Centre for Cities

PBR: Darling has the V-Factor

There's been a lot of talk this year about the shape of the recession-recovery. Will it be U-shaped (gradual and slow), L-shaped (very slow and protracted), or W-shaped (double-dip)? The more optimistic commentators have been calling a V-shaped recovery, i.e. a sharp rebound. 

In today's Pre-Budget Report, Chancellor Alistair Darling puts himself even more firmly in the V camp. You could say he's got the V-Factor.

The Treasury's growth forecast assumes quite a large trampoline bounce. This year, the economy will shrink by 4.75% - the biggest 1-year contraction since WW2. Next year, it's due to grow by 1.0-1.5%. And by 2011, growth is forecast at 3.5%.

That's a big bounce, and a very sharp V. If public spending cuts make the recovery look more like one of those other letters (U, L, W), then the deficit  - projected to be £140 billion by 2011-12, or 9% of GDP - will be an even bigger share of GDP. Let's hope Alistair has got his sums, and his alphabet, right.

PBR and Tax Increment Financing

As expected, the Pre Budget Report has just given a cautious nudge towards Tax Increment Financing. No actual pilots yet - more work needed. Details in Chapter 4 (paras 4.35-4.36).

"The Government is interested in exploring, subject to the overall fiscal position, what further finance mechanisms, powers and flexibilities could support local authorities to drive growth and innovation most effectively.

"In light of this, the Government will continue to examine the framework that would be needed to implement Tax Increment Financing and consider the primary legislation that would be needed if schemes were to be introduced.

"The Government will also examine the scope for local authorities to borrow against future Community Infrastructure Levy revenues...and revenues from new council homes."

Other related points:

• Infrastructure UK will be set up in 2010, inside the Treasury. Chaired by Paul Skinner, its strategy will be published at Budget time, and it will focus on stimulating private sector investment in new infrastructure. (see paras 4.30-4.32)
• Govt will shortly publish a revised Planning Policy Statement for economic development, to speed up the local planning process and focus it on growth.
• Agreements with Manchester and Leeds City Region Pilots are also in there.

Spending Reviews - every 2 (or 3) years

Peter Mandelson yesterday confirmed what many of us had concluded already - there won't be a Spending Review before the next general election. I would have preferred a Spending Review this year - that would have provided some much-needed clarity on public spending. But then I'm not a politician.

This morning, Ed Balls explained the spending review delay by pointing out that the last two spending reviews were three years apart, in 2004 and 2007. He was sort of implying that spending reviews every three years are the norm. That's not quite true. Between 1998 and 2004, spending reviews took place every two years. (You can stop reading now, if you're not a Treasury geek like me...)   

Gordon Brown started 3-year expenditure reviews with the Comprehensive Spending Review in July 1998 - that one covered the years 1999-2000, 2000-01 and 2001-02.

After that, the Treasury held Spending Reviews every two years in 2000, 2002 and 2004. In each case, the third year of the previous spending review became the first year of the new one - so the first year of the 2000 Review was 2001-02. This gave the Treasury the chance to amend the third year of each spending review. Holding the spending review every two years also gave departments almost a year to plan before their new budgets kicked in.

All that changed in 2006, when Chancellor Brown extended the expected 2006 Spending Review into a Comprehensive Spending Review and pushed it back to Oct 2007. There was a big political reason for doing that - Gordon wanted to delay the CSR until he had taken over from Tony Blair at Number 10 in summer 07, and use the CSR to define his premiership. That was the idea, anyway.

This time, the Spending Review is being delayed for a combination of political and economic reasons. Delaying until after the general election means the Government can avoid conceding the full extent of the fiscal crisis - although Ministers are already coming under intense pressure to explain how they are going to cut spending. And yes, it is particularly hard to do a spending review right in the middle of such an uncertain and unpredictable time.

The big downside for all of us, is that the spending debate will lack the clarity it needs over the coming months. Instead of having a Spending Review this year, mapping out all the departmental budgets, we're in for a protracted political debate based on the political parties' own numbers. This won't be as helpful.

Which has got me thinking. As part of his big constitutional reform plans, why doesn't Gordon give real power to the Treasury Committee in the House of Commons? In the US, the Congressional Budget Office performs a vital role, checking and challenging the President's budget numbers.

I reckon we need the same sort of thing here, with the Treasury Committee - properly staffed and resourced - producing its own cross-party budget forecasts twice a year. These would be different from the Treasury's own forecasts, but - as in the US - would be seen as independent of government, and therefore more reliable. At the moment, the excellent Institute for Fiscal Studies acts as the only check on the Government's fiscal numbers. It's time that Parliament played a bigger role, like Congress does in the US.

Budget preview

Just a few reminders, before the big Budget speech tomorrow:

• Last November, in the Pre-Budget Report, the Chancellor was predicting a sharp but relatively short recession - with growth returning in the second half of this year....

• In his PBR forecast, Alistair Darling forecast that the UK economy would shrink by minus 0.75-1.25% this year. As we said in Cities Outlook, it's going to be a lot worse than that. Tomorrow, the Chancellor will admit the real scale of the recession and say that UK plc will shrink by around minus 3.5% this year, with the recovery pushed back to 2010.

• Unemployment has increased sharply since the PBR, to 6.5% for the 3 months to January - that's 2.03 million people. Youth unemployment (18-24 year olds) accounts for about 621k of that - up from about 500k a year ago. So tomorrow there's going to be a big push to skill up and train young people, rather than add more of them to the dole queue. Big problem - with a massive fiscal deficit, the Government's scope to reduce unemployment will be limited.

• The Treasury has already leaked the outline of a £1 billion housing package, including an extended stamp duty holiday for homes worth up to £175k. We're also hoping for an announcement on private-rented housing, but that's not certain yet.   

• The Chancellor will also confirm "forerunner" status for at least two city-regions, giving them the green light for enhanced powers and funding flexibilities. In our letter to Alistair Darling last month, we recommended  Greater Manchester, Birmingham and Leeds - and we reckon at least two of those will get the nod.

Two ex-bosses

I've had quite a colourful line-up of bosses - including former Treasury minister, Geoffrey Robinson, and former British Ambassador to the US, Christopher Meyer.

Sir Christopher writes in today's Times, about Gordon's big trip to see Obama. Meyer was running our DC Embassy when Blair first met Bush in 2001 - remember George W's quip about their shared taste for Colgate? Brown is clearly hoping for a much-needed bounce from his address to a joint session of Congress tomorrow. But Meyer doubts whether "any amount of Obama stardust" will affect the outcome of our next general election.

Another ex-boss, John Kingman, appeared before the Treasury Committee this morning - he now runs UK Financial Investments (UKFI), which manages the Government's rather large stake in bailed-out banks like Royal Bank of Scotland.

John is described as "self-effacing but self-confident" - the classic trait of today's Whitehall mandarin. He's also younger than me, which is a constant source of surprise.

Pre-Budget Report: stimulus now, pain later

The Chancellor's PBR speech was a big one - more like a full-on Budget, really. After opening with a volley of scary words like "extraordinary", "exceptional" and "unprecedented", Alistair Darling set out a heady mix of short-term spending and longer-term borrowing numbers - which basically mean "stimulus now, pain later". (He said "fall" or "falling" 23 times, and "increase" or "increasing" 44 times - which kind of illustrates my point...)

Growth forecasts have been downgraded massively - and contrast sharply with the Treasury's own Budget forecasts earlier this year. Darling is predicting a sharp but relatively short recession, with recovery starting in the second half of next year:

• 2008 GDP due to grow by +0.75% - down from the March forecast of up to +2.25%
• In 2009, the economy is set to shrink by -0.75-1.25%
• Return to positive growth in 2010, between +1.5-2.0%

But even this is way more optimistic than most independent forecasts.

Part of the £20 billion stimulus package includes bringing forward £3bn of capital spending from 2010-11. The £3bn will be spent on e.g. new transport (£700m for motorways and rail carriages), social housing and regeneration (£775m), and schools (£800m). This will be some relief to the construction sector.

But the public sector is set to be squeezed further, with more efficiencies round the corner. Since 2004, the Government has exceeded the Gershon efficiency targets, and achieved £26.5bn of savings - including 86k net job cuts. Whitehall departments are also on track to meet their target to relocate 20k civil servant posts out of London and the South East, by 2010. So far, 17k staff have been moved. See the table on page 11 of this - DWP, for example, has shifted about 4k jobs.

To help pay for the short-term stimulus, the 2010 target for additional savings has today been increased from £30bn to £35bn. These savings will include a reduction in back-office civil servant jobs. Which is bad news for public sector workers - including in local government. And there will be much deeper cuts, if the recovery is less strong and later than the Treasury predicts.

As the FT reported today, employment growth over the last decade has largely been fuelled by the public sector. Between 1998-2006, the West Midlands saw a 25% increase in public sector jobs, and a 2% fall in private sector jobs. This is a useful reminder that regions should not become too dependent on public sector jobs.

The regional impact of the recession (and PBR) is hard to call. I suspect the impact is going to be more sectoral, than regional. For example, Darling conceded that our financial services industry is particularly exposed to the recession: "Because of the size of our financial sector, we are likely to be affected more directly by a global financial recession". Next month, we will publish new research on the impact of recession on financial services in Leeds - so look out for that.

Finally, the PBR included the promise of real devolution for city-regions. See paras 4.75-4.78 of the PBR report - and this supplementary paper The UK economy: addressing long-term strategic challenges - which proposes new statutory arrangements for sub-regional cooperation on things like transport, employment and skills, housing and planning.

The Government intends to announce new arrangements with at least two "forerunner" city-regions, at Budget 2009. I bet one of them is Greater Manchester. More on that tomorrow, when the Sub-National Review implementation plan is published.

Budget - quick reaction

The Chancellor did his best to reassure us just now. On a quick wordcount, his speech included "stability" over 20 times, and "resilience" at least 5 times.

Two big headlines worth remembering...

Growth this year has been revised downwards, from 2.0-2.5% to 1.75-2.25%. But that's higher than in Japan, the US and the Euro area. And although it is slower growth this year, the Treasury is not forecasting a recession.

Over the next 3 years, public spending will grow much more slowly, by 2.2% (in real terms) - that's down from 3.6% a year growth between 1997-2007. The Chancellor also pointed out that public sector employment has fallen over the last year, while private sector employment has grown strongly.

Yesterday, I was looking for progress on three key urban issues - employment, housing and transport:

• Employment: I was surprised not to hear more about worklessness, but the Chancellor did announce an expansion of the employer-led Train to Gain programme. The enterprise white paper includes a range of (quite small) packages of support, with a focus on women entrepreneurs and access to finance. We'd like to see a clearer split between national government and cities, on promoting enterprise. Government should concentrate on getting the overall business environment right (e.g. tax and regulation), while cities should have the flexibility to deliver a high quality physical business environment, transport infrastructure and skills.

• Housing: There's a continued focus on homeownership, and shared ownership - with more flexibility for shared equity schemes. The Government has also managed to identify space for 70k new homes, on public sector land - a welcome, but relatively small contribution to the 3m new homes target by 2020. We want to see an expanded and better managed private rented sector - and will be publishing a report with the Smith Institute this summer.

• Transport: The final confirmation of Crossrail - including supplementary business rates - was very welcome. Business leaders are still complaining about SBRs, but surely they will benefit from major new infrastructure like this? The Chancellor also tried to revive the prospect of national road pricing, with a new fund for evaluating national road pricing technology. That's also welcome, but more bold steps will be needed if congestion is to be tackled effectively.       

We'll be picking up all these issues in our forthcoming research. Meanwhile, look out for the Sub-National Review implementation plan - coming soon. And next week, we'll be publishing a report on the links between London-Reading and Manchester-Burnley. Quite a contrast...

Finally, some interesting factoids from the speech:

• "creative industries account for 7 per cent of the economy"
• "high-tech manufacturing has grown by 30 per cent in the last ten years"
• "energy prices have tripled since 2002"
• "public transport usage is at a 25 year high"

The Budget

Alistair Darling's first Budget tomorrow will be an important test for the Chancellor, and our cities. With the global and domestic slowdown now starting to bite, and public spending due to fall as a proportion of GDP, we should all brace ourselves for a period of belt-tightening.

 

The slowdown will ask some big questions of UK cities and regions. After over a decade of sustained overall growth, how resilient will they be in the face of a possible economic storm? Can they make progress on reducing worklessness, against this unhelpful backdrop? Will they be able to build the 3 million new homes target? And can they adapt to a tighter fiscal climate, by prioritising public spending on those transport projects that really matter?

 

The slowdown will also test Ministers' resolve on devolution, following last year's promising Sub-National Review. The forthcoming Implementation Plan from CLG and BERR will set out how the Government proposes to beef up local councils' economic development role, and promote more powerful city-regions. But how will the momentum for new financial powers (e.g. business rate supplements) be maintained, as councils face an increasingly tight settlement, and businesses face a higher tax bill?

 

The Budget needs to provide reassurance to consumers and businesses, and help our cities to ride out this period of uncertainty. Further devolution must be part of the Chancellor's answer. More local solutions to worklessness, housing demand and congestion are surely the way forward - especially in these more difficult times. Stepping back from devolution, just when cities need more powers, would be a mistake.   

 

We'll be addressing some of these questions in our forthcoming research, with papers on (a) the impact of a downturn on financial services employment in our cities, (b) the current scale of the worklessness problem, and (c) the role of the private rented housing sector. And we'll be pushing for action on the devolution front. Weathering the economic storm is now the biggest issue facing UK cities. We'll be watching their progress closely in the year ahead.