The economics of Citizen Smith

Strengthening local powers may be the key to rebuilding public trust in government and ushering in a new era of stability and prosperity.

In the late 1970s, the UK’s most famous freedom fighter was not Nelson Mandela or Che Guevara. It was Wolfie Smith, activist for the Tooting Popular Front – or ‘Citizen Smith’ as he was known in the eponymous TV series. Citizen Smith’s rallying cry was “Power to the People”, with one arm raised in revolutionary salute. Half a century on, the same rallying cry (if not salute) can be heard from the UK’s two main political parties. 

After decades of stasis, the past 20 years have seen significant, if incremental, progress towards increasing subnational powers in the UK. That momentum has gathered pace recently. For example, last year the government committed to give every English region a devolution deal, with London-like powers, by 2030. And former prime minister Gordon Brown’s report on devolution, also published last year, proposed sweeping new local powers and has since been endorsed by the Labour party.

For the first time in living memory, the two main political parties are playing leapfrog in their devolution ambitions – in prospect a potentially seismic shift in UK governance, and the largest for perhaps a century. This is overdue. It is also necessary if economic growth, locally and nationally, and trust in politics and policy, locally and nationally, is to be restored. 

A little history

Prior to the Industrial Revolution, governance of the UK was highly decentralised. Power sat locally, often in parish councils. Government was small and local. So, too, were urban centres and business and commerce, with the latter largely following an artisanal model. The role and scale of central government in people’s everyday lives was modest, with very few public goods, from transport infrastructure to health and social security, available at the national level. 

During the Industrial Revolution, that all changed. Money and people gravitated to new industrial hubs typically located in cities. Resources across the UK centralised and the country urbanised. Where money and people led, power followed and began centralising. Some of this newfound power was held in local government. A sequence of local government acts during the 19th century established a two-tier system at the county and district level, with strengthened powers to spend and tax. This occurred alongside a much larger and more expansive role for central government, whose share of national income doubled between the 18th and 19th centuries, creating a three-tier cake of governance. 

The 20th century saw various attempts to simplify and harmonise the UK’s complex, three-tier administrative geography. For example, the 1966 Royal Commission on Local Government (the Redcliffe-Maud Commission) proposed creating eight regional councils and a move away from two-tier local government. It never took full effect. Likewise, the Local Government Commission for England, established in 1992 by then-Environment Secretary Michael Heseltine, proposed so-called ‘unitarisation’. This, too, was only partially successful. 

The incoming Labour government at the end of the 20th century made strides in a similar direction, establishing nine Regional Development Agencies (RDAs) and a Greater London Authority headed by an elected mayor. New, devolved administrations were proposed in Scotland, Wales and Northern Ireland, with accompanying (if limited) powers. These moves were against a backcloth of a still-expanding central government machine, whose share of national income again doubled during the course of the 20th century.

Entering the 21st century, the pendulum swing towards devolution has continued, albeit erratically. The incoming coalition government in 2010 abolished the RDAs and replaced them with a patchwork of Local Enterprise Partnerships (LEPs), ‘City Deals’ and the emergence of the so-called Northern Powerhouse. More recently, we have seen further consolidation of local powers in combined local authorities, often headed by an elected mayor with delegated powers. 

There are now 10 regional mayors across England, covering around 35% of the English population, in addition to the devolved administrations in Scotland, Wales and Northern Ireland. The government’s white paper on levelling up published last year proposed a further rollout of devolution and a further six new mayoralties have since been announced. It also proposed a deepening of delegated powers, starting with the ‘trailblazer’ deals for Greater Manchester and the West Midlands announced earlier this year. 

Economics of devolution

Although the history of devolution has been complex, its economics are surprisingly simple. 

In theory, the optimal degree of decentralisation of powers to the subnational level rests on two competing forces. Both apply to a country or nation state, but at the subnational or community level, too. In practice, choosing the optimal degree of decentralisation of decision-making over taxation and spending involves weighing these competing forces. 

The first is risk-sharing. A nation state with centralised powers to spend and tax can use these resources to share risks facing citizens at the subnational level. This redistributive role can be important for smoothing out differences in subnational outcomes and for cushioning the impact of shocks that affect places differently, such as the recent Covid and cost-of-living crises. In short, central government can smooth out the subnational bumps facing its citizens which, in the UK in particular, have been large historically.

The second effect, working in the opposite direction, is local autonomy. The benefits of this include enhanced local information, benefits that are larger the more localised the problems. A second benefit is enhanced local agency – stronger incentives – when designing and delivering local solutions. And a third benefit is improved coordination across the different arms of policy, something more easily done at the local rather than central level.  

How does the UK compare on this cost/benefit calculus? The starting point is a very high degree of centralisation of both spending and taxation powers. In the UK, around 80% of all spending decisions, and around 95% of all tax decisions, are made centrally rather than locally. Notwithstanding the progress made so far this century, this makes the UK an outlier by comparison with other advanced economies, where the averages are 62% and 72%, respectively. 

The UK’s regional differences are also more extreme than in many other advanced economies, looking across a broad range of economic and social metrics such as income, health and connectivity. On the face of it, that might justify the UK having a large central government able to pool and then redistribute resources subnationally – from rich to poor, healthy to sick, or connected to disconnected regions. In practice, it is unclear how effectively central government in the UK has played that role.

Spatial differences across the UK are wider than at any time in the past century and have been widening for the past 70 years. Far from stemming that tide, some central government spending has exacerbated them. For example, central government spending on housing, arts and culture, transport, and digital infrastructure and research and development has had a strong historical skew towards richer, better-served parts of the UK, rather than poorer ones. In theory, central government should help reduce the risks facing poorly performing places; in practice, it has often exacerbated them. 

And it is not just the UK’s regional divides that are wide and have been widening. 

Differences at the local level are not only still larger but have been widening faster. The UK’s economic and social geography is hyper-local, with pockets of affluence and deprivation often sitting cheek by jowl. Nowhere is this more apparent than in the UK’s cities, home to the greatest concentrations of both wealth and health and poverty and homelessness.

These hyper-local patterns in economic and social geography have also been exacerbated by the UK’s concentrated and centralised model of governance. This has made it far less likely that these problems can be identified (due to lack of local information) and remediated (due to lack of local agency) than if powers had been held at the local level. 

International evidence is revealing here. Looking across a wide range of countries, there is a negative relationship between degree of centralisation of decision-making and the extent of spatial disparities. On average, devolution tends to shrink regional differences. It also tends to boost both local and national growth, as more potential – among local people, businesses and government – is unleashed. 

Strikingly, the UK sits at one end of the spectrum on these comparisons, with simultaneously low degrees of devolution, high levels of spatial difference and low levels of economic growth. International experience suggests this confluence is no coincidence. Historically, the UK has struck the wrong balance between the competing forces of risk-sharing and local autonomy, widening geographic differences.

This keeps local resources among the public, private and civil society sectors under-utilised relative to their potential, holding back opportunity for local citizens and stunting growth locally. It has also contributed to rising political discontent. These deeply entrenched forces, operating over many decades, explain the pendulum shift in governance underway across all four corners of the UK.

Looking ahead

How much further should the devolution pendulum swing? And in which direction? 

Devolution is assuredly no panacea for the UK’s economic and social ills. Indeed, international evidence suggests clearly that badly executed devolution can be counter-productive for local and national fortunes. So how are these pitfalls best avoided, and the opportunities of devolution best harnessed? 

Single financial settlement

Devolving powers is a necessary, but not sufficient, condition for success. Without devolved monies, local powers will be ineffective. At present, local government finance seriously constricts local effectiveness in the UK. Formulas for determining local government finance are out of date, and of inadequate scale, to address the UK’s spatial differences. And other local financing mechanisms – such as the plethora of over 100 centrally allocated pots – are diffuse, complex and often unsuitable for levelling up.

The Levelling Up Fund, introduced by the government in 2020, is a case in point. While its aims are laudable, its design makes it ineffective in meeting them. Its competitive bid structure is a recipe not only for disappointment but has often seen funding flowing to those areas able to produce the best bids – often, large metropolitan areas – rather than those most in need. This is contrary to the aims of levelling up. The competitive process also imposes a large deadweight burden on those whose bids are unsuccessful. 

This may now be changing. As part of their new trailblazer deals, Greater Manchester and West Midlands were offered a single financial settlement from 2025, an option now also available to other mayoral combined authorities. In time, this will not only simplify and lengthen funding for local government, but will also give them far greater flexibility over the use of these funds, enabling monies to be tailored to local priorities without the deadweight bureaucratic burden of bidding. 

Powers and people

The trailblazer deals, and London’s experience over the past 20 years, have expanded the envelope of delegated powers at the subnational level. These now extend to health, transport, employment support, innovation, policing and crime. Over time, it is likely those delegated powers will be replicated across England as the number of elected mayoralties expands. But even these changes would leave the UK as one of the most centralised countries in the Western world, particularly in respect of taxation powers. 

Gordon Brown’s recent report for the Labour party on devolution suggested a more sweeping set of devolution powers over both spending and taxation. These included increased powers over skills and further education, energy and the environment, housing development, childcare, culture and wellbeing.

At a very practical level, the case for further evolution of taxation powers is a nuanced one. On the one hand, fiscal devolution makes sense in granting local leaders the autonomy to raise local monies to finance local regeneration. It also helpfully aligns local incentives, with any decision to boost local spending balanced against the need to raise local taxes to finance that spending. This is important from an accountability and transparency perspective. 

On the other hand, as Brown’s report noted, caution is needed before proceeding too speedily down the path of tax devolution. That is because, with large pre-existing differences in incomes across the UK, poor regions with a low tax base could see their spending depressed if they were asked to raise all or some income locally; that could worsen disparities within and between regions. This does not diminish the case for devolution, but it does suggest caution in the speed with which it is approached.

Accountability

Any governance model relies for its success on appropriate degrees of accountability. UK devolution needs to avoid one demographic deficit (an imbalance between central and local powers) morphing into another (an imbalance between local powers and local accountabilities). That would be a recipe for disenchantment with politics shifting from central to local government. This lack of local accountability has been an achilles heel of devolution, in the UK and internationally, in the past.

Avoiding this risk means strengthening local accountabilities and transparency in line with the move to increased local powers. There are already some steps being taken in this direction. The newly created Office for Local Government (OfLog) is one attempt to fill the accountability gap. With luck, OfLog will promote a culture of learning about good practice across regions, as well as providing checks and balances on how monies are being used.

But efforts beyond OfLog and the local ballot box will also be needed. This is likely to include heightened Westminster scrutiny, improved data on local outcomes, and strengthened local media scrutiny.

Double devolution

Finally, while most efforts have so far been concentrated on devolution of powers to the regional or mayoral level, there is a debate to be had about appropriate degrees of sub-regional delegation to the community level – so-called ‘double devolution’. There is an element of back to the future about this debate, bearing in mind the UK’s localised model of governance that pre-dated the Industrial Revolution.

The question is: which services are most effectively delivered at the community level, while avoiding multiple tiers of decision-making with its associated costs? Progress is already being made towards double devolution – for example, through the Community Ownership Fund giving local residents control over local assets and, most recently, the proposed Community Wealth Fund. These initiatives put local residents at the heart of spending decisions for their communities.

Power to the people? 

Today, both the main UK political parties are competing for virtue in their plans for devolution. As rare as it is welcome, this means there is a good chance devolution will have support beyond the next election. As shrinking the UK’s deeply entrenched spatial divides will be a cross-generational endeavour, this cross-party support is crucial.

At present, the UK has greater stability and longevity in regional, rather than in national, politics. Not coincidentally, there are also greater levels of trust in, and collaboration between, the regions of the UK than in and between its main political parties. Taken alongside the country’s large and widening spatial divides, this is fertile ground for a further significant shift in the tectonic plates of UK governance.

This is long overdue. The democratic deficits felt by many parts of the UK have generated a deep sense of disenfranchisement from politics and policy. They have also constrained local opportunities for regeneration of people and places. A weakened Westminster and Whitehall should not resist this tide. Indeed, the best hope of rebuilding trust in both comes from strengthening the hand of local leaders.

Slowly but surely, power may be returning to the people.

Andy Haldane is Chief Executive Officer of the RSA.

This article first appeared in RSA Journal Issue 2 2023.

Cover and artworks by Helen Friel. Helen is a UK-based paper engineer, illustrator and author.