Ed Miliband speaks at the Labour conference in Brighton last year. Photograph: Getty Images.
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Labour must challenge the myths about decentralisation

Far from creating a postcode lottery, greater localism can lead to lower levels of regional inequality.

When Ed Miliband set out his vision for people-powered services, he was clear that the centralised state cannot diagnose and solve every local problem. Genuine power cannot be transferred to service users if decision-making is hoarded in Whitehall. Jon Cruddas reinforced this when he set out the importance of devolving power to delivering Labour’s ambitions of a more equal and inclusive society.  

This reflects Labour's  defining mission to tackle inequality. The Local Government Innovation Taskforce’s First Report: The case for change, now sets out the underlying case for such a power shift – and why inequality and decentralisation are inherently linked.

The election in 2015 will be an important juncture for our public services – the course pursued after this point will determine whether they can play an effective role in the future in overturning the social determination of poor life chances. The twin pressures of rising demand and shrinking resources are forcing a choice. Either to continue, as this government has largely pursued, the course of salami-slicing Whitehall budgets, squeezing separate services and tinkering around the edges of traditional modes of delivery. This will lead to the decline, retrenchment and residualisation of public services with ever-higher thresholds for use and the termination of some altogether.

The danger is so immediate that this status quo has now become riskier than the second option: fundamental reform. The Taskforce’s report sets out the foundations for how this can be achieved through a new strategy that organises services around places, rather than within departmental silos from the centre replicated in communities. This is based on evidence of what is working already – where innovations are being driven against the flawed logic of a system which constrains the ability of services to adapt to the challenges they are confronted with.

By providing services that are more anchored to local conditions, designed around people’s actual, not perceived needs, they can be more effective. By better enabling services to collaborate and cooperate beyond institutional boundaries they can be more efficient and drive out duplication. And by taking a whole system approach across all services in an area, early intervention can be built in with incentives between services aligned to secure the cashable savings that are required for proper shift away from high cost reaction and towards prevention.

But to realise this strategy will involve dispelling some myths that are often propagated about decentralisation.

Firstly, that it will lead to a postcode lottery in provision. While we must recognise existing variations in a centralised system, our evidence cites international comparators which show higher levels of decentralisation can lead to lower levels of regional inequality. This, combined with evidence that the potential of our big cities outside London is held back by centralisation, would strongly suggest that to achieve greater fairness overall we should pursue decentralisation with determination, as an effective route to social justice.

Secondly, that local structures are not up to the job. Local councils can be prone to weaknesses in a system that largely concentrates power and resource at the centre. Yet failures at the centre occur frequently – the Work Programme and Universal Credit are two examples of centrally managed programmes that are struggling to cope. But when the centre fails this is seen as particular, rather than a reflection of its systemic inability to deal effectively with complexity at scale. Given that all levels of public administration are prone to strengths and weaknesses, a more objective strategy would be based on understanding what level of governance is appropriate for maximising the impact of interventions.

Thirdly, that by decentralising, a Labour government wouldn’t be able to deliver on its agenda everywhere in the country. On the contrary, our approach to a new settlement between the centre and local areas would be based on a clear set of national entitlements as the basis of a devolved approach to ensure people and places are directly empowered as a result. Given that the old levers of a centralised state have reached the limits of their efficacy, a more decentralised statecraft is now a more realistic means of achieving change: in a complex world distance is a hindrance.

The challenge will be to create a reformed approach which enables innovation that can quickly develop, spread and embed – driving success, rather than enshrining aversion to failure. In this way, we can create new routes to meeting the demand pressures and over time seek a sustainable system-shift towards prevention, and ensure a system in which no individual or community is held back from fulfilling their potential. This will be the ultimate test for people-powered services.

Sir Richard Leese is Co-Chair of the Local Government Innovation Taskforce and Leader of Manchester City Council.

The Taskforce’s First Report: The case for change is available here. Their final report is due later this year. 

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Let's turn RBS into a bank for the public interest

A tarnished symbol of global finance could be remade as a network of local banks. 

The Royal Bank of Scotland has now been losing money for nine consecutive years. Today’s announcement of a further £7bn yearly loss at the publicly-owned bank is just the latest evidence that RBS is essentially unsellable. The difference this time is that the Government seems finally to have accepted that fact.

Up until now, the government had been reluctant to intervene in the running of the business, instead insisting that it will be sold back to the private sector when the time is right. But these losses come just a week after the government announced that it is abandoning plans to sell Williams & Glynn – an RBS subsidiary which has over 300 branches and £22bn of customer deposits.

After a series of expensive delays and a lack of buyer interest, the government now plans to retain Williams & Glynn within the RBS group and instead attempt to boost competition in the business lending market by granting smaller "challenger banks" access to RBS’s branch infrastructure. It also plans to provide funding to encourage small businesses to switch their accounts away from RBS.

As a major public asset, RBS should be used to help achieve wider objectives. Improving how the banking sector serves small businesses should be the top priority, and it is good to see the government start to move in this direction. But to make the most of RBS, they should be going much further.

The public stake in RBS gives us a unique opportunity to create new banking institutions that will genuinely put the interests of the UK’s small businesses first. The New Economics Foundation has proposed turning RBS into a network of local banks with a public interest mandate to serve their local area, lend to small businesses and provide universal access to banking services. If the government is serious about rebalancing the economy and meeting the needs of those who feel left behind, this is the path they should take with RBS.

Small and medium sized enterprises are the lifeblood of the UK economy, and they depend on banking services to fund investment and provide a safe place to store money. For centuries a healthy relationship between businesses and banks has been a cornerstone of UK prosperity.

However, in recent decades this relationship has broken down. Small businesses have repeatedly fallen victim to exploitative practice by the big banks, including the the mis-selling of loans and instances of deliberate asset stripping. Affected business owners have not only lost their livelihoods due to the stress of their treatment at the hands of these banks, but have also experienced family break-ups and deteriorating physical and mental health. Others have been made homeless or bankrupt.

Meanwhile, many businesses struggle to get access to the finance they need to grow and expand. Small firms have always had trouble accessing finance, but in recent decades this problem has intensified as the UK banking sector has come to be dominated by a handful of large, universal, shareholder-owned banks.

Without a focus on specific geographical areas or social objectives, these banks choose to lend to the most profitable activities, and lending to local businesses tends to be less profitable than other activities such as mortgage lending and lending to other financial institutions.

The result is that since the mid-1980s the share of lending going to non-financial businesses has been falling rapidly. Today, lending to small and medium sized businesses accounts for just 4 per cent of bank lending.

Of the relatively small amount of business lending that does occur in the UK, most is heavily concentrated in London and surrounding areas. The UK’s homogenous and highly concentrated banking sector is therefore hampering economic development, starving communities of investment and making regional imbalances worse.

The government’s plans to encourage business customers to switch away from RBS to another bank will not do much to solve this problem. With the market dominated by a small number of large shareholder-owned banks who all behave in similar ways (and who have been hit by repeated scandals), businesses do not have any real choice.

If the government were to go further and turn RBS into a network of local banks, it would be a vital first step in regenerating disenfranchised communities, rebalancing the UK’s economy and staving off any economic downturn that may be on the horizon. Evidence shows that geographically limited stakeholder banks direct a much greater proportion of their capital towards lending in the real economy. By only investing in their local area, these banks help create and retain wealth regionally rather than making existing geographic imbalances worce.

Big, deep challenges require big, deep solutions. It’s time for the government to make banking work for small businesses once again.

Laurie Macfarlane is an economist at the New Economics Foundation