In this third blogpost on the future of cities, we look at city economics. Although tied up with political decisions, notably on devolution, it is worth considering the current dynamics of city financing.
Cities contribute massively to the economy. London alone accounts for 25% of UK GDP (2018) and the next 10 largest cities together contribute 16%. But city finances have been under pressure. Spending power has fallen by 18% since 2010, largely because of reductions in central government grants. While grants from central government were cut, rates of council tax were increased generating a 21% increase in real terms in tax raised between 2009/10 and 2018/19. Metropolitan districts and London local authorities have borne the biggest reductions in spending power since 2010. This is because central government grants were cut and these grants made up a larger share of income for local authorities in areas of higher deprivation (many of which are metropolitan districts or London authorities).
The scope to increase council tax is limited by the requirement to call a referendum if it exceeds a centrally set amount. Since 2013/14 local authorities have kept 50% of the business rates revenues raised locally, while the grant they receive from central government has been reduced to compensate. The government has said it intends local authorities to keep 75% of business rates from 2021/22 with the aim of increasing the incentive for them to promote local growth.
Councils are responsible for social services for adults and children, arts, leisure and sports services, local roads and waste collection. Social care accounts for 57% of council spend. Councils have faced particular difficulties because of rising demand for social care, even though they have – since 2016/17 – been allowed to increase council tax rates more quickly. Because this is a statutory responsibility, cost savings elsewhere (libraries, potholes etc) can represent a large proportionate cut. Croydon council is in effect bankrupt – it issued a formal declaration that it cannot meet the legal requirement to balance its books and will halt all but essential spending. (A report by the council’s own auditors, Grant Thornton, savaged the council for “collective corporate blindness”, so there are also other factors at play there).
In their Budget submissions, co-ordinated for the first time, the 32 London boroughs and the 11-strong Core Cities group — that includes Manchester, Birmingham and Glasgow — have asked for fiscal devolution. They want the right to introduce a tourism tax, borrow against future revenue and reforms to business rates and council tax. With government grants cut by 60 per cent since 2010, local authorities say they need fresh sources of finance to provide essential services. The Local Government Association predicts an £8bn budget shortfall nationally by 2025.
The pandemic and ensuing recession have both ramped up the demand for local government services and massively reduced councils’ incomes. In the short to medium term, around a third of the jobs in cities and large towns are in industries that are expected to be severely affected – every city has at least one in five jobs classified as either vulnerable or very vulnerable. Crawley, Luton and Derby have high shares of employees in the aviation industries and employ more people in the automotive sector than in other parts of the country; Aberdeen’s industry is largely dominated by the oil and gas sector, which is also expected to suffer particularly from the effects of the pandemic.
The scope for cities to bounce back depends on the proportion of vulnerable jobs in “exporting” industries (that is those that serve regional, national or international markets, in contrast to local services businesses). All of the cities above have more than half of their exporting jobs at risk. Conversely, Cambridge, Reading, Worthing and Edinburgh look relatively resilient.
The future economics of cities and how they invest in infrastructure and “smart” technologies will depend heavily on how the Government manages the exit from the pandemic recession, and the extent of devolution and “levelling up”. These issues will be covered in the final blogpost in this series covering the political dynamics of change.
Written by Huw Williams, SAMI Principal
The views expressed are those of the author(s) and not necessarily of SAMI Consulting.
SAMI Consulting was founded in 1989 by Shell and St Andrews University. They have undertaken scenario planning projects for a wide range of UK and international organisations. Their core skill is providing the link between futures research and strategy.
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