total public expenditure by category (%)
Figure 3.9. Subnational expenditure as a share of total public expenditure by category (%)

Note: UWA: unweighted average. The total of public spending is non-consolidated. Data for the OECD average are from 2015 and from 2016 for the UK.

Source: Author’s elaboration based on OECD National Accounts and OECD (2018[22]), OECD Regions and Cities at a Glance 2018, https://doi.org/10.1787/reg_cit_glance-2018-en.

In reality, due to asymmetric decentralisation, local government responsibilities vary from one nation to another within the UK. In England, the Localism Act 2011 provided local authorities and some parish councils with a General Power of Competence and transferred new responsibilities in areas such as housing, public health and social protection. In addition, as discussed earlier, the Cities and Local Government Devolution Act 2016 allowed for greater devolution of powers to combined authorities (housing, transport, planning and policing powers), whereas the Greater London Authority has more powers and responsibilities (OECD/UCLG, 2019[2]). The allocation of responsibilities also differs between the areas where there is only a tier of local government (unitary authorities) and those where two tiers share responsibilities (county councils and the district or borough councils). In Scotland, the Scottish Government and the Convention of Scottish Local Authorities (COSLA) jointly launched the Local Governance Review in 2017 (still underway, interim consultations were disseminated in May 2019) to consider how powers, responsibilities and resources are shared across national and local spheres of government, and with communities. In Wales, the Welsh Government is giving extensive thought to the institutions, frameworks and practices that support regional decision-making and policy delivery. In Northern Ireland, since the recent local government reform, the new councils have gained additional functional responsibilities, particularly in terms of community planning, in addition to being granted a General Power of Competence.

Assigning the right responsibilities and the right functions (regulating, operating, financing and reporting) across the different levels of government is a longstanding challenge for all OECD countries. There is no single model for allocating responsibilities between national and subnational governments, and across different subnational governments when there are two or three tiers. The increasing trend towards asymmetric decentralisation also sometimes leads to allocating different responsibilities within the same category of subnational governments in the same country. However, an overarching pattern based on the observation of OECD country experiences can be proposed (Box 3.5).

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Box 3.5. How are responsibilities distributed across subnational government levels in OECD countries?

The allocation of responsibilities depends on many factors, including the country’s institutional structure:

  • In many OECD countries, the municipal level tends to manage community services. Municipal responsibilities are not always defined precisely, as regulations often refer to the general clause of competency or the “subsidiarity principle”. This principle gives local authorities explicit freedom to act in the best interest at the local level. Laws rarely limit or specify local responsibilities but enumerate broad functions, except if a specific responsibility is devolved by law to another government level.

  • In two-tier subnational government systems, the regional level between the municipalities and the central government usually provides services of regional interest, which benefit from economies of scale, generate spill-overs, involve redistribution and are required to meet the same standards across the jurisdiction. The regional tier may also facilitate co-operation and strategic planning. In unitary countries, regions tend to have “specialised responsibilities”, while the general clause of competency or the “subsidiarity principle” applies more to the municipal level.

  • In three-tier systems, the breakdown can be complex, sometimes resulting in duplication, overlap and co-ordination challenges. Over recent decades, the intermediate level has lost many of its powers and responsibilities in favour of regions, which gained more importance. In a majority of countries, intermediate level governments are now mainly responsible for administrative and delegated tasks. They have small budgets and generally no or limited taxing powers (Table 3.2).

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Table 3.2. Breakdown of responsibilities across subnational government levels in OECD countries: A general scheme

Municipal level

Intermediate level

Regional level

  • A wide range of responsibilities:

O General clause of competency

O Eventually, additional allocations by the law

  • Community services:

O Education (nursery schools, pre-elementary and primary education)

O Urban planning and management

O Local utility networks (water, sewerage, waste, hygiene, etc.)

O Local roads and city public transport

O Social affairs (support for families and children, elderly, disabled, poverty, social benefits, etc.)

O Primary and preventive healthcare

O Recreation (sport) and culture

O Public order and safety (municipal police, fire brigades)

O Local economic development, tourism, trade fairs

O Environment (green areas)

O Social housing

O Administrative and permit services

  • Specialised and more limited responsibilities of supra-municipal interest

  • An important role of assistance towards small municipalities

  • May exercise responsibilities delegated by the regions and central government

  • Responsibilities determined by the functional level and the geographic area:

O Secondary or specialised education

O Supra-municipal social and youth welfare

O Secondary hospitals

O Waste collection and treatment

O Secondary roads and public transport

O Environment

  • Heterogeneous and more or less extensive responsibilities depending on countries (in particular, federal vs unitary)

  • Services of regional interest:

O Secondary/ higher education and professional training

O Spatial planning

O Regional economic development and innovation

O Health (secondary care and hospitals)

O Social affairs e.g. employment services, training, inclusion, support to special groups, etc.

O Regional roads and public transport

O Culture, heritage and tourism

O Environmental protection

O Social housing

O Public order and safety (e.g. regional police, civil protection)

O Local government supervision (in federal countries)

Table source: OECD (2019[12]), Making Decentralisation Work: A Handbook for Policy-Makers, https://dx.doi.org/10.1787/g2g9faa7-en.

Source: OECD (2019[12]), Making Decentralisation Work: A Handbook for Policy-Makers, https://dx.doi.org/10.1787/g2g9faa7-en; OECD (2017[23]), Making Decentralisation Work in Chile: Towards Stronger Municipalities, https://doi.org/10.1787/9789264279049-en; OECD (2018[24]), Maintaining the Momentum of Decentralisation in Ukraine, https://doi.org/10.1787/9789264301436-en.

Direct investment

Accounting for only 35% of public investment on average in 2016, local governments in the UK also play a much more limited role as public investors than the OECD average (56.9% of public investment and 1.7% of GDP in 2016), even when considering the average for unitary OECD countries (50.7% and 1.7% of GDP) (Figure 3.10 and 3.11). On average, however, they invest more than central governments across a range of key areas that are critical to growth and well-being: in 2016, 37% for local investment dedicated to economic affairs and transport, and 31% to housing and community amenities; followed by education (13%) and general public services (11%).

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Figure 3.10. Subnational governments in the UK account for a lower share of public investment than OECD average, 2016
Figure 3.10. Subnational governments in the UK account for a lower share of public investment than OECD average, 2016

Note: 2015 data for Mexico, New Zealand and Turkey. IMF data for Australia and Chile. For the UK, the subnational government sector does not include the accounts of the three devolved nations (included in central government accounts).

Source: OECD elaboration based on OECD (2018[16]), Subnational Governments in OECD Countries: Key Data, http://dx.doi.org/10.1787/region-data-en.

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Figure 3.11. Local investment as a share of GDP in the UK is two times less than in the OECD on average, 2016
Figure 3.11. Local investment as a share of GDP in the UK is two times less than in the OECD on average, 2016

Note: 2015 data for Mexico, New Zealand and Turkey. IMF data for Australia and Chile. For the UK, the subnational government sector does not include the accounts of the three devolved nations (included in central government accounts).

Source: OECD elaboration based on OECD (2018[16]), Subnational Governments in OECD Countries: Key Data, http://dx.doi.org/10.1787/region-data-en.

Efficiency savings measures combined with large cuts in grants have resulted in a decrease of the local government share both in expenditure and in investment over the 2001-18 period (Figures 3.12 and 3.13).

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Figure 3.12. UK local government expenditure as a % of public expenditure and GDP, 2001-18
Figure 3.12. UK local government expenditure as a % of public expenditure and GDP, 2001-18

Source: OECD calculations based on OECD National Accounts.

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Figure 3.13. UK local government investment as a % of public investment and GDP, 2001-18
Figure 3.13. UK local government investment as a % of public investment and GDP, 2001-18

Source: OECD calculations based on OECD National Accounts.

Borrowing and debt

Finally, access to borrowing is quite constrained in the United Kingdom, although regulations differ from one nation to another. As in many OECD countries, local governments are able to issue long-term debt to finance capital investments only (golden rule). In addition, local governments must follow the Chartered Institute of Public Finance and Accountancy (CIFPA) Prudential Code, which sets indicators to be respected regarding affordability, sustainability and prudential rules. In Northern Ireland, borrowing is subject to approval by the Ministry of the Environment and must aim at financing capital projects only. To boost infrastructure development in large cities, some new measures have been taken, in particular in the framework of Devolution Deals. The latter involve more borrowing powers against the long-term Investment Fund Grants, which are part of the deals promised over 30 years as regional financial support.

As a result of these constraints, local government debt remains well below the OECD averages:5 9.5% of GDP in the UK vs. 24.5% of GDP in OECD countries (14.5% for unitary countries only) and 7.9% of public debt in the UK vs. 20.7% of public debt in OECD countries (11.8% for unitary countries). It is composed of financial debt (51% of financial debt stock), pension liabilities (24%) and other accounts payable (25%). The use of bond financing by local governments is very limited in the UK: 95% of the financial debt stock is made up of loans and only 5% by bonds. In 2015, the Local Government Association of England set up a municipal bond agency (the Local Capital Finance Company) aimed at reducing long-term capital costs for councils and increasing competition in the marketplace and at giving councils more control over the interest rates they pay.

According to Core Cities UK, borrowing should be an essential part of fiscal devolution, as a way to enable them to pursue their strategic investment priorities and manage volatile revenue flows without having to make “emergency” cuts and reduce the quality of local public services to balance their budgets (Metro Dynamics, 2016[18]).

Core Cities are confronted with funding uncertainties, which are exacerbated in the context of Brexit

Slow growth, widening regional disparities, the impact of austerity and uncertainties surrounding Brexit make it more critical than ever to strengthen the capacity of UK local governments to finance public services and infrastructure adequately. More fiscal devolution to local governments (including to Core Cities) could include giving more taxing powers over rates and bases, diversification of local tax revenues, more autonomy in managing grants (less ring-fenced grants) and fewer constraints on borrowing for cities that have a certain level of creditworthiness. The OECD Fiscal Network analysed “decentralisation and growth” (Blöchliger, 2013[25]) and evidenced the growth dividend of fiscal decentralisation and the role of fiscal decentralisation in reducing regional disparities (Blöchliger, Bartolini and Stossberg, 2016[26]). Such research found that policies that foster more own-source revenue (taxes, user fees and other revenue) for subnational governments dampen regional GDP disparities and underpin regional convergence.

Already starting from a lower baseline than their international peers, Core Cities have also had to concentrate significant resources on the delivery of front-line services. The Local Government Association estimates that even if all local authorities used the flexibility of Council Tax to raise revenue, a funding gap of GBP 1 billion would remain (Local Government Association, 2019[19]). Adult social care for the over 65s and child social care continue to require increased spending by local authorities (National Audit Office, 2018[27]). Demographic change and increased deprivation are taking their toll on local authority spending, raising concerns on the long-term sustainability of such funding. The Centre for Cities (2019[28]) recently made the case for a separate settlement for social care to enable local authorities to pursue activities to support economic prosperity. Core Cities, combined authorities and other stakeholders similarly argue for a more holistic approach and more proactive measures from the national government to alleviate pressures on the fiscal system.

In 2016, the UK Government embarked upon a Fairer Funding Review to revise the way funding is allocated and redistributed between local authorities from 2021 onwards. Analysis led by Core Cities suggests that around 40% of the productivity gap is due to deprivation, low skill levels and disengagement from the labour market. Core Cities advocate that the Fairer Funding Review and Spending Review should focus on the following principles:

  • Stability: to stabilise the currently unsustainable financial position of the system as a whole.

  • Place-based: to create a comprehensive, place-based settlement for a city or city-region, creating maximum alignment across all relevant public services and funding streams.

  • Devolved: to give certainty across multiple years and flexibility on how funds are used to address agreed priorities, including fiscal reforms.

The Shared Prosperity Fund announced by the UK Government in 2017 will replace EU Structural Funds to “reduce inequalities between communities” (Conservative Party, 2017[29]). EU funding is currently worth GBP 2.1 billion annually and covers a range of economic development and labour market interventions (Brien, 2019[30]). The Shared Prosperity Fund is intended to underpin the aims of the Industrial Strategy at both the national and local levels. To date, the government has committed to maintaining parity with EU allocations, but at the time of writing, more precise details about the fund have not been released. Core Cities are advocating for a devolved Shared Prosperity Fund focusing on inclusive growth targets and investment to reduce deprivation, with spending brought forward as soon as possible (Core Cities, 2018[31]). Further consideration will need to be given over the administration of the fund and its alignment with the range of local growth funding administered through the City Deal partnerships, combined authorities and Local Enterprise Partnerships.

copy the linklink copied!While Core Cities play a key role in productivity, they face limitations within their current powers

Whilst it is too early to assess how effective the negotiated approach to devolution has been, there is consensus among stakeholders that existing powers need to be strengthened and that fiscal devolution has been limited, which, in the context of sustained spending cuts, risks creating missed opportunities to enhance productivity. It is estimated that Core Cities do not have sufficient powers or resources to tackle the scale of the problems facing each area (Cambridge Econometrics, 2019[32]; UK2070, 2019[33]). A number of influential collaborative commissions (such as the RSA City Growth Commission [2014],6 the LSE Growth Commission [2017], the UK2070 Commission [2019]), think tanks (Centre for Cities, the Resolution Foundation, IPPR)7 and academia argue for more meaningful devolution that aligns functional devolution with increased fiscal powers.

Both the 2015 and 2017 OECD Economic Surveys of the United Kingdom (OECD, 2017[34]; 2015[35]) set out the need for more investment in the levers to enhance productivity including transport and infrastructure, human capital, research and development and business support. The 2017 OECD Economic Survey of the United Kingdom specifically focused on productivity and a thematic chapter focusing on reducing regional disparities concluded that:

The role of subnational government is sub-par relative to the OECD average, but more devolution has recently been introduced in several city-regions. Such efforts towards more decentralisation need to continue to cover larger parts of the country and involve greater transfers of powers and responsibilities at the local level. (OECD, 2017, p. 69[34])

The 2017 survey recommended continuing with devolution to allow for greater tax and spending autonomy, arguing that broadening the local tax base could trigger a virtuous circle of cities becoming more attractive through more investments in infrastructure and skills.

Creating scale through pan-regional bodies

In an attempt to unlock agglomeration benefits, some Core Cities and national government have come together to form regional or pan-regional partnerships. These include the Northern Powerhouse, incorporating the North East, North West and Yorkshire and Humber regions (Liverpool, Leeds, Manchester, Newcastle and Sheffield); the Midlands Engine, including the East and West Midlands, Birmingham and Nottingham); and the Western Gateway (Bristol, Cardiff and a number of other linked areas).8 Each pan-regional structure focuses on addressing barriers to productivity including innovation, investment, skills and transport. A recent IPPR assessment of the Northern Powerhouse (IPPR, 2019[36]) noted that since its creation in 2014, 47.1% of the North is governed 5 metro mayors and 69.6% of the population lives with a combined authority, but resources and investment remain an issue. While such partnerships have created foundations for future growth, the actual realisation of planned investments, particularly with respect to infrastructure, will be essential to ensure long-term impact.

Contributing to the implementation of the UK Industrial Strategy

In 2017, the UK national government released the Industrial Strategy Green Paper, “Plan for Britain” and the final Industrial Strategy in 2018. The Industrial Strategy focuses on:

  • Five drivers to improve productivity: business environment (become the best place to start a business), ideas (become the world’s most innovative economy), people (create jobs and greater earning power), place (ensure prosperous communities across the UK) and infrastructure (upgrade the UK’s infrastructure network).

  • Four Grand Challenges: artificial intelligence (AI) and the data economy (AI has the potential to boost productivity by up to 30% in some industries and GBP 9 million has been invested in a Centre for Data Ethics and Innovation), future of mobility (includes GBP 40 million in funding for new charging technologies and GBP 250 million for the development and testing of autonomous vehicles), clean growth (by 2030, the UK “clean economy” has the potential to support 2 million jobs and generate up to GBP 170 billion in annual exports; government is investing over GBP 2.5 billion in low-carbon innovation up to 2021), and ageing society (harnessing the power of innovation to meet the needs of an ageing society).

At roughly one-quarter of the UK economy, Core Cities are instrumental in addressing the four Grand Challenges identified in the Industrial Strategy. The national Industrial Strategy is underpinned by Local Industrial Strategies and Regional Industrial Strategies in the Devolved Administrations that cover Belfast, Cardiff and Glasgow. Responsibility for the Local Industrial Strategies sits with the combined authorities and the LEPs. The West Midlands (Birmingham) and Greater Manchester (Manchester) were the first Core Cities regions to prepare a Local Industrial Strategy. The What Works Centre for Local Economic Growth (2018[37]) is providing strategic guidance to stakeholders to ensure that Local Industrial Strategies are evidence-based, build on Strategic Economic Plans and enable Core Cities regions to enhance productivity. Local Industrial Strategies also represent a chance to better exploit agglomeration economies. It is too early to assess the impact of either the national or local industrial strategies, but they present an opportunity to drive growth across the country by continuing devolution to cities (OECD, 2017[34]). They will play key roles in helping Core Cities regions diversify their economies, drive innovation and be better placed to respond to megatrends. Key factors of success in this regard include a focus on functional economic scales (rather than administrative local boundaries), clear identification of place-based comparative advantages, shared commitments towards goals, monitoring and evaluation mechanisms to check progress over the short and long term, and active engagement of public, private and civil society stakeholders.

Boosting skills in Core Cities

In Core Cities, skills have long been considered a major challenge to enhancing productivity and reducing inequalities (Parkinson et al., 2004[38]). Megatrends such as ageing, digitalisation and globalisation all pose additional skills challenges for Core Cities. The skills system in the UK is complex, implicates a large number of ministries, levels of governments and stakeholders, and has been in “considerable flux” in recent years, as successive governments have reformed and reorganised policies, agencies and programmes (OECD, 2017[39]). Through City Deals, Devolution Deals and Growth Deals, a range of skills policies, programmes and finance have been decentralised to Core Cities regions. For example, in England, the national government has devolved the adult education budget to the combined authorities in an effort to better align skills and training programmes to address economic priorities and productivity challenges. Such devolution can help target skill policies to local needs and helps to address the skills mismatch. LEPs are also a critical part of this new context, as increased employer engagement will be essential to improve the skills levels of those with very basic skills (OECD, 2017[34]). However, decentralisation can lead to geographical imbalances, which need some degree of national oversight in order to maintain quality and equity in the skills system (OECD/ILO, 2017[40]).

The OECD 2019 Skills Strategy (2019[41]) recommended that national government tackle complexity in the skills system by promoting greater collaboration and co-ordination across responsible ministries (such as the Department for Education, the Department for Business, Energy & Industrial Strategy [BEIS], the Department for Work and Pensions) and between levels of government. National and local agencies and funds operating within given labour markets also need to join up their actions and funds to address place-specific challenges. Greater stakeholder engagement throughout the policy cycle with the private sector (trade unions, business and employers’ associations) in the design, implementation and evaluation of skills policies is necessary. All levels of government and relevant stakeholders will need to support integrated information systems to facilitate evidence-based policymaking and to enable better skills outcomes. Perhaps most significantly for Core Cities, the OECD Regional Outlook (2019[42]) highlighted the need for a long-term strategic approach to financing skills. This is vital as the benefits from investments in skills materialise over the long term, which can create tensions with more short-term policy priorities. The determinants of future skills often go back to pre-school factors, which makes investment in early childhood education critical to the success of the future labour market. While Core Cities have grappled with the skills challenge for several decades, the adult skills system tends to remain supply-driven rather than based on how the local economy demands and uses skills.

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Box 3.6. How Core Cities are working on boosting skills: Select examples

The Belfast City Region City Deal establishes a formal agreement between six local authorities and Belfast and Queen’s University Belfast and Ulster University, Belfast Metropolitan College and Northern Regional College, South Eastern Regional College and the Southern Regional College. Employability and skills cut through all aspects of the deal, which aims to create 20 000 “new and better” jobs over its lifetime and will operate alongside a 10-year programme of inclusive growth.

Birmingham City Council (BCC) has recently secured funding from the European Social Fund for a GBP 12 million Supplier Skills Programme, to be launched in early 2020. It is a three-year programme and will run until June 2023. The programme has been developed and led by BCC and is a major skills initiative which will upskill over 7 000 employees within small- and medium-sized enterprises (SMEs). It will offer training grants between GBP 500 to a maximum of GBP 18 000 per SME to upskill new and existing employees. This will lead to full qualifications, units of qualification across basic, level 2 and at level 3+, including higher-level management and leadership skills. Partners include the National College for High-Speed Rail; Society for Motor Manufacturers and Traders; Kaplan Financial Services; and Creative Alliance to name a few.

Cardiff is emerging as an alternative fintech base to London and the sector is supported by the Welsh Financial Services Graduate Programme, a collaborative two-year full-time programme of work, training and academic study unique to Wales designed to develop an elite talent pool. The programme is backed by leading financial services employers.

In Sheffield, over the last decade, the council, employers and education providers have collaborated to enhance the skills of young people and adults to bridge the digital divide. In 2018, the city-region adopted the Digital Skills Action Plan to help support 3 500 new jobs and 1 300 additional businesses. The five-year plan sets out a road map to grow the tech sector in the city-region and enhance the digital skills of the citizens through measurable actions. The Sheffield City Region also introduced a Skills Bank, which is a business-led, innovative and flexible funding programme designed to help businesses invest in their workforce and improve their productivity by delivering tailor-made training. Sheffield City Council, the University of Sheffield and Sheffield Hallam University are also working collaboratively to deliver RISE, a project that brings together growing small- and medium-sized enterprises (SMEs) with suitably qualified graduates, enabling business growth and retaining talent within the Sheffield City Region’s economy. The impact of RISE 2013-19 has resulted in 3 years funding being secured, through the European Structural and Investment Funds Growth Programme 2014-20, to deliver an enhanced programme of tailored business support to 198 SMEs to employ 330 graduates by 2022.

Source: Author’s own elaboration, drawing on https://www.belfastcity.gov.uk/; https://www.wmca.org.uk/what-we-do/productivity-skills-commission/; https://www.cardiffcapitalregion.wales/; https://www.sheffielddigitalskills.org.uk.

Unlocking the potential of transport and infrastructure in Core Cities

While devolution has seen transport powers and funding strengthened in Core Cities regions, the function for transport remains highly centralised. Local government and local public transport bodies (which can take on some responsibilities on behalf of the local authority) can bid to the Department for Transport for funds, which are then appraised through a structured mechanism. This process is often highly uncertain and risky, as it can incur significant costs for local partners in making the bid, which they will lose if the bid is unsuccessful (estimated cost of around 1.7% of total costs). The appraisal process currently does not take into account the need for economic rebalancing, or the relative local gains to economic and productivity growth (as opposed to national gains, which as a measure favour the South East).

Greater alignment of National Infrastructure Commission investments, the National Productivity Investment Fund (budget of 1.2% of GDP by 2021/22), increased devolved powers to combined authorities and pan-regional bodies needs to be prioritised by the government (OECD, 2017[34]). The government has committed to a number of investments, which are deemed critical to the long-term economic growth of the country. Some have stalled, or are under review as in the case of High Speed 2 (HS2). The success of the national Industrial Strategy and effectiveness of the emerging local industrial strategies are dependent upon transport and infrastructure investments. The National Infrastructure Commission recommended that city leaders be required to create integrated transport plans to connect housing and jobs, that the government devolve infrastructure budgets and commit GBP 43 billion in additional investment in urban transport by 2040 (National Infrastructure Commission, 2018[43]). The national government has yet to formally respond to the recommendations of the commission. The OECD has previously recommended staying on course with an urban perspective on transport infrastructure planning as a measure to enhance productivity (OECD, 2017[34]; 2015[35]).

Going forward, the national government should continue to invest in transport and infrastructure across Core Cities as recommended in the OECD Economic Surveys: United Kingdom 2015 and 2017, specifically to:

  • Champion the recently created strategic planning and delivery agencies for transport infrastructure planning and delivery to achieve a stable and more efficient long-term investment framework.

  • Invest in improving inter- and intra-city transport links where such investments can foster agglomeration effects and unlock related productivity benefits.

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Box 3.7. How Core Cities are investing in transport and infrastructure: Select examples

In the Birmingham city-region, infrastructure investments include over GBP 5 billion for public transport. The GBP 1.3 billion investment in the West Midland Metro expansion will triple the network size and add 50 additional trams by 2026, increasing passenger numbers from 7.2 million to 30 million and interchanging with both High Speed 2 (HS2) stations. GBP 280 million is being invested in bus rapid transit, which will allow 800 000 bus trips every day, and 7 new suburban rail stations and 31 km of new track will connect people to jobs across the city-region.

In Cardiff, the 2016 City Deal GBP 1.2 billion investment Fund will invest in the region’s infrastructure, prioritising the South East Wales Metro and Valley Lines Electrification Programme and a new regional transport authority. GBP 40 million invested in the Metro Central Development will create a Central Transport Interchange in Cardiff’s city centre Core Employment Zone.

HS2 and HS3 are critical pillars of the growth strategy for the Leeds city-region and the Northern Powerhouse and the opportunity to bridge the investment gap between the city-region and the south of England, to improve access to jobs across the region and deliver the Local Industrial Strategy. Integral to the transport vision for the city-region is the regeneration of Leeds Station and GBP 500 million of investment, including a new Station Campus.

Addressing the climate imperative in Core Cities

Core Cities are critical players to tackle climate change in the UK. The Climate Change Act 2008 set a statuary target to reduce greenhouse emissions by 80% from 1990 to 2050. Following the recommendation of the UK Committee on Climate Change, the national government increased the statutory target to net-zero gas emissions by 2050. Each city is in the process of adopting progressive strategies, some declaring a climate emergency.

Action will be required across various sectors including transport, infrastructure, construction, energy, waste and consumption. A range of national levers is in place, from the Industrial Strategy and the Clean Growth Strategy to large-scale infrastructure and transport investments that create new framework conditions for Core Cities and their regions to accelerate climate adaptation. The government has the opportunity to pursue a new agenda to strengthen infrastructure and climate policy alignment and to create new opportunities for growth. In 2017, the OECD advocated a new approach to climate adaptation, which placed it at the heart of economic growth:

Current economic conditions – including low real interest rates in most countries – afford many governments the opportunity to invest in the right infrastructure now, to reignite growth while also paving the way to achieving the Paris Agreement goals. Governments need to bring together structural policy reforms, effective climate policies and the progressive alignment of regulatory frameworks to ensure effective action. A combined agenda for climate and growth offers numerous economic opportunities, including enhanced markets for low-emission infrastructure, technologies and services; increased market confidence spurred by greater climate policy clarity; and enhanced incentives for innovation and efficiency. (OECD, 2017, p. 19[44])

Climate adaptation has the potential to enhance productivity in the UK, the economic impact of a range of climate-related sectors and investments are seen as opportunities for Core Cities and Core Cities regions to tackle climate change whilst promoting local growth. For example, the low-carbon economy could grow at 11% a year to 2030, 4 times faster than the rest of the economy, and deliver up to GBP 170 billion in exports (Ricardo Energy and Environment, 2017[45]). City Deals are creating opportunities through which Core Cities can advance climate mitigation efforts. For example, Liverpool and Newcastle are growing low-carbon manufacturing sectors, Birmingham is accelerating building retrofits, Manchester is creating a low-carbon investment portfolio, district heating is tackling climate change and inclusive growth in Bristol and Nottingham and all Core Cities are looking to promote sustainable transport solutions and promoting the uptake of active and public transport (Scott, 2012[46]). Climate emergencies have been declared in Bristol, Glasgow and Nottingham. Core Cities have released a Climate Emergency Declaration, which calls for a renewed partnership between national and local governments to drive radical, innovative and urgent change (Core Cities, 2019[47]). All Core Cities have adopted individual carbon-neutral targets or are part of regional efforts. Going forward, cities will play increasingly important roles in mitigating and adapting to climate change (OECD, 2010[48]). Cities have control over a wide range of policy instruments that are critical to the fight against climate change, which means that Core Cities and their regions acting together can create an impact of significant scale in the UK.

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Box 3.8. How Core Cities are tackling climate change: Select examples

Bristol was the UK’s first European Green Capital in 2015. In 2017, low-carbon environmental goods and services supported 14 000 jobs in Bristol and 38 000 in the west of England. Bristol has a strong start-up culture (93.7 per 10 000 working-age population in 2017), including being home to the globally renowned university-led incubator, SETsquared. In the city-region, the combined authority and partners are pursuing an ambitious agenda to reduce carbon emissions. Since 2005, carbon emissions have reduced by 30% and local renewable energy generation, insulating homes and reducing coal generation has grown by 30%. It is developing the clean growth sector, GBP 10 million was awarded to the Institute for Advanced Automotive Propulsion Systems, and investments made in the National Composites Centre, which is developing lightweight materials that have the potential to increase carbon efficiency.

Leeds declared a climate change emergency in March 2019 and aims to be carbon neutral by 2030. There are a number of schemes working towards this aim, including introducing the Leeds PIPES district heating network. The network will reuse heat from Leeds’s Recycling and Energy Recovery System to supply heat to almost 2 000 council homes and numerous businesses to reduce the release of greenhouse gases and lift citizens out of fuel poverty.

Manchester worked with the Tyndall Centre for Climate Change Research to develop a science-based target committing the city to release a maximum of 15 million tonnes of CO2 from 2018-2100. To stay within this budget, the city must reduce its carbon emissions by at least 13% every year, which means roughly halving emissions every 5 years, and become zero-carbon no later than 2038. Manchester City Council is one of 60 “pioneer” organisations that are currently developing action plans to help meet the zero-carbon 2038 target. The council has achieved a 48.1% reduction in CO2 emissions between 2009/10 and 2018/19 via the implementation of energy efficiency improvements to council buildings, a full LED street lighting replacement programme and the development of a new Civic Quarter Heat Network to provide low-carbon power for major buildings in the city centre.

Nottingham has been working on tackling climate change and air quality, meeting its 2020 energy strategy target of reducing CO2 emissions by 26% (from 2005 levels) several years ahead of schedule, and targeting to become the UK’s first carbon-neutral city by 2028. Reducing emissions from transport, and tackling the issue of congestion in the city are key areas to support the city’s climate and air quality ambitions, with numerous health benefits. Nottingham has also adopted the UK’s first workplace parking levy (WPL) – a small charge made on workplace parking places provided by employers in the city. All the funds are ring-fenced for improving public transport and supporting workplace travel schemes. Benefits of this have included extending the Nottingham Express Transit tram network, redeveloping Nottingham’s Railway Station into a 21st century transport hub, and investing in the UK’s largest fleet of electric buses. Nottingham is now looking to extend the tram to the east of the city and provide links to HS2. To promote other sustainable forms of transport (walking and cycling), Nottingham City Council also secured funding from its Local Enterprise Partnership to support the aim of increasing the number of people cycling on a regular basis by 10% by 2025. It is building four main cycle corridors into the city centre, segregated from traffic where possible.

Source: Author’s elaboration, drawing on https://www.bristol.gov.uk/; https://www.westofengland-ca.gov.uk/; https://www.apse.org.uk/apse/index.cfm/local-authority-energy-collaboration/beis-local-energy-team/nottingham-city-council/; https://newcastlehelix.com; http://gmlowcarbonfund.uk/; https://www.gov.uk/government/statistics/uk-local-authority-and-regional-carbon-dioxide-emissions-national-statistics-2005-to-2017.

Pursuing more inclusive growth in Core Cities

Inclusive growth has become a major policy goal across Core Cities and their regions. Definitions and approaches vary: city plans (Bristol, Leeds and Liverpool), mainstreamed throughout all policy areas (Glasgow, Greater Manchester), a framework for reducing inequalities (Belfast, Sheffield), through Devolution and City Deals (Cardiff, Newcastle) or a dedicated unit (West Midlands Combined Authority). A range of supporting policy measures include Fair Work and living wage campaigns – on average, 22.5% of jobs in the Core Cities pay below the living wage (slightly above the national average, which is 22%).

A strong evidence base is emerging in the UK to help Core Cities realise more inclusive growth. The RSA Inclusive Growth Commission (RSA, 2017[49]) built on earlier work of the City Growth Commission (2014) to set out an evidence-based framework and recommendations relevant to central and local government and specifically to Core Cities regions and the emerging mayoral authorities. The UK2070 Commission (UK2070, 2019[50])9 is an in-depth inquiry into city and regional inequalities. A Fairer and Stronger Economy (UK2070, 2019[33]) makes the case for greater devolution of powers and funding, including the creation of four new “super-regional” economic development agencies; a national spatial plan; action to harness new technologies and strengthen local economies and the creation of a National Renewal Fund to rebalance the economy over a 25-year period. In Scotland, the 2015 Economic Strategy mainstreamed inclusive growth across government and led to the creation of the Centre for Regional Inclusive Growth. The centre is a collaboration between government, industry and academia to support the delivery of inclusive growth. In Wales, the 2015 Well-Being of Future Generations Act similarly establishes inclusive growth as a whole of government objective.

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Box 3.9. Anchor institutions, public procurement and social enterprises are playing critical roles in supporting inclusive growth: Select examples

In Glasgow, Strathclyde University leads the Glasgow Procurement Collaboration Group, which includes Glasgow City Council, NHS Greater Glasgow and Clyde, the University of Glasgow, Glasgow Caledonian University, City of Glasgow College and Glasgow Clyde College. The initiative seeks to leverage the significant employment and purchasing impact to increase local spending and benefit SMEs in the city.

In Birmingham, anchor institutions employ significant numbers of people (the Queen Elizabeth Hospital around 6 000 and the University of Birmingham 7 400) and leverage procurement spending. In 2016/17, Birmingham City Council spent GBP 762.3 million with organisations based in the city, equivalent to 68.7% of procurement spend with the top 300 organisations. The University of Birmingham spent GBP 125.6 million in 2012-17 and 58.3% of net salary spend goes to people living in the city.

Bristol is investing in the shared prosperity of its citizens through an established network of social businesses. Over 1 000 organisations operate in the social enterprise sector, employing 9 000 people and generating an annual turnover of GBP 233 million in 2016. Community businesses focus on diverse needs in the city through a range of innovations. The Bristol Pound (£B) encourages people and businesses to buy locally, keeps money circulating in Bristol to support local job creation and more recently has piloted provides zero-rate loans to business.

In Leeds, major employers have joined forces to create a super-network to boost the city’s economy. Leeds City Council, universities, hospitals and educational institutions are working together as the Leeds Anchors Network to improve job opportunities, retain talent in the region and maximise the local benefits from their spending, services and recruitment. The network members employ hundreds of thousands of people and spend hundreds of millions of GBP. The Anchors Network is an innovative way of unlocking the potential within Leeds to create jobs and prosperity that can be shared by everyone in the city, as part of the Leeds Inclusive Growth Strategy.

In Liverpool, the Procurement Strategy and Fair City Policy Statement aim to leverage community benefits to support the 2018 Inclusive Growth Strategy from GBP 550 million of annual spend on good and services. Objectives include job creation, a Real Living Wage and Decent Work contacts, apprenticeships and opportunities for young people, contracts awarded to local businesses, and collaborations with a range of third sector actors across the city.

As part of Newcastle’s City Deal, the council secured the ability to borrow against future business rate income, investing in critical infrastructure through tax increment financing across key development sites including Newcastle Helix. A 24-acre quarter in the centre of Newcastle upon Tyne, this is a unique joint venture partnership of Newcastle City Council, Legal and General (one of the UK’s largest asset managers) and Newcastle University. A GBP-350-million transformational programme of investment is creating a new district for commercial, academic and residential-led economic development and innovation in the heart of the city. It has attracted businesses in emerging growth sectors – data, ageing and urban sustainability – which are aligned with Newcastle University’s research expertise and the creation of two National Innovation Centres – Ageing and Data. Helix has excited multi-nationals including Engie, Red Hat and Siemens, whilst providing opportunities for homegrown talent, including HexisLab, NewCells and Urban Foresight. An active engagement programme is ensuring that local residents and school children are connected to current and emerging employment opportunities on the site. Upon completion, Helix is expected to create 4 000 jobs, 500 000+ square feet of office space, 450+ new homes, conferencing, hotel, leisure/retail and public spaces.

Source: Author’s elaboration, drawing on https://www.bristol.gov.uk; www.glasgow.gov.uk; www.birmingham.gov.uk; https://liverpool.gov.uk.

copy the linklink copied!Ways forward to help make devolution more effective in boosting productivity in Core Cities

A stronger partnership between Core Cities, combined authorities and the national government is essential to raise productivity. When properly designed and implemented, devolution can have a range of benefits, ranging from economic aspects (e.g. greater efficiency in the local public sector, contributing in turn to higher productivity) to improved public service delivery and greater democratic accountability (e.g. bringing government closer to citizens). The OECD has long advocated the need for effective place-based policies supported by robust multi-level governance and fiscal systems as mechanisms to boost growth and well-being. According to the recent OECD report Making Decentralisation Work: A Handbook for Policy-Makers (2019[12]), decentralisation is among the most important governance reforms of the last 50 years. The report argues that:

.. making the most of decentralisation for regional development is particularly crucial in the current context of a “geography of discontent” characterised by growing divides between places that feel left behind by globalisation and technological change and those that may benefit from the opportunities offered by megatrends. Dysfunctional decentralisation systems are part of the story behind the crisis that some democracies are facing: it is thus critical to find ways to make decentralisation systems work more effectively. (OECD, 2019, p. 11[12]).

Continue the devolution process and ensure a better match between responsibilities and financial resources

The national government should continue with the recommendations set out in the 2015 and 2017 OECD Economic Surveys and consider how more comprehensive devolution could enable Core Cities regions to boost their capacities.

Fiscal decentralisation also needs to go hand in hand with administrative decentralisation to reduce vertical fiscal gaps and ensure there is no unfunded (or underfunded) mandate. Enabling local authorities to retain a greater share of business rates is a positive step forward but more comprehensive fiscal decentralisation could strengthen the current programme of functional devolution, help reduce disparities and ensure that responsibilities are adequately resourced. A more systematic and coherent strategy should be established to help bring the revenues and tax powers of Core Cities regions and combined authorities closer to the OECD average. This could include increasing their taxing powers on the current property taxes (Council Tax, business rates, district rates) diversifying local tax revenues, providing more flexibility in managing grants and easing borrowing restrictions for more capable cities in order to safeguard the level and quality of public services while boosting infrastructure investment.

Drawing lessons from across the OECD, decentralisation of social service delivery and networked co-ordination responsibilities to local governments, especially in the case of redistribution, has proved to be effective (OECD, 2019[12]). In Finland, for example, networked co-ordination (including horizontal inter-municipal co-ordination) has been introduced with support from the national government. Greater Manchester has been at the forefront of health and social care decentralisation in the UK, albeit within the broader context of addressing adult social care funding challenges. Core Cities will need adequate resources to deliver this agenda.

Enable multi-year budgeting

Core Cities would benefit from the ability to plan over longer-term frames. Multi-year budgets would improve funding predictability and enable more strategic policymaking and investment by the Core Cities. It has long been argued for, and if reinforced with appropriate powers to determine funding priorities and the means to raise revenue, Core Cities would be in a stronger position to address structural weakness in their economies, reduce disparities and boost local growth. A one-year spending review replaced the usual multi-year approach and increased spending was announced across a number of areas including health, education, social care and policing. Proposals by the UK Government to increase spending on education and health are important for Core Cities, but in light of economic uncertainty, increased spending in strategic areas such as transport, skills and research and development should continue.

Strengthen the capacity to plan and implement integrated strategies

Devolution creates a new imperative to reduce policy fragmentation and ensure alignment between various deals and strategies. Core Cities and their leaders had built up strong economic development capacities between 1990 and 2010, which contributed to making the case for devolution. Narrowing the productivity gap and reducing disparities will require the appropriate capacity to co-ordinate strategic sectors (such as skills, transport and infrastructure, spatial planning, climate change) across the entire public policy system and budget for them over the long term. Both national and local policymakers should continue to ground their decisions in solid evidence, which can be provided by bodies such as the What Works Centre for Local Economic Growth.

Towards achieving the productivity-inclusiveness nexus in Core Cities

Addressing the productivity-inclusiveness challenge in Core Cities is an important step on the path to higher productivity in the UK. Enhancing productivity in Core Cities is ultimately about embracing a more inclusive type of growth – not only across the national territory but also within cities themselves. In 2012, the OECD launched All on Board for Inclusive Growth to fundamentally rethink growth – what drives it and who benefits from it. From this work emerged a comprehensive framework to help policymakers design and implement multidimensional policy programmes,10 and understand the trade-offs and synergies that exist between pro-inclusiveness and growth-friendly policies and the need for effective multi-level governance (OECD, 2018[51]). Cities, as is evident with Core Cities, are the places where the nexus between productivity and inequality is most evident.

A new accord between Core Cities and national government needs to be achieved to strengthen key drivers of productivity by upskilling low-skilled workers, encouraging labour force participation, strengthening public transport provision and regulation, reinforcing spatial planning at the city-region scale and better exploiting the potential of place-making policies. The devolution process needs to continue and ensure a better match between responsibilities and financial resources, enable multi-year budgeting and planning, as well as strengthen the capacity to implement integrated policies.

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Box 3.10. The OECD Productivity-Inclusiveness Nexus – A call to policymakers

To adopt a broader, more inclusive, approach to productivity growth that considers how to expand the productive assets of an economy by investing in the skills of its people and providing an environment where all firms have a fair chance to succeed, including in lagging regions.

National policies to boost productivity and foster inclusiveness need to take into account the spatial dimension

  • Labour markets and skills policies need to take into account the local dimension. Measures to improve information about labour market conditions, matching, training and/or subsidies to employers tend to be better designed at the regional or local level –– since information about local conditions can be a crucial factor in their effectiveness.

  • Economy-wide policies aimed at increasing skill levels and reducing skills mismatch are often most effective when adapted to the characteristics of local labour markets.

Spatial policies play a major role in facilitating the efficient allocation of resources in the labour market and improving access to opportunities and essential services.

  • Land use planning and transport, along with housing and commercial development policies, help shape the location decisions of individuals and firms; they play a key role in determining whether and to what extent disadvantaged groups can access training, jobs and services.

  • Providing accessibility to efficient and affordable transport systems helps determine the size of the effective labour market and thus contribute to both productivity and inclusion.

  • Housing policies should be integrated with jobs and public transport systems to reduce congestion, pollution and commuting costs that reduce productivity and well-being.

Systems that govern metropolitan regions can either support or hamper productivity and inclusion

  • Co-ordination across municipalities or regions can be used to improve the cost-effectiveness of public services, the quality of those services, and coherence of overall planning.

Source: OECD (2018[51]), “The productivity paradox”, https://dx.doi.org/10.1787/9789264292932-3-en.

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Notes

← 1. This model is currently not employed in the devolved nations. The administrative arrangements of Belfast, Cardiff and Glasgow are determined by their respective Devolved Nation. There are “Devolved Administration City and Growth Deals” jointly agreed between the UK, devolved nations and local authorities (seven in Scotland, two in Wales and one in Northern Ireland as of September 2019) while devolved nations also established their own schemes to support local growth.

← 2. According to the National Audit Office in 2018.

← 3. It is important to note that figures for the “subnational government sector” presented in this chapter are under-estimated as fiscal data regarding the devolved administrations in Scotland, Wales and Northern Ireland are not included in the subnational government sector but rather in the central government sector. Therefore, data presented relate to local authorities and their related organisations only.

← 4. The seven Core Cities are: Birmingham, Bristol, Leeds, Liverpool, Manchester, Newcastle upon Tyne and Sheffield.

← 5. Based on the SNA 2008, gross debt includes the sum of the following liabilities: currency and deposits + debt securities + loans + insurance pension and standardised guarantees + other accounts payable. Most debt instruments are valued at market prices. OECD definition differs from the one defined in the EU Maastricht protocol which is restricted to the sum of the first three items (i.e. mainly borrowing).

← 6. RSA stands for the Royal Society for the encouragement of Arts, Manufactures and Commerce.

← 7. IPPR stands for the Institute for Public Policy Research.

← 8. For further details, see http://www.metrodynamics.co.uk/blog/2019/7/9/a-powerhouse-for-the-west-britains-missing-powerhouse.

← 9. The UK2070 Commission is an independent inquiry into city and regional inequalities in the UK.

← 10. Macroeconomic policies, labour market policies, education and skills, competition and product market regulation, innovation and entrepreneurship, financial markets, infrastructure and public services, and development and urban policies are all part of this new paradigm.

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