After the referendum “no” vote, what next? Part Three - Decentralisation within England – the four biggest difficulties - Prof Perri 6 - Chair in Public Management, Queen Mary

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Now that the Scottish voters have rejected independence by a modest majority, debates begin in earnest and with urgency about what can happen next. This third post in the series considers the implications of the discussion about decentralisation within England, following the prime minister's remarks in his speech in response to the referendum result.

Mr Cameron said on the morning of 19^th September “It is also important we have wider civic engagement about to improve governance in our United Kingdom, including how to empower our great cities. And we will say more about this in the coming days.”

Debate about this has been intense over several years. A series of commissions has published reports, including the City Growth Commission chaired by investor Jim O'Neill (its final report is due next month). But we cannot yet know which approach the government will propose. So here I confine myself to specific issues which have got lost in the mist of general encomium for the principle of greater decentralisation, but which will present major challenges of public management.

The corollary: more local self-reliance

If new and additional powers to spend public money are given to sub-national bodies at their discretion without having to secure the approval of the Treasury, then they will almost certainly be accompanied by tax arrangements which mean raising more funds at sub-national level and each city or region or locality having to rely more on what it can raise locally and less on central grants. This will likely be true for two reasons. The first is political. Ministers who agree to give away powers will want to be sure that they are also handing over the political exposure for blame when things go wrong and, conversely, that they are acquiring the right to lead the blaming. The second is financial, and will be important to the Treasury. If the Treasury is to be persuaded or required by ministers to hand over control of parts of public expenditure, it will insist that with those powers go disciplines. And the key discipline will be some kind of budgeting rule that restricts exposure to losses on the central exchequer. The “prudential” limit on borrowing by sub-national authorities will come under strain, as the Treasury seeks to find ways to reduce total public sector debt in a decentralised England.

If the unit to which powers are devolved is the local council in its current form or at least the ones for the big cities, then the first and biggest consequence of new powers will be higher council tax bills and business rates so that these sources of revenue make up a bigger share of their spending as they exercise their new powers. Explaining this to voters and to businesses will be hard enough.

If this is not matched by corresponding reductions in other national taxes, it will be even harder.

The second consequence will be the dwindling of the equalisation of resources among councils which has long been in place, to limit the extent to which poor areas unable to raise much more revenue locally would be left without compensation from central grants. There are perfectly respectable long term arguments for this, which claim that even if the effect is greater inequality, making fiscal self-reliance the corollary of new powers for localities will unleash innovation and creativity, will give councils incentives to try to transform their areas to attract people and businesses able to create jobs which will enable them eventually to raise more revenue, and that the responsibility of a greater degree of fiscal self-reliance will cultivate greater capacity and skill and political responsibility among elected councillors and among local government managers.

But there is no avoiding the consequence of greater inequality. Poor and economically declining areas such as the impoverished seaside towns and inland post-industrial areas which have weak transport links will be pessimistic that they can sustain their services as equalisation is reduced and may be gloomy that any kind of local bootstrapping economic development programme will transform their prospects in time before fiscal self-reliance leads to even further capital flight than they have already experienced.

The political debate of the next decade will be about whether the observable, measurable improvements in innovations, incentives and local economic development achieved in absolute terms are worth the greater relative inequality. One can argue that if we want a more mature democratic debate about local and other tiers of sub-national government, that is precisely the right question about which we should be disagreeing more explicitly. And certainly increasing the proportion of public expenditure for which local councils are responsible for spending and collecting revenues to support from the current position, which is the lowest in western Europe and one of the lowest in the OECD will have that effect. But if England is to embark on this, following Mr Cameron's speech, then we ought to go into it with the firm expectation that the debate could become politically polarised.

Handing over national taxes or just allowing changes to the rates of local taxes?

On the day that Scots were voting to remain in the union, Labour MP Margaret Hodge published an article in the London Evening Standard arguing that London should not only keep more of the tax revenues raised in the city, so that in effect they would not be redistributed to poorer areas of England, but that as well as greater freedoms to vary rates of council tax and business rates the revenues from a series of national taxes should be transferred to London. Part of her argument was that the money would enable London to reduce inequality within the city. But the obverse of that coin is that the reduced funds available for redistribution away from wealthy London to the rest of the country could mean greater inequality in spending on public services when measured nationally.

Mrs Hodge's argument is the opening salvo in a long battle about just which kinds of tax powers might be transferred from the Treasury. Her was that as well as powers to increase council tax and business rates, the national taxes of stamp duty and capital gains tax on property should be transferred. The City Growth Commission's report on city finance talks of new property taxes for cities. For a long time there have been proposals made that cities could take on benefits budgets and use them in different ways, by redesigning schemes, and that these might be supported by national taxes but ones where the locally raised element would not be pooled but hypothecated and handed over by the Revenue and Customs to city authorities.

Clearly, the more that yields from national taxes or new taxes are ring fenced for localities, the steeper the inequality effect between areas, at least in the short run before any resulting dynamism does its hoped-for work.

The immediate effect of Mr Cameron's announcement that he will bring forward plans will be to pit central departments and sub-national bodies against each other in deep rivalry in the process of policymaking.

What will the unit be?

There will now be a fierce debate about just what it should be, that is given decentralised powers and fiscal responsibilities. Local government will press its case that all councils should benefit. The mood of the prevailing argument in recent months has tended to privilege major cities only. Increasingly, though, international debates about economic development have concentrated on the city region. This is variously defined. Some commentators use it to mean the city and its immediate environs – for example, the administrative area of greater London. For others, it means the travel-to-work area. But for London, much of the workforce for which arrives daily by train from as far afield as Sheffield and Manchester, that is a huge area. There are advocates of a single grand city region stretching from Liverpool in the west to Leeds in the east, for which they hope to develop a common transport infrastructure and common economic development programme. At the moment, City Deals and Local Enterprise Partnerships (LEPs) often span several authorities. The Labour government tried to offer decentralisation to whole regions, but failed to secure acceptance even in the north east, where a referendum rejected a plan for a regional assembly with tax raising powers to match the powers of that government's regional development programme and its agencies.

But geographical boundaries are not the only dimension of the “what unit?” question. Because LEPs don't yet raise many taxes in their own names (some are involved in collecting business rates on their council members behalf and with the consent of their business members), it has not been very important that citizens may not recognise them or regard them as having political credibility. When a major programme of decentralisation within England begins, there will have to be some way of securing public recognition and acceptance of and perhaps even identification with whatever units are given powers and responsibilities.

Although there are no good technical reasons for thinking that we need a single tier of agencies to give devolved powers and taxing authority, and indeed very good economic and service design reasons why personal social services, waste collection, transport and economic development should be pursued by very differently sized units, the politics of being taxed tend not to work like that. Citizens who want representation if they are to accept greater taxation at sub-national level will want representation at the smallest number of tiers. They will do so, as much for reasons of what they can identify with as members of named communities as for reasons of reducing the numbers of tiers of politicians to the minimum necessary.

The debate on which England is about to embark, following Mr Cameron's announcement, will pit the tiers of sub-national governance against each other in ferocious competition for powers and for credibility.

Can decentralisation be achieved while cutting spending?

The coalition government's projections for public spending during the 2015-2020 parliament are eye-watering. If NHS care, secondary schooling and pensions continue to be protected even to the level they have been, then the reductions assumed by the numbers published will be very painful indeed. Even Labour accepts that austerity of some kind must continue for the duration of the next parliament if fiscal credibility is to be achieved.

This puts a huge strain on any plan which Mr Cameron announces for decentralisation. If the Treasury insists that the whole programme must be kept within the bounds of the falling totals for public expenditure, then the subnational governing bodies will be given a larger share of a shrinking pie. Securing their commitment to that will be difficult but not so difficult as explaining to citizens and businesses why their council tax and business rates will rise, even if other taxes fall, at a time when services will still have to be cut. Limiting the increase in inequality resulting from greater fiscal self-reliance when spending is also falling for at least five years in nominal as well as real terms will be very difficult.

In sum, Mr Cameron has started a process which will become imbrangled quickly in technicalities, which will be hard to explain and justify to the public when visible local tax rates rise, which will raise serious difficulties about the extent of relative inequality across England even if there is continued improvement in the absolute level of GDP and in the national average quality of some public services, and which will hugely strain the relationship between overall fiscal discipline and sub-national autonomy. If it comes to be accepted that the settlement with Scotland cannot be achieved without some kind of decentralisation in England, then these four difficulties will dominate the politics of the public services in England for years to come.