Centre for Cities

Feeling the Pinch: Declining wages in cities

Nick Clegg will warn today that “the squeeze on middle-income Britain has reached ‘a state of emergency.’” This is on the back of the fact that real wages have been falling since 2008. And, as Cities Outlook 2012 illustrates, incomes in some cities are being squeezed much harder than in others.  

Undoubtedly 2011 has been a challenging year for the UK economy. Rising unemployment has forced more people out of work. But the position for many people in work has also deteriorated; poor wage growth, coupled with high inflation, has squeezed take-home pay.

Cities Outlook 2012 shows just how much wages have fallen between 2010 and 2011 across the UK's cities. Even ignoring inflation, almost half of the UK’s cities saw a decline in the average wages paid to those working (see chart below). This has been compounded by price increases in 2011. While average wages in the UK increased by £4 per week (0.8 percent), inflation averaged around 5 percent. That means that the same pound will buy you less this year than it would have last year—your weekly paycheque feels smaller.  

So when we factor in the effects of inflation, the average wages in almost all cities have fallen. In fact, only four cities (Milton Keynes, Grimsby, Southend and Worthing) saw a real increase in average wages. As the table below illustrates, even if your wages did rise on your paycheque, the increasing cost of products and services means that you can actually afford less. Ipswich saw the largest decline in ‘real’ wages; the average worker took home an equivalent of £54 less in 2011 relative to 2010.

So will the UK continue to feel the ‘big squeeze’ over 2012? The Bank of England expects a sharp fall in inflation over the year. But even if inflation falls, we could still see continued decline or stagnation in nominal wages. High unemployment means lower wages are offered for new jobs. At the same time, firms are offering less or no pay rises. While easing inflation will help, many of us may continue to feel the pinch over 2012.

National contraction, city implications

The GDP figures released today showing a contraction of the national economy of 0.2 percent in the final quarter of 2011 underline the fragile nature of the UK’s economic recovery.  

As we stressed in Cities Outlook 2012, the impact of this contraction is likely to have been felt very differently across our cities. While some places may have seen an expansion of their economies in Q4 2011, others are likely to have seen a contraction much larger than the -0.2 percent seen at the national level. 

Although we don’t have data for ‘city GDP’, looking at the performance of different sectors at a national level can give us some clues as to how the contraction of national GDP is likely to have impacted UK cities. Manufacturing and construction both saw contractions of 0.9 percent and 0.5 percent respectively, while services saw no change to the previous quarter. The implication of this is that those cities that have a higher number of jobs in manufacturing and construction, such as Barnsley and Blackburn, are likely to have been hit harder by the contraction at a national level than others. 

We do have much more detailed data on unemployment, and this year’s Outlook focuses specifically on the unemployment challenge that cities face. This data shows that there is very strong divergence in city performance. And the worry for these places is that if unemployment continues to rise as expected throughout 2012 the gap between some of our strongest and weakest city economies will continue to widen. We’ve already seen the difference in the JSA claimant rates of Cambridge and Hull double since the start of the downturn in 2008. Continued public sector job cuts and the weak performance of the private sector mean that this gap could become ever larger.  

JSA claimant count rates across cities

Source: Nomis 2012, Claimant count, non-seasonally adjusted data

Cities will be key drivers of the recovery in the national economy. They are home to 58 percent of national employment and 62 percent of national output. As such it is vital that policy removes barriers to their growth, especially in the context of the latest disappointing national growth figures. City Deals offer a key opportunity to the Core Cities to do just that. The challenge now to Government is to expand this policy out to allow other cities more freedom to tackle their specific challenges too.

Cities at the heart of their regional economies

We know cities are important to the national economy, that’s why Greg Clark was appointed Minister for Cities in July last year. But cities are also important to their regional economies. And this is one of the things this year’s Cities Outlook highlights.

Cities are the heart of their regional economies. The 11 cities in the North West are home to 68 percent of the region’s businesses and 72 percent of employment – both large proportions considering they only cover 24 percent of landmass. Similarly, the 18 cities in the Greater South East cover just 16 percent of landmass yet generate 70 percent of wealth and account for 69 percent of those working in highly skilled occupations.

And it’s not just the most successful cities that support their regional economies. Cities like Hull and Doncaster despite having less dynamic private sectors housed, together, 8 percent of businesses located in Yorkshire & Humber, accounted for 10 percent of employment and generated 9 percent of wealth.

In addition, the influence of cities is not simply confined to their urban cores but extends out beyond their physical boundaries. People travel to cities to work – people living outside Bristol travel around 38km to work in the city – but also to shop and enjoy amenities like theatres and restaurants. Business supply chains also extend well beyond city boundaries and their customers are often located elsewhere too. 

For more stats and facts see Cities Outlook 2012 and our new data app.     

The battle for growth will be lost or won in our cities

Yesterday we launched the fifth edition of our annual report, Cities Outlook 2012. Our economic snapshot on the state of the cities shows that, while the whole economy faces a difficult year, each city will face quite different economic opportunities and challenges.

Our index suggests that some cities are better placed to grow, while others are more vulnerable to the difficulties of the year ahead. But we know from our work across the UK that all cities are working hard to help those most affected by the recession as well as to make the most of any economic opportunities.

And there is little doubt, as Greg Clark said at our event yesterday, that the battle for growth will be won or lost in our cities. 

Greg openly acknowledged that city deals would be on the table for all cities and that the core cities were just a start – something the Centre welcomes. The next step is for Government to make good on its offer, and for cities to make the most of the opportunity to gain greater autonomy and powers as well as responsibilities. 

Nick Forbes, Leader of Newcastle City Council, said that Newcastle was ready for the risks and responsibilities that come with devolved powers. He highlighted the importance of cities being clear they are "open for business”, while also dealing with the challenges of unemployment.  

Sian Reid, Leader of Cambridge City Council spoke about the importance of striking a balance between short and longer term policy. Public sector job cuts, welfare reform and a weak economic climate taken together mean that city leaders could very easily get bogged down in short terms fixes. But economic growth requires cities to take short term actions that are on the path to a longer term vision of success.

Greg Clark recommended Cities Outlook as ideal bedside reading; I'd suggest it's a good read at any time of day. I hope you do have a chance to read it, and please get in touch with your thoughts on the outlook for 2012 for your city and those around you.

Whole-place Community Budgets: devolution, revolution?

In the run up to Christmas, amidst office parties and last-minute present buying, you would be forgiven if Eric Pickles’ latest policy announcement was not foremost in your mind.  As the New Year is well upon us, however, it is worth reflecting on the positive impact it could have for cities in 2012.

The Secretary of State announced the 14 areas chosen to pilot the Community Budget approach to the funding and delivery of local public services.  The project is the second part of the Local Government Resource Review, a process we have been following closely. Of particular interest for cities and their leaders will be the four whole-place Community Budget pilots, in Manchester, Essex, London and Chester. 

These pilots will test whether a combined budget can be used across a range of public services in an area.  The principles behind Community Budgets are simple: spending is decided locally; service providers work together; the tax-payer saves money. Keen-eyed local government finance spotters will point out that these ideas are not new – and that the process will be difficult.  However, the principles have much to recommend them.

Centre for Cities has long been a champion of devolved spending powers from Whitehall.  To have genuine control over their economic futures, cities need the freedom to decide on their priorities for investment and spending on their patch.   Whole-place Community Budgets, in tandem with devolved capital pots on offer through the City Deals, could bring the prize of genuine financial autonomy from Whitehall much closer.

There is a long way to go though.  The pilot areas will have been very busy on their return from the festivities.  They will spend the rest of the year scoping, modelling, consulting and drafting.  In the autumn they will sit down with Government officials and get the verdict on whether their plans can work and whether they can be trusted to put single budgets into place in 2013.

In choosing the ten local authorities of Greater Manchester as a pilot area, DCLG is backing a favourite – showing its keenness to see this scheme work.  Having set up a combined authority for economic development and transport in April last year, the Manchester city-region has a head start in partnership working.  The good news for other cities is that the Government recognises that a “whole-place” doesn't begin and end at the city council's border. 

What is less clear at this stage is how whole-place budgets will be managed across multiple councils – who will take the lead?  Throw in the complication of emerging LEPs and potential city mayors and the picture becomes more confused.

Then there is the issue of who benefits from any savings brought about through whole-place budgets.  There needs to be a financial incentive to take on the responsibility of public spending across a city.  Budget holders should be able to retain savings and reinvest them locally, rather than seeing them siphoned back to Whitehall spending departments.

But experiments are about identifying and resolving difficult issues.   If the pilots are able to demonstrate that their plans are sound and viable, the Government is more likely to move towards devolved financial powers on a wider scale.  It is worth the effort to get it right this time.

HS2 plans are still on track

The Rt Hon Justine Greening MP, Secretary of State for Transport, announced this week the Government’s decision to go ahead with the High Speed Rail proposal, HS2. Phase one of the route between London and Birmingham should be up and running by 2026 with the routes to Manchester and Leeds ready for 2032/3.

The capital cost of these sections will be £32.7 billion with current estimates stating it will generate benefits of up to £47 billion and fare revenues of up to £34 billion over a 60-year period.

But is the time right for this initiative?

On the whole, budgets have become limited and funding more scarce. As our report, Access All Areas, shows, in such difficult economic times it is imperative that city centres can attract high value employment and overcome labour market spatial mismatches through a coordinated, integrated and improved transport infrastructure.

Unfortunately, many cities still need to vastly improve its local infrastructure to ensure efficiency and efficacy.

As a result, the largest benefit to people who live in cities and their hinterlands would come from local infrastructure improvements. This would fit nicely with the City Deals agenda in boosting cities’ economic growth and should, therefore, be the Government’s priority.

Furthermore, consistently delaying the decision on HS2 has led to budgetary uncertainty. By moving the HS2 decision back other much needed local infrastructure projects have lacked full government support and have been unable to begin. Now the decision has been made, will this financial commitment over the coming decades hamper arguably more beneficial local projects?

With this in mind, a faster rail link between London and the core cities should certainly be considered in the long term but only once local and regional infrastructure issues have first been resolved.

Vote ‘Yes’ for metro mayors

Could we soon see a Boris for Bristol or a Ken for Liverpool? The time finally draws near when 11 of England’s largest cities will hold referendums for directly elected mayors. This shake-up to city governance is one more example of the Coalition’s localism agenda and wish to encourage greater city-leadership at the local level.

Political changes are rarely easy and the mayoral issue is no exception.  Over the last year the debate has been lively between those in favour and those firmly against.  Even as the Government closed its consultation on the proposed mayoral powers last week, the debates raged on.   Manchester’s Local Enterprise Partnership voiced its opposition arguing that a mayor ‘would bring no advantages to the city-region and would be disruptive to arrangements already in place that link the conurbation’s 10 councils’. Similarly, the Leader of Bristol City Council, claimed that the ‘the public are uninterested and the subject switches them off.’

The reticence by those opposed to mayors stems in part from the uncertainty about what powers and influence they will have over the things that really matter.  Whilst the Mayor of London is often held up as the desirable model, this is not the model on the table for the 11 cities. If we want our big cities to opt for mayors we have to give them real powers.

Our recent report, Big Shot or Long Shot: How elected mayors can help drive economic growth in England’s cities, went further and argued for Metro Mayors, covering the geography of the real economy, for all our major cities.

Our vision for a Metro Mayor would take the best aspects of the London mayoral model and apply them to our big cities.  This would give Metro Mayors powers to:

• Develop a strategic spatial plan for their area;
• Take decisions on strategically significant planning applications;
• Co-chair the LEP;
• Chair the Integrated Transport Authority and appoint the board;
• And play an active role in negotiating new powers and devolutions from Whitehall, as enabled by the Localism Act and the General Power of Competence.

With May just around the corner, to convince those that are against mayors, the Government will need to create a mayoral model that offers city mayors real control over their places.  Who could resist that?

The Local Government Resource Review: Christmas come early?

Centre for Cities has been a long-term advocate of business rates reform.  So, this morning we waited excitedly like the boy from John Lewis’s Christmas advert for DCLG’s response to the Local Government Resource Review consultation.  Having read the document, my feeling is now more akin to receiving an ill-fitting jumper.

Clearly much of the detail is still to be set out, but government’s interpretation of the policy at the moment seems to have taken a “growth-light” approach to rates retention. Whilst the proposed system will reward authorities for growing their business base, it is also very complicated, reduces the incentive authorities’ experience, and creates uncertainty in local government revenues.

Focusing on the 10 year re-set period, this will have several effects on local authorities: 

First, because the system will be re-set every 10 years (Government will also be able to re-set more often in "exceptional circumstances"), local authorities will have relatively little certainty of their revenues beyond that period. This will limit their ability to borrow against business rates revenues in a TIF system (which is based on loans over a longer period of time) or plan for long-term projects.  

As we expected, both forms of TIF were confirmed in the Response. Option 1 TIF—which is really an extension of an authority’s prudential borrowing powers—will be available to any local authority. Though, the business rates retention system, as proposed, will not easily facilitate borrowing at that level due to the level of uncertainty the system creates. Option 2 TIF—which protects business rates from the uncertainty created by the system—will also be allowed, but on a rationed basis yet to be set out.

Second, authorities will benefit less from new businesses built towards the end of the 10-year period. The reset will strip out some of the business rates the authority retains (benefitting from 4 years of rates growth if the property is built in year 6 of the resetting period). This is likely to influence authorities as to when they encourage and approve new developments.

Third, by excluding the growth in business rates from revaluations, authorities which have raised property values by investing in transportation or public realm improvements will not retain the growth benefits from those investments.

There is still an opportunity for the government to create a business rates system that really encourages economic growth at the local level. But, the balance at the moment is more on the side of central control and equity at the expense of a system that seriously incentivises growth. If Eric Pickles really wants to give “every possible reason to create the conditions for local growth,” the Government must create stronger and clear incentives for growth.

Thriving High Streets need strong city centres

The anticipated Portas Review of the High Street has been published today. And it is not short on ideas – it proposes 28 measures to “save” the High Street. The problem is that the study’s narrow focus means that these recommendations are unlikely to make much of a (positive) difference.

Some of the proposed measures seem very reasonable. Portas calls for increased accessibility, attractiveness and safety of High Streets and improved provision of parking. The introduction of “town teams” might help High Streets to be better managed if their responsibilities are defined properly. And the proposed initiatives to encourage small businesses are also commendable.

But a closer look at the Review reveals several underlying problems. Henry Overman has already pointed out that a call for reduced regulation of some parts of the High Street (such as freedoms around market trading) stands next to proposition of more red tape in others (such as forcing large retailers to support local business). And the desire to re-empower the community contradicts the fact that the poorest community members might suffer the most as higher burdens are put on chain stores that provide better variety of products at lower prices.

The biggest flaw in the report is that it treats retail sector as though it is isolated from the rest of the economy. But vibrant city centres are more than just shops. High Street retailers are dependent on footfall generated not only by Saturday shoppers but also weekday workers. The problem is that the lack of relative scale of some city centres, such as Preston and Sunderland, mean that they have a relatively small proportion of total jobs in their cities. And it is this issue that is likely to have the largest impact on city centre retail. 

It is this narrow focus that has led to proposal of the most controversial recommendation in the report that the Secretary of State should give “exceptional sign off” to all out-of-town developments. The assumption made here is that shops that would otherwise have set up out of town will now choose to locate in the city centre. The reality is much less clear and such a recommendation could serve to actually restrict overall city growth. Businesses should be encouraged to choose a city centre location because it is the most profitable place to set up, not because they are forced into a second best choice.

Portas would like to return many of the UK’s faded High Streets back to their former glory. Even setting aside changes to consumer behaviour, failing to understand that High Streets are part of wider city centre ecology will likely undermine her efforts.

Investing in Growth Cities

On Thursday we welcomed the news that the Government is giving cities greater freedom to steer their economies and fuel the “engines of economic growth” from within.  Each of the eight core cities in England will have the opportunity to individually bargain over which freedoms – and responsibilities – they take on.  Nick Clegg and Greg Clark have called this their challenge to cities. 

But there is a challenge for government as well.  If we are to make the most of the contribution of cities to the wider economy, this offer should be extended beyond the core cities.  Last night this challenge was presented directly to Chloe Smith MP – Economic Secretary to the Treasury – at the launch of the Centre’s report Investing in Growth Cities.

The report looks at a group of cities in the Greater South East, from Norwich to Southampton, and explores what they can do to boost investment and drive economic growth.  The potential is definitely there; these are strong economic achievers.  In the decade before the recession hit they contributed 27 percent of the UK’s growth in private sector jobs.  Core cities are a logical place to start, but growth potential also lies elsewhere.

Investing in Growth Cities recommends a number of things these cities can do for themselves to become growth-ready.  But they also want Whitehall to loosen the shackles. We heard from the leader of Portsmouth City Council, Gerald Vernon-Jackson, that they are ready for their turn at the city-deal negotiating table.  A show of hands in the room showed that other cities are joining the queue.

Chloe Smith acknowledged the role that local MPs need to take in working alongside their local government colleagues. Representing Norwich North, she has a strong local interest in how these places perform and how they work together – she wants to see them flourish and thrive. Encouragingly, given her “other” job, she also recognises that they are extremely important for the UK economy. 

It seems that the cities bug is catching in government.  We hope it won’t be long before Greg Clark is signing deals in Norwich, Portsmouth, Ipswich and Brighton.