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Competing and collaborating for success

Investing in the cities most likely to succeed, and getting them to reach out to the rest of their r

"Competition among cities is like a bicycle; if you don't pedal you'll fall off," says the Urban Land Institute. The competitiveness of our cities on the global stage is crucial to the UK's recovery. But should all cities be competing all of the time? And at what point should cities collaborate rather than compete?

The interconnectedness of the global economy was once again demonstrated at the beginning of August when the downgrading of the United States' credit rating sent shockwaves throughout of the rest of the world economy. The official announcement from Standard and Poor's rating agency was global news in seconds. By the end of the day the FTSE 100 was down 2.7 per cent.

Thomas Friedman in his 2005 international bestseller The World is Flat claimed the technological advances behind increased globalisation mean that historical and geographical divisions are more or less irrelevant now. In Friedman's world, all competitors - firms and locations - have equal opportunity. The world is "flatter" and more connected than ever. However, at the same time, people and firms increasingly cluster in cities.

The previous decade saw, for the first time, more than half the world's population living in cities. Over 80 per cent of the UK's population live in cities - a figure forecast to rise to over 90 per cent by 2030. Cities are the engines behind national economies: the English cities and their hinterlands account for almost 90 per cent of the country's economic output.

Cities across the world have operated in global supply chains for goods and services throughout much of history. But the nature of these relationships has changed. A city's international reach now has greater economic, social and political significance than ever before - and it has created winners and losers.

The world is spiky

Some cities have lost out in this era of globalisation. Detroit, once a global centre for the automotive trade, has lost more than one-quarter of its population over the last decade and the average wage is barely half the national average. Stoke, a city previously at the centre of an international pottery industry, has lost nearly one-fifth of its jobs in the private sector over the last decade.

Others have thrived as globalisation has bought huge returns to ideas producers. London and New York are both obvious examples; here knowledge is key. The internet is a powerful tool but it works best when combined with knowledge gained face to face - and therein lies the paradox. Globalisation and ICT have reinforced the benefits of clustering to drive innovation. High value, knowledge-based companies benefit from clustering together. So, in our view, in contrast to Friedman, the world is "spiky" not "flat".

The existing economic and spatial geography of cities has a strong influence on their individual potential. They are all undergoing constant change, illustrated by the uneven impact of the reduction in the per capita benefits spend in different cities, the loss of public sector jobs post 2008 and the dominance of London and the south east in the creation of private-sector jobs between 1998 and 2008. Here, for every ten jobs created in London and the south east, just one was created elsewhere. This spike is huge, but it is not just a simple north/south split; rather it is one of smaller spikes of relative success and growth and decline in private sector jobs in other cities (see Figure 1).

Competition is a key feature of this globalised world, whether it is governments stating their aims to secure "more investment, more jobs and more trade"; corporates, like Google and Apple battling it out for dominance in the smartphone market; or cities.

Globalisation has led to increased competition between cities for investment and talent, as both have become increasingly mobile. Cities and regions compete in numerous ways. Picture the leaders of Londonderry bidding against Birmingham and Norwich for the title of Capital of Culture 2013; or the race to host the 2014 Commonwealth Games between Glasgow, Abuja and Halifax; or any other ­major sporting or cultural event for that matter. The efforts of Hull City Council to secure investment from Siemens are also illustrative of the competition to attract investment from multinationals. Over the last two decades, city strategies have increasingly focused on gaining inward investment and promoting themselves. Sometimes this leads to unrealistic aspirations which don't match underlying economic performance or potential and, for some cities, these aspirations are now unobtainable and need to be rethought.

Many of the factors influencing cities' performance derive from national trends. At the same time, the performance of national economies is largely the aggregate of city performance. Economic growth - and jobs growth - depends on city growth.

Cities don't compete in the same way firms do. Competition can drive cities to deliver better services and to keep costs down but cities are about much more than the pursuit of profit. Two urban economists, William Lever and Ivan Turok, set out their definition of success as being, "the degree to which cities can produce goods and services which meet the test of the wider regional, national and international markets, while simultaneously increasing real incomes, improving the quality of life for citizens and promoting development in a manner which is sustainable". For cities, competitiveness is about longevity, sustainability and inclusivity, as well as profitability.

And cities cannot go bankrupt like firms, at least not in the UK. Rhode Island City is the latest city in the US to file for bankruptcy. But, unlike firms, it means increased borrowing costs and reduced access to funding rather than closure. Over the last 30 years, there have been just 47 such recorded bankruptcies, compared to over 14,000 corporate bankruptcy filings in the last year alone.

Combination of assets

Most important is what makes a city competitive. One way to view city competitiveness is as the combination of assets within a city. It is about the attributes of cities as locations: the quality of infrastructure, land and premises, skilled labour, social factors (such as cohesion); and governance factors (including the influence of planning decisions). The real gains - attracting and retaining firms and talent - come from developing a city's assets rather than merely promoting them.

Competitiveness is also about the strengths and weaknesses of firms and other economic agents within a city. The diversity and competition between these firms leads to urban success. This is linked to the size and density of a city. Larger, more diversified cities can usually compensate for the relative decline of some activities by growth in others.

This leads us to perhaps the most fundamental point. While competition can have positive impacts, many UK cities are too small, and competition between them is likely to be a "zero-sum" game or, worse still, have negative impact. It is likely to result in waste and inefficient allocation of resources. In some cases, competition may result merely in the redistribution of ­investment or workers, rather than an overall gain - as with the 1980s policy on enterprise zones. This underlines that a city's performance is inextricably linked to the sophistication, realism and leadership provided by its politicians, who need to base aspirations on realistic prospects for growth and work in co-operation with neighbours to understand and facilitate growth across the city region.

The enterprise zones of the 1980s offered some incentives to developers, investors and occupiers of industrial and commercial properties within designated areas, aiming to promote enterprise in ­deprived areas. Essentially, zones changed the terms of competition for investment from firms and, rather than creating additional jobs, many were simply shifted from other parts of the country. As the national competition for Enterprise Zones Mark 2 reaches its final stages, the jury is still out on whether they will create the economic boost the UK vitally needs. What the current round will certainly create is potential for cities' governments and their business partners in local enterprise partnerships to invest monies saved from the business-rate holiday that comes with designation of an enterprise zone.

Figure 1: Net private sector job creation: Top and bottom five English cities

[Source: City Relationships: Economic Linkages in Northern City Region, Centre for Cities 2009] Graphics by: Kristine Omandap

Yet competition by no means exhausts the nature of relationships between cities. Collaboration between cities is also a key feature. Every city economy is shaped by its economic relationships with other areas: connections and flows of people, firms' business relationships, and supply chains. The relationships between places have the potential to generate mutual economic benefit. People in York for example gain from the employment opportunities created by Leeds' growth and firms in Leeds benefit from access to highly skilled people living in York.

Through collaboration and development of complementary roles between cities, success of one area need not be at the expense of another. The financial services sector in Leeds City Region (see Figure 2) is a good case in point. Leeds offers the critical mass to attract multinational firms, as well as the legal and accountancy services that financial companies require. Bradford and Wakefield, on the other hand, provide more affordable premises for firms wanting to set up back-office functions.

Here a realistic assessment of a city's assets is needed if cities are to forge stronger, more beneficial relationships. For Leeds City Region, capitalising on the strengths of different places - be it cost, amenities, or connectivity - creates "scale" and an overarching offer likely to be more attractive to a wider range of firms.


[Source: Private Sector Cities, Centre for Cities 2010] Graphics by: Krstine Omandap

An approach based on collaboration between places can bolster UK city competitiveness, particularly among smaller cities. As Greater Manchester has recognised, funding separate inward investment agencies for Manchester and Salford or Manchester and Trafford makes little economic sense. Instead, one agency - Manchester Investment Development Agency Services (Midas) - operates across the wider functional economic area. It promotes the city region as a European business location with a complementary proposition to London.

If competition between cities does add up to more than a zero-sum game, we will achieve economic growth in the UK. We need to redefine the government's "rebalancing agenda", which implies that everywhere has the potential to grow at the same rate and achieve the same levels of ­prosperity. Focusing investment in the places with most potential to grow (the "spikes"), and then developing mutually beneficial links with other places, is far more likely to promote economic recovery than policies that effectively redistribute employment.

The political focus on growing the UK economy is both essential and urgent. Sprinkling economic fairy dust over every area of policy will not give guaranteed or predictable results, but doing all we can to support the UK's cities as the engines for our economic fortune is a sure bet.

Joanna Averley is interim chief executive, and Naomi Clayton is senior analyst at Centre for Cities

This article first appeared in the New Statesman supplement 'Competition in a New Society: Cities and Regions'

This article first appeared in the 28 November 2011 issue of the New Statesman, The rise of the muslim brotherhood

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Q&A: What are tax credits and how do they work?

All you need to know about the government's plan to cut tax credits.

What are tax credits?

Tax credits are payments made regularly by the state into bank accounts to support families with children, or those who are in low-paid jobs. There are two types of tax credit: the working tax credit and the child tax credit.

What are they for?

To redistribute income to those less able to get by, or to provide for their children, on what they earn.

Are they similar to tax relief?

No. They don’t have much to do with tax. They’re more of a welfare thing. You don’t need to be a taxpayer to receive tax credits. It’s just that, unlike other benefits, they are based on the tax year and paid via the tax office.

Who is eligible?

Anyone aged over 16 (for child tax credits) and over 25 (for working tax credits) who normally lives in the UK can apply for them, depending on their income, the hours they work, whether they have a disability, and whether they pay for childcare.

What are their circumstances?

The more you earn, the less you are likely to receive. Single claimants must work at least 16 hours a week. Let’s take a full-time worker: if you work at least 30 hours a week, you are generally eligible for working tax credits if you earn less than £13,253 a year (if you’re single and don’t have children), or less than £18,023 (jointly as part of a couple without children but working at least 30 hours a week).

And for families?

A family with children and an income below about £32,200 can claim child tax credit. It used to be that the more children you have, the more you are eligible to receive – but George Osborne in his most recent Budget has limited child tax credit to two children.

How much money do you receive?

Again, this depends on your circumstances. The basic payment for a single claimant, or a joint claim by a couple, of working tax credits is £1,940 for the tax year. You can then receive extra, depending on your circumstances. For example, single parents can receive up to an additional £2,010, on top of the basic £1,940 payment; people who work more than 30 hours a week can receive up to an extra £810; and disabled workers up to £2,970. The average award of tax credit is £6,340 per year. Child tax credit claimants get £545 per year as a flat payment, plus £2,780 per child.

How many people claim tax credits?

About 4.5m people – the vast majority of these people (around 4m) have children.

How much does it cost the taxpayer?

The estimation is that they will cost the government £30bn in April 2015/16. That’s around 14 per cent of the £220bn welfare budget, which the Tories have pledged to cut by £12bn.

Who introduced this system?

New Labour. Gordon Brown, when he was Chancellor, developed tax credits in his first term. The system as we know it was established in April 2003.

Why did they do this?

To lift working people out of poverty, and to remove the disincentives to work believed to have been inculcated by welfare. The tax credit system made it more attractive for people depending on benefits to work, and gave those in low-paid jobs a helping hand.

Did it work?

Yes. Tax credits’ biggest achievement was lifting a record number of children out of poverty since the war. The proportion of children living below the poverty line fell from 35 per cent in 1998/9 to 19 per cent in 2012/13.

So what’s the problem?

Well, it’s a bit of a weird system in that it lets companies pay wages that are too low to live on without the state supplementing them. Many also criticise tax credits for allowing the minimum wage – also brought in by New Labour – to stagnate (ie. not keep up with the rate of inflation). David Cameron has called the system of taxing low earners and then handing them some money back via tax credits a “ridiculous merry-go-round”.

Then it’s a good thing to scrap them?

It would be fine if all those low earners and families struggling to get by would be given support in place of tax credits – a living wage, for example.

And that’s why the Tories are introducing a living wage...

That’s what they call it. But it’s not. The Chancellor announced in his most recent Budget a new minimum wage of £7.20 an hour for over-25s, rising to £9 by 2020. He called this the “national living wage” – it’s not, because the current living wage (which is calculated by the Living Wage Foundation, and currently non-compulsory) is already £9.15 in London and £7.85 in the rest of the country.

Will people be better off?

No. Quite the reverse. The IFS has said this slightly higher national minimum wage will not compensate working families who will be subjected to tax credit cuts; it is arithmetically impossible. The IFS director, Paul Johnson, commented: “Unequivocally, tax credit recipients in work will be made worse off by the measures in the Budget on average.” It has been calculated that 3.2m low-paid workers will have their pay packets cut by an average of £1,350 a year.

Could the government change its policy to avoid this?

The Prime Minister and his frontbenchers have been pretty stubborn about pushing on with the plan. In spite of criticism from all angles – the IFS, campaigners, Labour, The Sun – Cameron has ruled out a review of the policy in the Autumn Statement, which is on 25 November. But there is an alternative. The chair of parliament’s Work & Pensions Select Committee and Labour MP Frank Field has proposed what he calls a “cost neutral” tweak to the tax credit cuts.

How would this alternative work?

Currently, if your income is less than £6,420, you will receive the maximum amount of tax credits. That threshold is called the gross income threshold. Field wants to introduce a second gross income threshold of £13,100 (what you earn if you work 35 hours a week on minimum wage). Those earning a salary between those two thresholds would have their tax credits reduced at a slower rate on whatever they earn above £6,420 up to £13,100. The percentage of what you earn above the basic threshold that is deducted from your tax credits is called the taper rate, and it is currently at 41 per cent. In contrast to this plan, the Tories want to halve the income threshold to £3,850 a year and increase the taper rate to 48 per cent once you hit that threshold, which basically means you lose more tax credits, faster, the more you earn.

When will the tax credit cuts come in?

They will be imposed from April next year, barring a u-turn.

Anoosh Chakelian is deputy web editor at the New Statesman.