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Does devolution really boost growth?

Keir Starmer wants the UK to have the fastest-growing economy in the G7. But does Labour have the plan to achieve it?

By Jonny Ball

Keir Starmer wants the UK to have the highest rate of economic growth in the G7. It’s the first of his five “national missions”, announced last week.

Yesterday he set out some of the tools Labour would use in government to try to jumpstart Britain’s anaemic economy: £28bn a year of green investment and an £8bn National Wealth Fund; a promise to implement procurement practices to privilege domestic industries and local supply chains to “buy, make and sell more in Britain”; an Industrial Strategy that promises “partnership” between business, unions and the state; reform of planning laws to encourage housebuilding; and “closing the holes in Britain’s Brexit deal” to promote trade with Europe.

Along with these proposals, at the core of the Labour leader’s economic vision is a radical constitutional overhaul: a new programme of devolution that would, if enacted, represent “the biggest ever transfer of political power out of Westminster and into the towns, cities and nations of the UK”, Starmer said yesterday. It’s through this overhaul, he claims, that he will facilitate growth that’s broad-based and inclusive. In Labour’s new parlance this will be “bottom up and middle out”, not based on the failed theories of “trickle down” economics. The local state, not just Whitehall, will take part in a new interventionism to help “shape markets”, not only serve them.

At the end of 2022 the former prime minister Gordon Brown launched his Report on the Commission on the UK’s Future, which identified the over-centralised nature of the government as a primary barrier holding back the UK’s potential. The headline-grabbing proposal was abolition of the House of Lords, to be replaced by an Assembly of Nations and Regions, but the less discussed detail revealed plans to hand over control of policy on issues such as skills, transport and capital investment to councils. “Towns and cities across England should be given new powers to drive growth and champion their areas,” the report said, as well as calling for local authorities to be given “new fiscal powers” and “long-term financial settlements” after ten years of being hampered by austerity.

[See also: Keir Starmer’s international inspiration]

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The Institute for Government said that the recommendations in the report “largely continued the trajectory” of Boris Johnson’s government’s levelling up white paper. While that paper was criticised for being light on new investment in the regions, it was praised in some quarters for having highlighted the link between disparities in wealth and other social indicators on the one hand, and over-centralised political power on the other.

“The empirical evidence of a link between growth and devolution is fairly light,” says Paul Swinney, director of policy and research at the Centre for Cities think tank. While sometimes a correlation can be established between a country’s level of centralisation and its growth rates, it’s simply too difficult to prove direct causation because there are too many variables at play. The UK, for example, followed a positive trajectory both in productivity growth and in absolute and per capita GDP in the late 1990s and 2000s, despite the fact that its political structures were even more centralised than they are today. The first metro mayor was only created in 2014.

Swinney is keen to add, however, that there are strong theoretical reasons why distributing policy powers more evenly across Britain’s regions would strengthen the economy. “If policy can be tailored to an area, then that allows you to have a level of local variation which should lead to improved outcomes,” he says. Local authorities can be more adaptive to local needs. “Having one skills policy for the whole country just means it’s not really going to work anywhere,” he adds – the variations in local labour markets and the differences between employer needs across local economies would make it impossible. “But if we pass those powers down and allow places to tailor those policies we’ll have better outcomes as a result,” he says.

[See also: Keir Starmer’s economic model isn’t Blairism – it’s ordoliberalism]

The G7 consists of Canada, France, Germany, Italy, Japan, the UK and the US. It’s a group of large, advanced industrialised economies committed to representative liberal democracy (Russia was excluded in 2014 following the annexation of Crimea). Currently the best performing economy in the group is the US, a federal republic with high levels of decentralisation and many powers reserved for its fifty states. But under Joe Biden’s presidency, the US has also embarked on a programme of infrastructure investment not seen in generations, particularly in the renewables and green tech sectors. As an energy exporter, the world’s largest economy is also less subject to the inflationary turmoil in oil and gas markets since the Russian invasion of Ukraine.

Canada is similarly decentralised and growing strongly, but again, the US’s northern neighbour is insulated from the energy shocks in Europe, and has even benefited, because it has sold more fossil fuels to the continent. Our European G7 compatriots, Italy, France and Germany, are also experiencing shocks associated with the war, as well as lockdown hangovers, labour constraints and demographic pressures. All three have more decentralised systems. Germany collects 30 per cent of its taxes locally, for example, compared with the UK’s 12 per cent. But over the past year, all have had weaker growth, even though the UK is the only G7 economy that is still smaller than it was at its pre-pandemic peak.

Japan has a decentralised structure of 47 prefectures, with 70 per cent of government spending flowing through local government. In the 1970s and 1980s the Asian powerhouse initiated a programme of further decentralisation to deal with economic disparities between Tokyo and elsewhere. But those gaps persist, and the localist constitutional and structural fixes haven’t prevented the economy from stagnating for thirty years since the collapse of its asset bubbles in the early 1990s.

Handing over powers and fiscal levers is no panacea. Some local government experts have even argued that awarding more tax raising powers to councils would entrench and exacerbate geographical imbalances, allowing dynamic economies like London to bring in several factors more in revenue than authorities in depressed regions. “There’s a balance to be struck here,” Swinney says. “You need to make sure that you’ve still got a redistribution system in place that is sufficient for the country we’ve got.”

Starmer’s nascent economic offer is no exact blueprint, but it points to a broader direction of travel in Labour’s economic policy. Critics aligned with the campaign group Momentum have accused Labour of adopting a reheated Blairism. If he enters No 10, Starmer is unlikely to enjoy the same buoyant world economy that Blair’s tenure coincided with, boosted by the internet boom and the opening of Chinese, Indian and post-Soviet markets to globalised capital.

Instead of a 1990s re-run the opposition has signalled a desire to shift towards a more interventionist, corporatist, European-style social market economy, trying to strengthen local institutions to that end. Devolution won’t automatically improve the UK’s dismal productivity or the increasingly squeezed purchasing power of British households. But alongside policies that mirror Biden’s America, and the EU’s more relaxed approach to state aid, capital-spending stimulus, and industrial strategy and subsidy, the UK would be brought more into line with the new habits of its Western competitors.

Read more:

Keir Starmer’s economic model isn’t Blairism – it’s ordoliberalism

Andy Street: “Our devolution deal is the end of the begging bowl”

Will Labour divisions scupper Keir Starmer’s election hopes?

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