Local economies: an opportunity for councils or risking stagnation?

Giving councils more financial freedom could be a double-edged sword if they don't have the proper resources

Local councils are being told to step up and take responsibility for economic growth in their areas. But while councils are keen to exert greater control over their local economies, many feel they are being told to do so with "one hand tied behind their backs" – thanks to funding cuts, disparities in income and a lack of real freedom from Whitehall.

Councillor David Ellesmere, Labour leader of Ipswich borough council, explains: "At the moment they're telling us to take more things on, but without the resources to do it. Local councils are the whipping boys and the government is hoping we're going to take the blame for funding cuts and the lack of economic recovery."

Business groups as well as councils themselves are keen for more local economic control, highlighting the importance of local knowledge in matching employers to skills in each region.

"All the evidence shows that successful economic development at a local level happens when local bodies have the freedom to address local strengths and weaknesses," says Mike Spicer, senior policy adviser at the British Chambers of Commerce (BCC). "Until recently finance has come from various national funding streams, causing a bidding culture where councils tried to find projects that fit national criteria rather than focus on what was going to help the local area."

But while the BCC points to local enterprise partnerships as meeting points for dissemination of best practice, many councils lament losing the resources of the dissolved regional development agencies.

Ellesmere says: "We worked very well with the East of England Development Agency. They had the resources to allow us to regenerate and encourage economic growth. The partnerships that have been set up supposedly as a replacement are still finding their way and haven't anywhere near the level of resources. We currently have large building blocks that are unfinished because their developers went bust. The regional development agencies could have stepped in and found a solution but, as it stands, these developments might end up being demolished."

Control of the purse strings?

The local government finance bill, awaiting its third reading in the Commons, offers potential new funding in the form of the partial retention of any growth in business rates, and paving the way for tax increment financing. It is intended as an incentive to encourage local councils to prioritise growth, but many have concerns that some areas will lose out.

James Moodie, a Wigan councillor, says: "Areas might be hit because of the fact that the public sector was a major employer in the area. Also, there needs to be a regional perspective, otherwise we could end up with neighbouring councils competing against each other to attract business, rather than collaborating to improve things for everyone. There'll be a lot of repetition because we'll all be saying the same things to try to draw people to our area."

While the shake-up retains a redistributive element, there is a feeling that any initiative intended to incentivise growth is bound to create winners and losers. "If you want to incentivise councils to do things that impact growth, there has to be some inequality," says Henry Overman, professor of economic geography at the London School of Economics.

"Some boats are clearly going to rise more than others, and we're likely to see some areas really pulling ahead. But it will rebalance things so that councils have to consider the benefits of development rather than only the costs, which tend to be raised very vocally by minority lobby groups. As far as incentives go though, it's not actually a particularly huge one because business rates make up a very small portion of local government finance."

It is the idea of some boats rising higher than others that is of particular concern to councils in the north. Paul Watson, chair of the Association of North East Councils and leader of Sunderland city council, says there will be equalisation at the start, but "you can quite easily see how this will accelerate trends and how some areas will stagnate and others will zoom ahead".

"There are some areas of London where you could probably put one office block up and produce a bigger increase in rateable income than the whole of our take," he adds. "Councils don't need an incentive to do something we already do out of duty to our local area. It's also a particularly perverse incentive because business rates are a property tax, so the more buildings go up, the more rateable income you get. In rural areas, most new business comes about through the conversion of existing premises – things like people opening a café in an old barn – so a property tax is no incentive at all."

Growth through infrastructure

Infrastructure issues also leave rural areas at a disadvantage when it comes to pursuing economic growth.

Robert Barnard, Conservative councillor for Penistone East in Barnsley, says: "We don't collect a great deal of business rates because this is largely a commuter area. We would, of course, like to attract more business, but there are limitations to what we can do here. Some land designated for employment has been converted into housing, and we're hampered by painfully slow broadband speeds – as slow as one megabit per second – which makes the area very unattractive to any business that needs to use the internet, which is almost everyone nowadays.

"There are even parish councils who want more freedom and feel they could do a better job than more remote borough councils at generating local growth, but we have to be careful about how much responsibility is devolved so as not to overload authorities that aren't ready for it."

For some, the business rate proposal is a token gesture that goes nowhere near far enough if local councils are truly expected to take responsibility for their local economies. Thinktanks such as Localis have outlined alternative funding ideas, ranging from auctioning off enterprise zones to issuing municipal bonds. Graham Allen, MP for Nottingham North and chair of the Political and Constitutional Reform Select Committee, is calling for codified financial freedoms, allowing local government to raise money any way it sees fit.

He says: "It's not the centre's job to tell local government to take responsibility for regeneration. If local government was left to its own devices, it would do that anyway.

"At the moment councils are being asked to get through a global economic crisis with one hand tied behind their backs. They don't have the freedom to do what is being demanded of them. Thirty years ago local authorities used to play the markets, and there is no reason why they can't get back that expertise. Councils would step up very quickly but, at the moment, there are over 300 acts of parliament like the strings of Gulliver tying down the sleeping giant of local government."

Some councils will undoubtedly be uneasy about the idea of playing the stock market and being exposed to the whims of the ratings agencies, in light of the recent economic turmoil and risks faced by councils with investments held in Icelandic banks. But there is a growing feeling that if local government is to take on the responsibilities being shifted its way, it also needs the freedom and resources to be able to turn localism into something more than rhetoric.

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