Devolution has always failed in the UK - but here's the hard evidence as to how Andy Burnham could avoid another damp squib

Our next PM has said that decentralising power will be his governing project. But if it is to work, he should forget gimmicks like No 10 North and concentrate on the kind of devolution that is proven to boost economic growth. UK decentralisation, however, has generally led to lower growth and grievance politics – as in Scotland and Wales – but other countries show it can be done differently. That means giving local leaders real power to sort out their own problems – agency as well as legitimacy. It also means accepting there will be variation even if opponents decry it as a 'postcode lottery.'

First the upside. The economic potential of decentralising power is so huge I devote a whole chapter to it in my new book Can We Be Rich Again? The Surprising Potential of Britain’s Economy. I conclude it could add 0.3% to annual economic growth or 3-4% to GDP within a decade. That would be an extra £1,000 per household across the UK. Higher tax revenues would also transform life for the Chancellor, an extra £30–36 billion to spend on public services. But devolution to Scotland and Wales has not worked in economic terms – both have grown more slowly than England. Even the city that has been given more powers than anywhere else in England – Manchester – still only has a GDP per head around half that of London. So what should Andy Burnham do differently?

In the book I answer this by comparing what happens in the UK with other countries. Specifically I compare the West Midlands in the UK and Austin, Texas in the US. Over the last decade both areas, which have a similar population, were led by business-friendly mayors who worked hard to attract investment. But overall growth in the West Midlands was just 3% compared to a staggering 53% in Austin, Texas.

Calculations by Author || Sources: ONS, US Bureau of Economic Analysis

Why such a difference? In the West Midlands, Andy Street attracted £10 billion of investment, championed new transport schemes and oversaw the fastest growing tech sector outside the South East. For sure, Austin’s Steve Adler had big advantages including lower Texan tax rates and a nascent tech sector which accounts for some of the difference. But he also had something relevant to the current UK debate and it was something Andy Street could only dream of: extensive autonomy and executive authority. Adler chaired the city council, through which he was able to control the city budget. He could offer tax incentives to new businesses. He had control over local planning decisions. He could even issue municipal bonds, subject to voter approval. Through his powers and control of the City Council, he was effectively the city’s CEO. To fund a mass transit system, he persuaded Austin residents in a referendum to approve a 4% increase in property taxes.

Andy Street, on the other hand, had virtually no executive power. His budget came not from voters but from bureaucratic negotiations with local councils and national government. The former were generally under the control of Labour rather than his own party, which made the process fraught. Unlike Mayor Adler, he had no power to set or waive business taxes and no control over planning. Borrowing was subject to Treasury caps and controls, effectively making it impossible. Neither mayor had power to set local income tax, but in two crucial ways Mayor Adler had the stronger hand: firstly, he had control of the city council, which set many local taxes; and secondly, the city received 12% of local sales tax revenues, which boosted its coffers as business boomed. Mayor Street, on the other hand, could only add a small precept to council tax bills. He got only a small share of the increase in business rates. Perhaps the simplest way to compare the two mayors is their spending power: Mayor Street could direct spending of about £800 per household in the West Midlands; Mayor Adler had roughly ten times that amount – £8,000 per household.

A tale of two cities: Mayor Street and Mayor Adler || Credits: ‘Mayor Andy Street’ by WorldSkills UK, CC BY 2.0; ‘Mayor Steve Adler’ LBJ Library photo (DIG13870dhk_002) by David Hume Kennerly, Public Domain Mark. Both images cropped by author.

Homicide rates remain about six times higher in Austin, and one in seven people don’t have health insurance so it is far from perfect. But when it comes to fixing economic challenges, Austin was able to stand on its own two feet. With a good mayor, that made a huge difference.

And it could be so in the UK too – but only if we learn from what we have done wrong. One of the mistakes we have made is to devolve political power to parliaments, assemblies and regional mayors whilst keeping them dependent on Westminster for their funding. Scotland gets two-thirds of its revenue from a central grant. In Greater Manchester it’s 75% and in Wales it’s 80%. That fosters grievance politics in which problems can be blamed on ‘London’, particularly when there are nationalist parties actively looking to exploit them. Compare that with French cities, which receive very little from Paris but are allowed to keep nearly all the business taxes raised locally. Or the Basque region in Spain which raises almost all its own revenue before making a payment to Madrid for national services. Or the US, where cities receive only small federal grants but collect property taxes and a share of sales tax.

Calculations by Author || Sources: ONS, US Bureau of Economic Analysis. Source: OECD || Note: excludes transfers from central government

One of the biggest ways to boost growth is big new developments – new shopping centres, railways or roads. In France, Spain or the US authorities are actively looking for ways to say ‘yes’ because they receive the bulk of the additional taxes generated. Everyone is trying to make economic growth happen because incentives are aligned. There is even a French ‘département’ in the Loire region where all residents have free broadband because of the additional tax revenues generated from approving a nuclear power station.

But not in the UK. One way or another, the Treasury claws back additional tax revenues generated. Local councils generally have to hand half of the business rates they collect back to the Treasury. Even when they are promised a share of the uplift in any business tax collected, it is only temporary as extra amounts get clawed back with complicated local government funding formulae designed to ‘equalise’ spending power between councils. Faced with angry local residents, the safest thing for councillors on planning committees is often to say no. Allowing mayors and councils to keep all the extra tax revenues generated by their decisions would be the simplest and most effective way to unlock regional growth. Carefully designed, a new system shouldn’t mean less money to redistribute to poorer regions if it was applied to additional tax revenues rather than current ones. It would also help the government meet its housing targets: France has 24% more homes than we have, despite similar populations, because local authorities have much stronger incentives to approve them.

That kind of approach could be combined with giving local authorities a share of local VAT or income tax from their area, instead of block grants, so that they really are standing on their own two feet. Because US states levy and receive sales tax, they have the strongest incentive to boost tourism and the local economy. In the 1980s Denver, Colorado was in a similar position to Manchester – ‘deindustrialised’ as Andy Burnham would say. But since then, thanks to inspiring civic leaders with real executive powers, it has built new airports, funded a mass-transit system and virtually closed the wealth gap with New York.

Meanwhile Manchester’s GDP per head, as mentioned, languishes at around half that of London. So if ‘Manchesterism’ is about replicating what has happened in GM across England, it will be a damp squib. Getting slightly higher growth than a country that is stuck in a low-growth trap anyway is better than nothing. But if we want to end the learned helplessness that has become prevalent in our regions, we need to give our mayors the powers they would get in France, Switzerland or the United States.

Now the downside. Proper decentralisation involves risk – which is why finance ministries generally dislike it. Not all civic leaders are effective. Some would put up taxes and drive business away. Others are incompetent or corrupt. It is never possible to guarantee no failures – but Westminster politicians are hardly a shining example of how to get things right either. And the system we have in the UK actually makes failure more likely, because straitjacketed town halls are less likely to attract capable politicians. So unless we accept from the outset that outcomes will be different – a postcode lottery if you must – we will never unlock the power of civic entrepreneurship.

And we know local leadership works in the UK, because for many years we, too, had a strong tradition of it. Joseph Chamberlain was a hugely influential figure in shaping the growth of Birmingham in the late nineteenth century. James Kay-Shuttleworth pioneered public health and schools in Manchester. William Rathbone was a big civic figure in Liverpool, as was James Kitson in Leeds. Their energy and vision did not just transform the cities where they lived but also inspired and supported hugely successful local industries. We now need their twenty-first-century equivalents to transform the growth prospects of our regions.

And the impact? Let’s return to the figures at the start. They actually come from PwC who say that if regions with below average productivity closed just half the gap with the UK median, it would add 3–4% to overall GDP. Such a transformation would happen more quickly in some places and more slowly in others – real autonomy means an element of trial and error. But overall it would increase GDP, generate tax revenues for public services and start to close the regional divide. When it works so well elsewhere, surely it is worth the effort here.

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