Under new management? Devolution and regional economies

The gap in economic performance between London and the regions is large and will not be closed by devolving limited powers to  city regions and Celtic nations that will adopt conventional economic policies, argues Professor Karel Williams.
 

                                       “It is time for you to take control of your own affairs….we will hand power from the centre to cities to give you control over your local transport, housing, skills  and health care. And we’ll give the levers you need to grow your local economy and make sure local people keep the rewards.”  

This is the promise of devolution for the English cities (and for Wales and Scotland) as articulated by George Osborne in a May 2015 speech boosting city deals of the kind which Manchester pioneered. In the Chancellor’s rhetoric, devolution is the gift from the centre which will put your regional economy under new management and deliver growth and jobs.
 
The gift has been eagerly received by the political leadership of every English region and the Celtic nations because it offers them a new and grander role. Since 2010 elected members and officials have been managing retreat by administering austerity cuts and outsourcing ever more of their activity; after devolution their elected mayors will drive forward economic development. The Mayor of Liverpool added some stoical realism by arguing that city deals were no compensation for damaging cuts: “It’s like the Government taking a house off you and giving you a shed to live in, but a shed is still better than nothing.”
 
The economic challenge is daunting. It is easy to talk about ‘rebalancing the economy’, but the economic gap between London and the laggard post-industrial regions is large and could only be closed by powerful policy levers which induce a step change in relative performance. In Wales, for example, on the standard measure, GVA (or the value of output) per head is less than half that of London. Perhaps for this reason, it is notable that the enthusiasm for devolution is greatest in what are currently the most economically successful of the UK’s peripheral regions and cities.
 
Before the referendum, the SNP’s key economic policy paper opened with John Swinney’s claim that “Scotland Is a wealthy country”. In Scotland (as in Catalonia or Padania) devolution is being sold as secession for the richer regions. The implicit or explicit promise is that they would do better if they floated off and were relieved of the burden of supporting laggard regions which should be left to manage from their own resources. This scenario implies the breakdown of fiscal redistribution, which has guaranteed national standards and underpinned citizenship in Western Europe since 1945; and, as Angelo Salento argues in his blog, this is what happened in Italy where a 15 year experiment in regional devolution turned one nation into many principalities.
 
But what are the prospects that economic policy can redress the economic disadvantage of laggard UK regions like the North East of England or Wales? The answer is that this depends on the powers granted by the centre and how they are used by devolved governments. And, at this point in the argument, it all becomes rather puzzling because the centre is ceding very limited powers, while devolved governments propose to operate bog standard policies. Economic devolution for the laggard regions is more of the same (under new management). This point is obscured at present by the ‘Northern Powerhouse’ rhetoric about the power of transport investment and infrastructure improvement to create agglomerations and boost growth through connectivity.
 
The Northern Powerhouse is a way of hyping-up long overdue investment in rail electrification and probably misunderstands the causal relations between infrastructure and development. Economic development and momentum makes infrastructure work in London, but it is much more doubtful whether infrastructure will deliver development for the Welsh valleys or Liverpool where the relation between high fares and low wages traps workers in local labour markets. The journey time saved then is for the convenience of the middle classes, not the desenclavement of the low paid.
 
If improved connectivity is useful but not transformative, much the same could be said about fiscal powers. Limited fiscal powers are being devolved and (so far) they are being used conventionally. Manchester relies on council tax and central government grants and its city deal adds only an ‘earn back’ provision so the city retains more of the growth in business rates if GVA output accelerates. To be fair, the Celtic nations are being offered more with Scotland already set to gain some powers to vary income tax and gain a share of VAT receipts. But this, of course, applies only to current income and not to borrowing which effectively remains a central government prerogative.
 
Devolution is a fiscal mouse because the Treasury will not let go and devolved governments will use new powers in an entirely conventional way to build economic infrastructure and lower taxes. The Welsh government has very limited borrowing powers for approved projects and now plans to blow it all on infrastructure with 14 miles of M4 motorway improvement. The SNP’s only firm tax commitment in the referendum campaign was for a lower rate of corporation tax, which was then enacted UK-wide by Chancellor Osborne in his 2015 Budget. In terms of fiscal regime and policy objects, it is hard to see any difference between the old central and new regional management.
 
This is part of a larger problem about entirely conventional policies for regeneration which either represent no change and/or hope for a miracle. The Manchester strategy documents offer more of the same with infrastructure and training to get welfare claimants into work. The Scottish government adds industrial policy, which is hoping for a miracle in a country where whisky and refined petroleum account for 65% of the value of manufactured exports. The Welsh government puts its faith in inward investment without recognising that employers like Amazon brings them a bill for wage subvention because they pay minimum wages.
 
Doing the same thing over again will not deliver different results. For those who want to make devolution work this is a missed opportunity because the old politics and a tired policy imaginary will not deliver a new economy.
 

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Karel Williams's picture
post by Karel Williams
Manchester Business School
26th August 2015

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