A patchwork approach to UK devolution

THERE was a clear response from the UK’s business community on both sides of the border to the Scottish no vote: relief. The pound rose, the FTSE 100 index enjoyed a bounce, and business leaders queued up to celebrate the preservation of the union.
But within hours of that early dawn result on 19 September, it became clear the vote had anything but settled the issue. Prime minister David Cameron confirmed Scotland would get more powers, with proposals going before Parliament by Burns Night on 25 January.

But he also talked of “English votes for English laws”, triggering a clamour of voices calling for more powers to be handed down to the countries, regions and even cities of Britain. Labour leader Ed Miliband and deputy prime minister Nick Clegg quickly followed suit.

Cameron says the government will look at ways to “empower our great cities” while the mayor of London, Boris Johnson, suggests that greater devolution of tax and spending powers to the big urban areas of England is “one of the best and most elegant solutions”.

It is clear that the future of the United Kingdom is still up for grabs. “The referendum outcome is unlikely to end the crisis in the UK’s political affairs,” explains Stephen Lewis, chief economist at ADM ISI, an investment brokerage firm, and an observer of UK markets for some four decades.

Jim O’Neill, the ex-Goldman Sachs economist who chaired the commission on cities for the Royal Society of Arts that reported on 22 October, said he had not expected all political parties would “accept the case for bold efforts to help our diverse urban areas boost their growth rates, including the devolution of some decision-making powers” before the election.

But with polling day still seven months away, businesses will have to put up with more uncertainty – something finance directors and economists tend to hate. “If political uncertainty is serious enough, then it could weigh on growth,” warns Rob Wood, chief UK economist at Berenberg Bank and a former analyst at the Bank of England.

Making plans
Ambitious local authorities have started to set out their stalls. The ten councils in Greater Manchester agreed to produce a single jobs and housing plan. The first step by this cross-party grouping will be to consult the public on plans to work together to earmark land to meet expected housing demand and employment growth.

According to Lord (Peter) Smith, chairman of the Greater Manchester Combined Authority (GMCA), the referendum debate highlighted the “compelling case” for greater devolution for English cities.

He says greater freedom to make decisions and allocate funding will help the region maximise economic growth and job creation. “But to achieve that, we need the freedom to make decisions on funding and priorities based on the area’s needs, not one-size-fits-all approaches handed down from Westminster and Whitehall,” Smith explains.

Meanwhile, Birmingham City Council, Britain’s largest authority, has invited its neighbours to join what it calls a Greater Birmingham growth hub to share staff and resources on regeneration, skills, transport, planning and investment.

These two city regions have joined with eight other major British conurbations from Bristol in the south to Leeds in the north to form Core Cities, a group that together makes up a quarter of total UK economic output and an even greater chunk of its population.

Advocates of devolution say handing over powers to local regions can bring dividends in the form of more efficient public sectors, higher levels of growth and greater public engagement in policy and processes.

Research by Oxford Economics commissioned by Core Cities found that over the next ten years, these areas could create 1.6 million new jobs and £222bn extra economic output. According to the body – which includes Birmingham, Bristol, Liverpool, Leeds, Manchester, Newcastle, Nottingham and Sheffield, as well as Cardiff and Glasgow – it delivers 28% of the combined economic output of England, Wales and Scotland (26.5% of the UK economy) and the eight English cities alone could add an economy the size of Denmark to the UK if they were able to compete for more graduates, provide transport infrastructure to support more commuters and plough £104bn into capital investment projects.

Among the proposals put forward by Core Cities is the creation of a single ‘business growth hub’ in each Core City area that is coordinated between all of the cities to provide various support to local businesses in gaining funding, accessing foreign markets and receiving expert advice [see box].

Blanket policy
Whatever the final outcome, this will clearly have major implications for business. John Cridland, director-general of the CBI, the UK’s largest employers’ group, says devolution would only be a success if it gave local leaders “meaningful powers and incentives”.

And according to Paul Swinney, senior economist at the Centre for Cities think tank, the major gain from devolution for businesses would be an end to what he called a “one-size-fits-all approach that Whitehall comes up with and applies like a blanket” across the country.

“Our base line is that policy is better in the hands of local politicians who are the people who understand their region well, rather than sitting in Whitehall,” he says. “It should be a huge positive for them because it means that cities will be better able to address the key barriers to their economies that limit economic growth.”

The main areas where that benefit could be delivered, Swinney says, are skills and transport. The top-down mantra from successive governments has been that everyone needs to raise their skills to compete on a global stage. Swinney points out different regions would attract different types of business.

“If you take a low-skill business such as a call centre, they want lots of low-skill workers on the minimum wage: those businesses are very sensitive to costs and it would be those sorts of businesses that would react to offers of grants,” he explains. “But if you think about high-paying jobs or value-added business, they like to locate in city centres because of the benefits you get from proximity to other businesses.”
Those firms were focused less on wage costs and more on skills as they were more worried about their ability to hire the right staff. “That’s where cities need to think if they want to improve their economies in the future,” Swinney says.

Noel Tagoe, an executive director at the Chartered Institute of Management Accountants (CIMA), whose members include many finance directors, says businesses would be concerned that differences in regulations would lead to a “fragmentation” of the marketplace.

“It becomes almost as if you are exporting to another place. So if we do have evolution, there has to be some alignment so the market is not balkanised. Politicians need to be aware that the regulatory freedom they give to devolved authorities will have implications for the UK-wide market,” Tagoe says.

Taxing issue
But a major focus will be on tax. In the early 1980s, Slough Borough Council became famous – or infamous – for declaring itself a “nuclear-free zone”. Three decades later, could local authorities brand themselves tax-free authorities?

According to Core Cities, the key to unlocking the £222bn windfall is to give greater tax-raising powers to local authorities, which currently only raise 5% of their budget, compared with an average of 50% across the industrialised world.

Advocates of devolution tend to suggest property taxes – and particularly business rates and stamp duty. Swinney says a key issue was what share of the revenues should be set locally. “Where that split is I’m not sure but we need to start going down that route and try to find out what that balance is,” he says.

Cridland at the CBI is concerned that devolving business taxes would “trigger a race to the bottom”. “You’d get arbitrage between different areas of one small island and a basic framework of common rules is pretty important,” Cridland says. This view is echoed by Lewis at ADM ISI.

“I imagine there would be a race to the bottom in tax rates and so all these public bodies would end up impoverished,” he says. “But it would be lovely for companies as they would end up paying very little tax.”

He doubts any changes that did take place would make much difference to the economy or to businesses’ investment decisions. “It seems unlikely that things will get worse economically as a result of this – in England, at any rate,” he says.

“I don’t think the special constitutional arrangements will make much difference. I have lived with these anomalies for so many years and I don’t think it has materially affected business decisions.”

Swinney counters by saying that allowing authorities to set taxes would be a good thing as it would clarify what they were offering businesses in exchange. “It is actually a greater empowerment of what we have in place already. Governance as it is set up at the moment is not that effective,” he explains.

James Nicholson-Smith, finance director of Gardiner Bros & Co, a footwear wholesaler in Gloucester with £25m annual turnover, says that in an “ideal world, this should make it really rewarding for them to see their own economy thrive for the greater good of the population”.

But he adds that he is worried companies would get distracted by the effort of relocating to regions with lower taxes or higher grants from “just growing their business”.

However, Steve Gilroy, CEO of Vistage, a consultancy that works with executive directors such as FDs, says that tax competition had worked well in existing federal systems such as the United States and Germany. “I think it’s a natural outcome, frankly,” he says.

“In Germany, the federal system works extremely well and the regional governments there do differ in their approach from one region to another and they can compete with each other – and I don’t think that’s a bad thing at all.”

Green light, or red tape?
Any devolution of powers to raise and spend money locally will build on much that has happened in England over the past decade. Localism, city deals, community budgets and the partial localisation of business rates in England all point to greater local control over how money is spent and, ultimately, over how such money is raised in order to be spent.

But the issue for companies is whether this will be a green light for better policies in their local economic area or simply add to the mountain of red tape they already face. Gilroy at Vistage says some FDs were very concerned about “another layer of bureaucracy and more interference” if a new political structure was put in place.
Others recognised that if regional governments really could look at what the region wanted, be pro-business, deregulate locally, take a view on what the region needed, and alter business rates, that would be a “very positive thing”, he said: “The bottom line is that they would deal with it.”

Nicholson-Smith, who is also FD of five other firms including niche software designer Keysoft Solutions, says devolution would force politicians to be “truly accountable” to their electorate. “In an ideal world, this should make it really rewarding for them to see their own economy thrive for the greater good of the population,” he says.
Paul Kilduff, the former group FD at Mitie who is now a part-time portfolio FD working through The FD Centre, says devolution should ensure local governments published “where expenditure goes and the criteria and priorities for [that] spend”.

“The fact [is] that local authorities will have control of regional development funds and target quality local businesses by reputation, and not by bureaucracy – hopefully,” he says.

Tagoe, who worked in strategy and planning at BP in Africa before joining CIMA, says businesses would become “more agile”. “Business will recalibrate what they do. They are quite resilient, provided you take the uncertainty out of it,” he concludes. ?