Speech by the Financial Secretary to the Treasury, John Healey, at the Economic Prosperity: The Local Contribution National Conference, Bloomsbury

Thank you for inviting me to join you.

We all owe a word of thanks to Sir Michael – not just for his work on the review but also for very personally bringing us together and lining up this important conference programme for us.

With Gordon Brown as Chancellor, the Treasury has taken an increasingly active role in local and regional economic policy. Starting in 1997, we created a new national economic policy framework, ceding power from government to independent, credible institutions and setting clear objectives on stability, growth and jobs.

However, macroeconomic stability is a necessary but it’s not sufficient condition for longer-term economic success.

We knew that we need to reinforce therefore the microeconomic drivers of growth and productivity – skills, business investment, innovation and science, competition and enterprise.

And we knew too that we have to reduce the disparities in economic performance between and within the regions and nations in the UK, and we had to do so if we are to draw on the full potential of our country – levelling up the poorest six performing regions just to the national average would be worth a £60 billion boost to the UK economy.

And as we considered our microeconomic policies, alongside the macro, it became clear that many of the decisions were better taken in the regions.

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In economic terms, therefore our guiding principles became: first, that there is evidence of regional disparities in skills, employment levels, business start-ups, levels of R&D, business investment and access to venture capital; and second, that where the market failures that underlie these disparities are primarily regional or local, our policy response should be designed and delivered regionally or locally.

It is a mark of the importance we attach to encouraging local authorities to take a stronger interest and lead on jobs, growth and enterprise that changes Ruth Kelly and I are announcing today to the Local Authority Business Growth Incentive scheme, which last year awarded £126 million to 270 local authorities, will this year see around a three-fold increase in the total rewards to councils and next year the same. Extra funds to reward councils whose business base is growing and to promote stronger partnerships with the private sector. Benefits, if you like, to reflect relative economic performance, not relative economic circumstances. In all, almost £1 billion over the scheme’s three years.

Sir Michael in his interim report on the role and function of local government underlines the important role local authorities have in economic development.

As he has explained today, he links this to the wider concept of "place shaping"

I see this economic role as connected directly to the unique community leadership role of local authorities – experts on the needs of their area, accountable to the people in their area, capable of aligning the interests and visions and efforts of other agencies serving their area.

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That's why we introduced new trading and prudential borrowing powers, and powers for local authorities to improve the economic well-being of their area.

That’s why we encouraged innovation through Business Improvement Districts, through Urban Regeneration Companies, local strategic partnerships and enterprise areas.

That’s why we created the LAGBI and why we launched the Local Enterprise Growth Initiative, supported by the creation of the fourth economic block of Local Area Agreements.

But Sir Michael’s report – and contributions throughout today’s conference – question whether councils currently have enough powers and policy tools at their disposal to make a real difference to local prosperity and following Lyons in the CSR we will build on the measures already in place.

You know the decisions we debate and take in the coming period will help define the way our country is governed in the future. Both the Chancellor and I have spoken about the importance of local authority service delivery responding better to local needs and local citizens, and of the value of the concept of devolution to the town hall and from the town hall which Ruth is developing further for her forthcoming local government white paper (LGWP).

And the white paper is important. It will drive this policy direction further, and will be followed through as we receive the Lyons report later in the year and as we complete the CSR next year.

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And you know in the CSR there is the opportunity to look more widely and more long-term. Indeed, I would argue there is the imperative to do so.

The Government's big policy task in the next decade is to come to terms with the changing circumstances and new long term policy challenges. The challenges of the:

expanding global economy with rapidly emerging new economies and competitive pressures;
accelerating pace of technology change and diffusion of that technology;
intensifying scarcity of national resources and threat of climate change;
increasing insecurity and uncertainty caused by international crime and terrorism; and
rapidly changing demography of our own country.

We aim to publish our analysis of these five long-term challenges this autumn, as part of the groundwork for the CSR and in order to encourage as wide a public policy debate as possible.

Now alongside work in the Treasury on the five long - term challenges, we have been conducting – with help from DCLG and DTI – the analytical work for the review of sub-national economic development and regeneration, launched at the Budget. And In this we look to identify ahead of the CSR how better to release the economic potential of English regions, cities and localities in support of our regional growth and neighbourhood renewal PSA targets.

Now some of that emerging evidence suggests there is progress in reducing the gap. Progress in reducing the gap on Regional Gross Value Added (GVA) particularly for the poorer performing English regions; progress on employment growth in the North and Midlands; progress on employment rates in the most deprived local authorities; and on regional skills gaps, particularly at Level 2 and for those with no qualifications.

However, the early analysis also finds that while there are factors that support convergence of economic performance – such as the movement of firms, mobility of workers and transfer of technology – there are also structural factors – such as geographical location and the economics of agglomeration – that lead to places with different industrial and skill mixes, and therefore different levels of income and output per person. So in other words, persistent differences in economic performance between places cannot entirely be ascribed to market, coordination or government failures.

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Furthermore, our emerging analysis is showing that globalisation and technological change will increase specialization, increase returns to innovation and higher-level skills and increase the effects of agglomeration.

At a national level this is likely to reinforce the advantages of London and the South East; within regions it has potential to favour cities, which have moved early and more successfully to a knowledge-based economy; and within local places, it has the potential to widen differences between prosperous and disadvantaged neighbourhoods.

This means our key cross-government PSA targets to increase growth in all regions, reduce regional disparities and deliver neighbourhood renewal are all the more challenging, and all the more important.

It means too that further devolved decision making and freedoms are required for regions and local areas, first; to respond to rapidly changing economic circumstances, second; to deal with persistent pockets of deprivation or sluggish economic performance and third to develop to their fullest possible potential

Sir Michael’s inquiry has highlighted deficiencies in governance, accountabilities and incentives.

I have to say that Eddington, Leitch and Barker are all due to report later this year, and are all identifying the same barriers to delivery in their respective reviews of transport, skills and planning. So clearly these reports, as well as Lyons, will have important implications for levels of decision-making and for spatial organization.

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And the review of sub-national economic development and the CSR itself can help ensure a more consistent and systematic approach to tackling these barriers, with a more effective devolution of responsibilities and a direct link to future national investment plans. If we get this right, there is the potential to see far-reaching devolution and substantial benefits beyond what could be achieved through specific and separate policy reforms.

A further theme that cuts across the emerging findings in these policy areas is the importance of the private sector.

I was thinking last night that it must be six years since Ed Balls and I published the first of our five pamphlets on regional and local economic policy, and I’ve probably spoken at more than tow or three dozen conferences since then. Too many of these conferences are too heavily dominated by public sector participants, so I’m delighted to see the strong private sector panel that follows, and Sir Digby Jones speaking earlier.

We know it is enterprise that drives productivity and employment. In England alone, our top three performing regions have more than twice the number of businesses per resident than our poorest performing region.

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That’s why it’s vital we increase the investment and influence of the private sector in economic development.

There are some very good examples of collaborations between local authorities and the private sector around the country:

Business Improvement Districts – such as Kingston-upon-Thames, where the council brokered a business vote for a 1 per cent local levy on their business rate, generating approximately £4m to improve the town centre
Business involvement in LSPs – such as in Bradford, where Bradford Vision which operates as a private not-for-profit company and has a significant private sector membership
Urban Regeneration Companies – such as Sheffield, where the major development of the city’s retail quarter and the new £21m Macdonalds St Paul's Hotel could not be happening without close collaboration between Sheffield City Council and the private sector, through the URC.

I’m presenting awards at Lloyds building tonight to Britain’s most enterprising cities and towns, and there are a further 12 outstanding examples of public-private collaboration on the shortlist for the national award, including my home town of Rotherham as Yorkshire’s regional winner. In many cases the submissions and presentations have been led, not by the local authority but by business leaders playing an active part.

We have to be careful not to turn business people into public sector bureaucrats, speaking the jargon and losing the special drive and initiative that the best of the private sector can bring.

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But on the other hand we do need policy and delivery on skills, on business support, on urban development, on transport and on employment services driven more by the demands of employers and the needs of the local economy. And so will look to strengthen further the link between local authorities and local business, as we draw conclusions for the CSR.

In conclusion in developing a stronger economic role for our local authorities, it is really important to recognise, as this conference has, that economic spheres are very rarely consistent with council boundaries.

Labour markets, commuting patterns, transport networks, housing markets, or retail catchments simply do not respect the administrative boundaries of local government and local authority strategies must reflect these economic realities.

The regional and sub-regional economic context is therefore important, as are the relations with RDAs in particular.

Governance, accountability, incentives and putting the right responsibilities at the right spatial level lie at the heart of this agenda.

Ruth said this morning: “We must resist the false choice of city or region”.

And she is right we should not be diverted by zero-sum arguments between regions and cities or city regions and local councils.

Whitehall centralism is the biggest obstacle to progress.

And the real challenge is to devolve more power, policy decisions and resources from Whitehall to the regions, and to the local level.

We intend to make sure that this decentralizing drive will be at the heart of the local government white paper this Autumn and at the heart of CSR next summer.

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