Written evidence submitted by the Greater Manchester Combined Authority (FD06)
 

Summary

Fiscal devolution should be built around a new settlement between central and local government based on risk and reward, which incentivises local investment - thereby rewarding growth and reducing dependency. This will enable places to develop greater self sufficiency and is crucial to enable government to meet the financial challenges which lie ahead. The devolution of substantial fiscal powers should be contingent on the ability of places to demonstrate the robustness of the functional economic area concerned and effective structures for local leadership, decision-making and accountability for that area.

1.              Introduction

1.1              Greater Manchester warmly welcomes the CLG Select Committee Inquiry into fiscal devolution to cities and city regions. The inquiry is timely, following on from the recommendations of the Silk Commission and London Finance Commission, and responding to the launch of the City Centred Campaign for fiscal devolution as advocated by the Core Cities Group, Greater London Authority and London Councils.

1.2              We have argued for many years that democratically elected local leaders need to have control over the levers and resources which impact on their ability to deliver economic growth and to improve the quality of life for local residents. It is essential that financial capacity is aligned with functional economic areas so that growth and public service reform strategies can be integrated to support competitiveness and labour market productivity. The current system in this country, which is one of the most centralised in the world, limits local control over funding and means that cities are able to influence only around 5% of the taxes that are raised within them. This is far less than international competitors and constrains the ability of cities to deliver on growth and reform. The situation for major cities in England is also out of step with moves to increase fiscal devolution to the devolved administrations.

1.3              Whilst there have been a number of steps towards further devolution, in particular through City Deals and the forthcoming Growth Deals, we view these as only the beginning of an ongoing process of decentralisation from Whitehall. The City Deals process has underlined the importance of differential devolution, whereby packages of powers and resources can be devolved to local authorities based on the ability of those places to contribute to national priorities, as well as the capacity to demonstrate effective structures for local leadership, decision-making and accountability. One size does not fit all and devolution of powers and resources may be through different packages and to different timescales.

1.4              The recently published Core Cities Growth Prospectus[1] outlines the international evidence for decentralisation including fiscal devolution. The evidence shows that cities with more local control over funding and policy achieve better economic results and are better placed to outperform the national economy. This work is supported by Professor Michael Parkinson’s international research, which illustrates that decentralising powers and resources coupled with spreading investment and encouraging high performance in a range of cities produces benefits on a national scale.

2.              The case for change

2.1              Greater Manchester has established the first statutory Combined Authority (GMCA) in the country, demonstrating the strength of local leadership and governance arrangements, and building on 25 years of joint working through the Association of Greater Manchester Authorities (AGMA). A key advantage of the Combined Authority model is the joint governance arrangements which it provides for transport, economic development and regeneration, which allow for strategic prioritisation of the levers of growth across the functional economic area. The GMCA works closely with the Local Enterprise Partnership (LEP), and together the GMCA and LEP provide a unique platform for governance and accountability across the city region for future devolution of powers and funding.

2.2              Greater Manchester’s economic performance has been strong over recent decades, even during the recession – generating £48billion GVA per annum (around 4% of the national economy), and whilst the national picture remains uncertain, the number of jobs in Greater Manchester is predicted to grow by more than 7% over the next decade. However, while the economy has grown, our skills base and productivity have not kept pace and we have not been able to reduce dependency or close the gap between the tax that is generated here and the cost of public services. Our productivity gap is in part due to lower skills levels and lower levels of economic activity than the South East and if we are to fulfil our growth potential we must address that gap.

2.3              Despite the reductions in funding to public services, total public sector spend in Greater Manchester increased from £21billion to £22billion between 2008/9 and 2011/12. Reductions in spend by local authorities, the police and fire services and others have been offset by increases in spending on welfare and health and social care. The cost of providing public sector services is becoming increasingly unsustainable, with a greater proportion spent on the costs of dependency and less on opportunities to increase growth and reduce the demand for those services.

2.4              We know from our analysis and experience that with the right tools we can create jobs and growth, but that growth alone will not fundamentally change places or reduce the costs of dependency that fall to public services. We need to create levers to drive both growth and reform, which are rooted in real places with the capability and capacity to use them. This includes a local skills agenda, which will enable us to align the skills of our residents with jobs both now and in the future, thereby enabling more people to find sustainable work, productivity to rise and businesses to grow. An example of our innovative place based approach is the Greater Manchester Work Programme Leavers scheme. This will provide integrated and intensive support to help people claiming Employment Support Allowance who have not found sustained work through the Work Programme.

2.5              We are therefore seeking to create a platform for fiscal self-reliance that empowers local authorities to undertake their place shaping role to create high quality places that attract and retain more productive people and businesses. Our approach to achieving this, based around the twin themes of growth and reform, is set out in the recently revised Greater Manchester Strategy ‘Stronger Together’[2] and the Greater Manchester Growth and Reform Plan submitted to government as part of the Growth Deal Process.

3.              Incentivising and rewarding growth

3.1              Fiscal devolution should be built around a new settlement between central and local government based on risk and reward, which incentivises local investment - rewarding economic growth and reducing dependency. The aims of such devolution are to ensure that places can develop greater self-sufficiency with the tools to promote growth and reduce dependency to become potentially self-sustaining in the future. This is crucial to increasing growth and meeting the financial challenges that lie ahead for local government. The devolution of substantial fiscal powers should be contingent on the ability of places to demonstrate the robustness of the functional economic market area concerned and effective structures for local leadership, decision-making and accountability for that area.

3.2               In Greater Manchester we have sought to harness central and local funds in new ways to support our growth priorities for many years. We have developed an Investment Fund that has allowed us to coordinate funds to deliver growth priorities across the city region with an emphasis on recyclable investment. We have also worked with government to develop the innovative Earnback Model which allows us to capture a proportion of the growth generated as a result of our local investment in transport infrastructure for reinvestment. This is based on a formula linked to changes in rateable values over time at the Greater Manchester level, which provides a revenue stream over 30 years, provided that additional GVA is created relative to the agreed baseline. This therefore provides an additional incentive for Greater Manchester to prioritise local government spending to maximise economic growth.

3.3              We want to build on these approaches to drive long term growth through using new financial models that support early investment for projects where central and local government priorities converge and for which more traditional funding models do not work as well. This will require central and local government to work together to develop the optimum funding mechanisms to promote growth at the level of place.

3.4              This must be accompanied by national modelling and forecasts for public sector spending which incentivise or account for growth in places. The current system mitigates against innovation by treating local growth as a zero sum game – with growth in one locality being assumed to be at the expense of growth in another.

4.              Fiscal measures

4.1              Fiscal devolution must play a significant role in any realignment of the relationship between local authorities and central government. The current model rewards central government for behaviour and decisions made by local authorities, providing little incentive to communities.

4.2              Local authorities do raise council tax locally, but the bandings are set nationally and central Government maintains significant control over the level of any council tax increases. Whilst the principle of council tax referendums provides direct accountability, the variable nature of the referendum threshold set by central Government makes long term decision making for local authorities problematic.

4.3              Council tax is only one property tax, and there is a strong case for others to be devolved to local authorities, such as stamp duty. Alongside retained business rates, local authorities would be incentivised to encourage economic activity such as house-buying in their area if they retained some or all of the stamp duty due on a property sale, and the funds could then be used to provide local services.

4.4              There is also a need for a wider debate on local taxation, and in particular whether local authorities could be given discretion to introduce other forms of taxation, for example a hotel room levy. Given the role local authorities play in promoting their areas and encouraging both tourism and inward investment, a hotel room levy would provide a source of funding for such services derived from their success.

5.              Public service reform

5.1              As outlined above, incentivising and rewarding growth must be accompanied by more control over the other public sector resources which are spent in local areas. Greater Manchester has been on a journey of reforming public services which has involved piloting integrated working in the most deprived neighbourhoods of the city region, pioneering work on Troubled Families and the national whole place Community Budget Pilot. Our Community Budget Pilot has addressed how to transform the way we deliver services in order to reduce dependency and demand, and to increase productivity through work and skills. Our final submission to government included a number of new delivery and investment models which cross traditional public sector boundaries and have the ability to achieve improved outcomes through earlier intervention and prevention. This is part of a wider programme of Public Service Reform in Greater Manchester working on the reduction of demand and dependency – focusing on Early Years, Troubled Families, Transforming Justice, Health and Social Care and Work and Low Skills.

5.2              A priority for us is to take the results of the Community Budgets Pilot forward as the basis of a potential new settlement between national and local government that supports, incentivises and responds to public sector reform. A new way of capturing the benefits of growth must also not solely be related to business rates as a proxy of growth, but should also be related to new investment models which are designed to deliver savings by reducing dependency. This can only be delivered on an individual place basis.

6.              Place based settlements

6.1              Greater Manchester strongly supports the proposal within the 2013 Autumn Statement for government to work towards local public services having the same long term indicative budgets as departments and supporting local areas to deliver services differently if they can show it will save money. Greater certainty of future budgets would provide local partners with the impetus to invest now in public service reform that will deliver future savings. They will be able to decommission services no longer required in the knowledge that their investment will be recouped and recycled. 

6.2              This is strongly linked to the Greater Manchester Public Service Reform approach, whereby we are asking for the freedom to reinvest the return on capital projects, and on the increased tax income as businesses begin to do better as a result, we are also focused on the need to keep the savings made in places from reduced dependency for long enough for those changes to people and places to become irreversible.

7.              Joint accountability

7.1              Fiscal devolution is not just about whether powers should be devolved or remain at the centre. There are a range of policies and funding streams which need to reflect national and local priorities and where models of accountability could be explored in more detail. A solution may lie in creating a link between the channels of accountability already established by central government to manage its relationship with arms-length bodies, and the arrangements for local accountability in place in local government. 

8.              Local government finance reform

8.1              Although the focus of the inquiry relates to fiscal form it is also important to consider the wider context for local government finance. Despite some changes to the local government finance system, local authorities are still heavily reliant on central government funding to fund services. The part-localisation of business rates was an attempt to remedy this, but the outcome from the process was deeply disappointing as the incentive effect was heavily diluted, and overall funding levels remain determined by central government.

8.2              Whilst understanding and recognising the need for the Treasury to maintain control over public finances, there also needs to be recognition within the funding system of the strong financial stewardship of local government, accompanied with a more trusting relationship between central and local. Prudential borrowing is a strong example of this, as it provides a framework within which local authorities can borrow what they need for capital purposes, and which provides some reassurance to Treasury regarding the affordability of such borrowing.

8.3              The main sources of local funding are now both subject to direct government subsidy through the Council Tax Freeze Grants and the reduction in business rates following the Autumn Statement. Experience from the past shows that once local taxation loses its local rationale, there is a danger that it loses credibility, and government is faced with a future dilemma about whether to continue with its subsidy or find another solution.

8.4              Any reform of the wider local government finance system must, at its core, retain the principle of equalisation, to ensure that there is an underlying fairness within the system. A key element of this must be a reassessment of council tax, and in particular the bandings used. House prices have grown at significantly different rates across the country since the bands were originally set, and this has created an unequal system. Council tax bands must be revalued, in a similar way to business rates assessments, to ensure that the tax being charged on a property is fair wherever in the country it is.

8 January 2014