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A Budget for growth tomorrow?

The UK needs growth and it needs it now: the forecast for 2013 is now halved to 0.6% and unemployment is rising once more. So did the Budget deliver? From a growth perspective, there are various welcome measures. Putting infrastructure and housing centre stage, policies to stimulate business investment, a cut in the cost of employing people and, of course, confirming that the Heseltine Single Local Growth Fund will be implemented are all good to see. But it is too little, too late. It lacks a ‘place’ focus that means policies could have adverse consequences for both London and the South East as well as many northern cities.

Housing is a good example of what happens when you have place-blind policy. It’s good the Government is recognising (through New Buy and Right to Buy) how much many people are struggling to buy their own homes – the Centre’s Cities Outlook highlighted this. But the UK needs 232,000 new homes a year just to meet demand, and we’re already at least 100,000 homes short of that. Without more measures to build homes, and soon, there’s a danger that a further house price bubble will be fuelled, particularly in the least affordable cities which have most pressure on the few homes available. We would also have liked to see more of a place-sensitive approach: while many fast-growing cities need new houses – and this could help create jobs, other cities with weaker economies – many based in the North - would benefit more from measures to stimulate refurbishment and retrofit, also creating jobs.  

Infrastructure is also another case of benefits later rather than sooner. It’s good that the Chancellor is so clear about the importance of infrastructure to growth, and an extra £15bn for new road, rail and energy projects by 2020, starting with £3bn in 2015-16, could make a big difference to cities across the UK, especially where lack of infrastructure has been identified as a major barrier to growth. But why wait until 2015? And since many of the ‘shovel-ready’ infrastructure projects are relatively local, why not loosen Whitehall’s control on the purse-strings so that local areas can reallocate money towards infrastructure projects (or even other projects, if locally-appropriate) that they know will kickstart local growth?

Central pursestrings may well be loosened with the Budget’s very welcome endorsement of Lord Heseltine’s Single Local Growth Fund, alongside a range of other commitments to devolve more control of economic policy to local areas. Yet, the impact of policies such as the Fund will depend upon their scale, and this won’t be confirmed until the 26 June Spending Review announcements. Even when it is confirmed, it won’t make a difference in the short term as, again, it won’t launch until 2015. In the meantime, it’s vital that Government make use of City Deals as a way to devolve powers and funding more quickly (and considering how to extend the ‘core package’ to all other LEPs as a way into the Single Local Growth Fund negotiations in 2015).

Some of the tax cuts may help increase spending in cities, whether the increase in the personal allowance, the scrapping of the 3p rise in fuel duty or the 1p reduction in beer duty (a boon for community pubs at any rate). And, help on childcare is also good for cities, as it’s one of the biggest barriers to work – although there are questions about whether this approach (again not happening until 2015) – will really help reduce costs for parents, a particular concern for cities like London where childcare is most expensive.

Some of the business tax cuts may also be helpful to the UK economy as a whole (and therefore to cities), although the jury is out on the additional impact of some of the measures. For example, the interesting question about the Employment Allowance – the reduction by £2k of national insurance costs for all firms - is whether the additional benefits of encouraging businesses to take on employees will outweigh the deadweight incurred by a policy that subsidises employers for doing things they would have done anyway. What is undeniable is the importance of policies to generate jobs given today's figures showing youth unemployment is up.

It was a shame that there were such limited announcements on skills, despite the Chancellor saying that it’s the most important thing for long-term growth, there was a sense he felt the Government is already doing enough. We’d like to see more investment in this area – Cities Outlook 1901 shows it’s critical to keep investing in skills – and we’d also like more of a place lens on this policy area, as our evidence clearly shows that in certain cities, a lack of jobs available is further compounded by lower levels of achievement by school leavers.

It’s also likely that, as we pore over the figures, there’ll be more interesting nuggets to come on local government funding. It was good to hear confirmation of protection from further cuts for 2013/14 but, given the £11.5bn savings that need to be found, I’m sure that this won’t last long. It’s also likely that local government will be affected by the announcements on higher pension contributions from the public sector, so I’d expect to see local finances continuing to be squeezed over the next few years. Which brings us back again to the need for more local control over the money there is, enabling local areas to decide how to spend what little money is left.

Overall, it’s a Budget with various policies for growth – but more for growth tomorrow than growth today, with the inevitable impact this will have on cities. In the short term, it is to be hoped that policies on infrastructure, housing and business can be delivered in a way that helps cities grow. And, looking to the future, the key will be implementing Heseltine in a way that changes decision-making and funding in cities so that they can drive economic growth more effectively in the future – that’s the only way to achieve the kind of uplift in economic growth that the OBR is pointing to for 2014 and beyond.

 

Where are the foreign businesses in the UK?

Andrew set out yesterday how housing could deliver a short term stimulus to the UK’s economic conundrum. Another area that the Chancellor has hoped will deliver jobs and growth is inward investment, as shown by his cutting of corporation tax and the PM’s recent trip to India.

Cities have been keen to jump on the agenda of inward investment from foreign businesses too. The suitably vague request for the signing of a 'Memorandum of Understanding’ with UKTI has been almost ubiquitous across City Deal submissions and conversations around them.

It’s no surprise that cities are eager to encourage investment from foreign shores into their cities. But if the Chancellor takes the opportunity to further incentivise international business into Blighty, where are they most likely to want to locate?

Our Open for Business report last year looked at the geography of foreign owned businesses across the UK. Cities in the Greater South East, led by London, are the most popular destinations for foreign owned businesses. Almost one in three of foreign owned firms in the UK are based in these cities, compared with one in four businesses overall (i.e. those domestically and foreign owned). Cities in the North West, on the other hand, tend to be the least popular. They are home to 7.1 per cent of all businesses but just 6.1 per cent of all foreign owned businesses.

Individually, the two most successful cities in attracting foreign owned businesses lie outside of the Greater South East. At 7.2 per cent of the total business base, Swindon has the highest proportion of foreign owned businesses. It is followed closely by Aberdeen at 7.1 per cent. 

While there is large variation across cities in terms of the share of foreign owned businesses, there is much less variation in terms of the countries that these businesses represent.

Businesses from the USA dominate the total number of foreign firms in our cities. With the exception of Belfast, businesses whose ultimate parent is based in the USA account for the most foreign owned businesses in every city in the UK. Reading in particular is a hotspot for US owned firms – 2.8 percent of its total businesses had an ultimate parent from the USA in 2010. The next most frequent countries represented are near neighbours France, Germany and Holland.

The economies such as China and India are likely to become increasingly important for purchasing our goods and services. But the BRICS countries are conspicuous by their absence. Companies from these countries make up no more than 0.2 per cent of the total business base of the most popular city, Luton. The maps below show the geographies of businesses from the USA, Eurozone and BRICS across UK cities.

It is likely that any further moves by the Chancellor to attract companies to our shores in this week’s Budget will fall more loudly on the ears of business bosses in our traditional heartlands of Europe and the USA, rather than the fast growers of the developing world. And if history repeats itself, those businesses listening are most likely to choose cities in the Greater South East.

Follow Paul on Twitter - @paul_swinney

So what did Heseltine say?

I’ve been reflecting on the Government’s response to Heseltine overnight. While most commentators have reacted in a broadly positive way, as always, much depends on how policies are implemented and whether the rhetoric about the Government’s commitment to devolve is supported by day-to-day decision-making.

Key points worth noting:

Creation of Single Local Growth Fund: The details of what will be in the Fund are still being negotiated as part of the Spending Review, and we would expect this to be smaller than Lord Heseltine’s recommendation of £49bn. It is good news that transport, housing and elements of skills funding (though not yet apprenticeships) will be in the Fund, and it could be good news that they’ll be looking for “alignment” with other skills and employment programmes as well as EU Structural and Investment Funds, although ‘alignment’ is one of those words that can cover a multitude of policy responses...It will be important, however, that the perfectly sensible criteria for which monies to include in the Fund (on p.42) are not applied in such a way that, where evidence is limited as to what works best at national / local level, the default is to keep everything national.

 

Competition: There will be an element of competition, but perhaps not quite what Lord Heseltine envisaged. The response says that the Single Local Growth Fund will be allocated “through a process of negotiation and using competitive tension to strengthen incentives on LEPs and their partners to generate growth”. This means that every LEP will get something but the exact offer will depend on individual plans. A process similar to the Wave 2 City Deals approach may be used to strengthen the quality of multi-year strategic plans and bids to the Fund, with more available to those that “put forward robust and ambitious means of delivering economic growth plans”, demonstrate greater innovation, stronger capacity and stronger governance across the LEP area.

Capacity and Local Enterprise Partnerships: An approach based on competition raises questions, as always, about the places that have less effective LEPs and partnerships; the variability of LEPs around the UK is well documented. The response is clear that LEPs will be the main bodies through which funding is channelled, as for the Growing Places Fund, but that LEPs should remain “small, responsive, business-led organisations and avoid becoming local bureaucracies”. LEPs will get an additional £10m a year to boost their capacity and support development of strategic multi-year plans for local growth, and there will potentially be some support from Local Growth teams, but more detail is needed on whether government will provide different types of support to LEPs that are less developed, particularly in economic areas that are either particularly vulnerable or have particularly high growth potential.

 

Governance: It’s clear that the Government is pushing hard for local areas to improve their governance. Government has said it will support local authorities to form combined authorities or other forms of collaboration through a £9.2m Transformation Challenge Award, will not prevent areas pursuing unitary status, and will seek legislation for directly elected mayors for combined authorities where this is wanted by local areas. This is all very good news, particularly ‘conurbation mayors’ – the Centre has been calling for this since 2006, although we would want to see clear powers and funding attached to a directly elected mayor, to avoid the problems that the referenda last year ran into.

Getting Whitehall thinking locally: It is good that Local Growth teams are going to be established and that every LEP will have a senior Whitehall sponsor to work with them to understand their priorities and introduce more place-based thinking into Whitehall policy. However, to achieve the kind of transformation in policy making required to ensure that every national economic growth policy at least considers place when it is developed, this will need to go beyond senior sponsors having greater familiarity with one place. Instead the senior sponsors will need to challenge policies not just as champions for their LEPs, but on the basis that national policies work best if they are able to adapt to local circumstances.

 

Infrastructure and borrowing: It’s interesting that a new, concessionary Public Works Loan Board Rate will be available to an infrastructure project nominated by each LEP (except London), with the total borrowing capped at £1.5bn – and will be a good test of LEPs for them to have to put forward just one project to be considered. But will £1.5bn be enough – and will sharing it out between LEPs result in jam-spreading rather than prioritisation of the projects that could make the biggest difference to growth? Understanding the (national!) criteria for allocation of the borrowing will be important to ensure that this results in the boost to local growth intended.

Generally, there’s some good news in the response to Heseltine, not least because some of the measures are tackling the culture of centralisation as well as being specific policies to change allocation of powers and funding. But the proof is always in the implementation – and the money. Just as Heseltine’s approach was, the response from Government is still a relatively centralised approach to devolution and the real test will be whether this gets implemented in a way that really does cut through Whitehall silos, whether the pot is going to be big enough, and whether Government really does let go of some of its strings.

To help point the way forward, we have distilled the 81 recommendations that the Government has committed to at least partially implementing into the top ten priorities national and local policymakers now need to focus on, including establishing a significant Single Local Growth Fund, ensuring flexibility about the way funds are allocated, and building on some of the most useful aspects of City Deals such as the ability to negotiate, with constructive challenge from Government to help local areas improve their plans.

Heseltine is a real opportunity to make a difference to the UK economy; we need to do all we can to ensure it is implemented in a way that makes the most of that potential.

Creating a system of city-region governance one place at a time

In the furore associated with the Government’s response to the Heseltine Review another highly significant announcement regarding the North East has been overlooked.

Last Friday, the leaders of the seven councils that make up the North Eastern LEP (Newcastle, Gateshead, North & South Tyneside, Sunderland, Northumberland and Durham) voted to give their collaboration on economic development and transport legal status by becoming a Combined Authority.

They join a growing group that includes not only the Greater Manchester Combined Authority but also West Yorkshire (Leeds City Region) and South Yorkshire (Sheffield City Region), both of which declared their intention in their City Deals of forming combined authorities.

For those that want to know a bit more about Combined Authorities we published a briefing on them a while back looking at their powers, funding and potential advantages.

Coupled with yesterday’s announcement at the launch of the Greater Birmingham Project: the Path to Local Growth that Greater Birmingham and Solihull LEP will set up a ‘supervisory board’ to manage and “provide political accountability” for single pot growth funding means that a system of city-region governance for England at least is beginning to take shape.

Once the Combined Authorities are in place then the appetite to revisit the merits of Metro-Mayors, which we’ve been advocates for since our 2006 City Leadership report, will grow.

Directly-elected Metro-Mayors overseeing strategically focused city-region authorities. Now that really would be a significant step towards ‘real’ devolution.

 

Top 10 priorities for government as it takes forward Heseltine's recommendations

The Government’s response to Lord Heseltine’s report No Stone Unturned was announced today. It’s is a ‘once-in-a-parliament’ opportunity to support greater devolution to local areas.

Government has committed to 81of the 89 individual proposals, we have distilled the 10 most important reforms that central and local government must prioritise and seek to take forward beyond the forthcoming Budget and spending review. Informed by our independent research and analysis, not all of these follow Lord Heseltine’s recommendations to the letter. But taken together, we believe they represent the best opportunity free our cities to boost growth in the years ahead.

In particular, national Government should:

1. Create a single funding pot for local areas, aligned with European funding allocations to provide greater flexibility for cities to adapt policies to their local circumstances, a more efficient allocation of resources at a local level, a more effective allocation of European funding streams and more scope for local innovation in terms of service delivery and pursuing growth.

2. Be flexible about the institutional structures and geographies to which it devolves funding to ensure that funds are devolved to functional economic areas, rather than within administrative boundaries, and that the body making decisions about funding allocation is democratically accountable and committed to a long term growth strategy.

3. Resist the temptation to continue setting the agenda nationally, particularly in relation to LEPs, recognising that different areas need different kinds of support if their local economy is to thrive. Large Core Cities, fast-growing small and medium cities and cities struggling in a post-industrial economy all require different support. Government should be open to flexing policy according to different needs.

4. Implement an approach to funding allocation that relies more on incentives than competition recognising that there are challenges inherent in making all funds subject to competition, including the risk that all places pursue the same priorities. Incentives should instead focus on the fundamental capacity of areas to deliver, including a requirement for strong governance, meaningful engagement with business and a clear focus on local growth.

5. Tackle Ministerial and civil service resistance to devolution by adopting Lord Heseltine’s recommendation that Ministers and permanent secretaries should be associated with individual LEPs, as well as creating permanent, cross-departmental local growth teams of civil servants to join up government at local level.

6. Use Heseltine to set a long term local growth agenda addressing private sector concerns over a lack of certainty in relation to national and local policy frameworks that they feel is currently inhibiting investment.

Working together, national and local Government should:

7. Ensure that Local Government steps up to take responsibility for delivering economic growth. Local government and LEPs need to take a lead by taking advantage of all existing and new powers to support economic growth at a local level. When developing local strategic plans, LEPs need to ensure that they are realistic, strongly place-based, developed with partners, and backed with investment and a delivery plan.

8. Manage issues relating to limited local capacity to ensure that cities can find ways to support one another and draw on expertise from the private and third sector where necessary. Implementing Heseltine’s recommendation for senior sponsors associated with individual LEPs may help with this, as could the introduction of secondments from national to local government and making use of public private partnership arrangements.

9. Ensure that Heseltine builds on the City Deals programme by ensuring that new centres of influence and power are not set up to compete against one another. Local areas must decide on their own governance and institutional structures to implement these separate processes, while elements of the City Deals process, such as the Core Package, should also be available to all local areas provided they can satisfy minimum criteria.

10. Strengthen local leadership by working towards the difficult process of local government reform, attempting to simplify the current overly complex system to create a streamlined system that recognises functional economic geographies more closely. It is vital, however, that both national and local Government do not become bogged down on institutional reform at the expense of broader delivery on local economic growth.

We will be providing regular updates as the Government takes forward these commitments. 

Early indications about Heseltine response

As the Budget gets gradually leaked in time honoured fashion (although much less than last year), today is ‘growth’ day, with the focus on the Government’s response to Heseltine, to be published later today.

We haven’t seen the detail yet but press coverage (particularly good, as usual, in the FT) so far suggests: 

i) 81 out of 89 recommendations have been accepted, including: the government drawing up a national growth strategy; seconding more civil servants to the private sector; civil servants being in local growth teams; and more business engagement in the school curriculum.

ii) Recommendations that haven’t been accepted include: setting up unitary authorities; setting out plans for new airport capacity in the south of England before 2015; and beefing up the legal powers of chambers of commerce. The recommendation for a national growth council has been accepted ‘in part’ which means it hasn’t really been accepted; it’s regarded as existing already. 

iii) The single pot will be implemented, but it’s likely to be much smaller than Lord Heseltine recommended. It will include skills (but not apprenticeships), housing and transport, and the exact amount is being debated in Whitehall at the moment (for which read there’s a big battle going on, and Whitehall departments are trying to make this as small as possible). The exact amount will be decided on in the Spending Review.

iv) Much of the money will be channelled through LEPs. Each will negotiate a local growth deal, presumably along the lines of City Deals, with the funding allocated depending on the quality of the bid.  It will be interesting to see how this fits with what’s in the core package.

I’ll blog again once I’ve seen the detail. But there’s a missed opportunity if the single pot is so small that no meaningful work can be done, if everything is channelled through LEPs and combined authorities are to be ignored (the latest one is in the North East, announced on Friday – a significant achievement) or if local areas get a few more instruments to play with but Whitehall still gets to call the tune. More on this later.

 

Going for growth: why the Chancellor must aim for more than a “steady-as-she-goes” Budget

Five years into the longest recession in a hundred years, more than halfway through the Parliament…we need economic growth now. But what will – can – the Chancellor do to turn the UK economy around?

Press coverage to date suggests that this will be a ‘steady-as-she-goes’ Budget, trying to avoid the negative headlines of last March’s Budget (still described by some commentators as an ‘omnishambles’). Despite the UK’s downgraded credit rating and public interventions by the Business Secretary, there will be no abandonment of Plan A. Instead it’s likely that the Chancellor will be looking for cost-neutral policies that will make a big difference and will not be too unpopular – and there aren’t many of those around.  Bets are on housing, trying to boost lending to businesses via the Business Bank, some more infrastructure projects (perhaps supported by Qatar?) and then a few sprinklings of other policies, with childcare one that’s been discussed at length in the past few months.

But given the current state of the UK economy, and the lack of growth that has characterised the last two and half years, will this be enough? Politicians, economists and commentators from all sides seem to think not. The Chancellor is under pressure from the left and the right to take more radical action to kick-start the economy. 2013 will be a hugely significant year both economically, and politically, with a General Election looming large in 2015.

So, taking into account the circumstances that the Chancellor is faced with, what does our evidence base and analysis suggest a good Budget for the UK and its cities might look like?

First, it needs to invest more in the long term drivers of economic growth. Most economists broadly agree on what these are: high levels of skills; appropriate infrastructure; innovative businesses; strengths in a range of diverse industries; better management to improve the UK’s poor productivity. The Centre’s Cities Outlook 1901 showed how important it is to continue investing in these areas, especially skills. Previous Budgets have sustained investment in research and development, put a bit more money into infrastructure and talked about skills. This year a good Budget would be one that sets out a long term strategy that gives the private sector certainty about where to invest, and that sustains investment in key areas, especially skills and infrastructure, so that in three to five years, the UK will be in a better position to grow than it is today.

Second, a good Budget would inject some short-term fizz into the economy. Part of the problem is the time that projects take - Government has been bemoaning the lack of shovel-ready projects to put some backing behind. Another part of the problem is demand; despite all the work already ongoing to encourage more loans to small business or kickstart the housing market, demand remains fairly weak. So a good Budget would be one that would back some projects that can happen quickly and are likely to stimulate demand in a range of sectors. This may require the public sector to take a lead in identifying and de-risking these projects through up front investment, so as to make them attractive enough for the private sector to take forward. 

The Centre has already written to the Chancellor asking for three specific measures to be included in the First, a bold response to Heseltine that gives cities far greater autonomy over their economic development budgets, to help them better support local economic growth. Second, focusing investment in housing on the most unaffordable cities and sites that already have planning permission, while giving cities with weaker economies a different set of housing incentives to encourage refurbishment and replacement. Third, rethink the way that investment in cities is supported through reforming Urban Development Funds.

The Centre will be publishing a series of blogs in the run-up to the Budget, we’ll be live-tweeting and blogging on the day, and then we’ll be putting up rapid response commentary. And we’ll be following up with a whole series of papers in the run-up to the Spending Review, setting out how working differently with cities could make a big difference to economic growth. It’s an important time to be debating economic policy; if we can make more of our cities economic potential, it could help get us back on the path to growth.

(Not) spending pennies on the High Street

Seven per cent – that’s how much of the £10 million High Street Innovation Fund, set up last year to bring empty shops back into use, has been spent to date.

The figures come from a Freedom of Information request by Paul Turner-Mitchell, an independent retailer, who appears to be on a one-man fact finding mission on all things High Street policy related - his earlier FOI revealed that just 12 per cent of the £1.2 million money assigned to Portas Town Teams had been spent to date. His investigations also reveal how the money has been spent to date. In Dartford, £1,600 was used to hire a man in Peppa Pig costume.

Whilst understandable, Mr Turner-Mitchell’s displeasure at how much of this money has been spent to date, and how it has been used, misses the point. Regular visitors to this blog will be aware of Centre for Cities’ view on the Portas Review, as detailed here.

In short, a focus on retail alone is far too narrow to solve the malaise of the High Street. Retailers need sustained footfall. Unfortunately no end of grant spent on bunting and flower pots is going to deliver this. In the majority of instances the steadiest source of footfall past the doors of High Street retailers is likely to be by non-retail workers. But the Portas Review completely ignores this fact, and so too have a raft of studies published on the back of it.

The latest to do so is the London Assembly Economic Committee’s report on empty shops, published earlier this week. At the launch event, London Assembly Member Andrew Dismore, Chair of the Economic Committee, remarked that it is the outer lying High Streets of London that are struggling in particular, and it is these places that require specific attention from London policymakers to reverse their retail fortunes.

It’s worth reflecting on this point for a second to show why something that is well intended is ultimately misguided. A key economic role played by Outer London Boroughs, as shown in our report Size Matters, is to ‘export’ workers to business-rich central London. This means that the population of central London swells massively during standard trading hours, as illustrated in the infographic below (with thanks to Alasdair Rae - see his excellent blog). And so too does the potential market for retailers – this large in-migration of people every day provides them with punters to sell their wares to.

It is because of these commuting patterns that retailers such as Pret thrive in Central London. There are 193 Pret stores in the capital, the highest of any city in the UK (the next highest is Birmingham, with five). Where are these Prets located? 80 per cent are in the Inner London Boroughs. And almost 60 per cent are in Westminster, Islington and the City of London alone.

London’s core has been strengthening in recent years – more and more of the capital’s businesses are choosing to locate  and is likely to continue to do so as density becomes ever more important for knowledge based businesses. This, coupled with the on-going national economic malaise and the rise of internet shopping, means that for many Outer London High Streets retail is likely to be inappropriate as a response for reversing their fortunes. Instead policymakers in London should be thinking about what other uses are suitable for these areas.

What does this mean for cities more generally? Retail thrives where footfall is concentrated. This means that, particularly in cities where we have seen a dispersal of economic activity in recent years, any attempts to revive ailing retail-dominated High Streets should be thinking about how they can encourage a concentration of economic activity in their city centres. While not the only required response – tourism, residential and leisure also have a role to play - only when this has occurred will bunting and flower pots have any sort of impact.

We should worry less about Portas money not being spent – its approach means that the money is likely to have little impact even if it had been used. This could even be a blessing in disguise – at least it gives the opportunity for it to be recalled and spent on something a little more sensible. Instead we should be thinking about how to support growth in underperforming city centres. The Centre for Cities will be investigating this in more detail in the coming months.

Follow Paul on twitter - @paul_swinney

Regional banks – how do they look in Germany?

Colleagues in the office and those who know me already are aware that I am extremely interested in regional banks. It is hardly surprising that the topic is in vogue given we suffered the financial crash in 2007 and that six years on the economy continues to stutter. There are also political shifts such as the rhetoric to ‘rebalance the economy’ and a greater emphasis on local economic growth.

The discussion has been ratcheted up today with Ed Miliband delivering a speech on this topic at the British Chambers of Commerce conference. The model in Germany is often cited but how many people actually know what it looks like? Well, for those who want a bit more information, read on!

The German financial system operates within a federal political system and is based upon three tiers of banking: 1. Public banks; 2. Co-operative banks and; 3. Private banks.

Public banks

Public banks are owned, run and managed by federal government, states, districts or cities and have a specific investment remit, for example development and infrastructure, with a long-term perspective. Importantly, finance is raised by issuing bonds that are guaranteed by the federal state. There are two sub-sectors of public banks: Sparkassen (savings banks) and Landesbanken (regional banks).

• Sparkassen are locally owned and run, often by cities or a group of cities (not for profit) and concentrate on universal banking (for example, loans to individuals and SMEs).
• Landesbanken are owned by savings banks via the federal system. The Landesbanken are effectively the central bank for the region’s Sparkassen (by providing liquidity) and also provide wholesale banking (i.e. to large organisations and/or cross region finance).

Co-operative banks

Co-operative banks include both credit unions and co-operatives and offer similar but differentiated products.

• Credit unions provide loans and finance to the individual and small businesses based upon a common bond under which the credit union operates. For example, the credit union could be location specific or profession specific.
• Co-operatives provide finance to individuals and SMEs but offer more democratic accountability as members can decide how the bank is run.

Private banks

Private banks operate as private banks do here, in the UK. They have branches across the country (and, indeed, the world), and provide all the same services.

The UK does not have public banks but rather has a private sector led system. The difficulty in changing the system in the UK is that we don’t have a federal political system and so financial responsibilities are maintained at the national level. Moreover, public banks would also require institution building which takes time and money.

However, there are already many funding streams from central government to target specific industries – namely manufacturing or green technology – as well as specific financing ideas such as the Cambridge and Counties Bank (a partnership between the university and the county) which could benefit from such a targeted system. There may also be a role for quantitative easing to be better channelled into regions via a new finance structure.

One thing is for certain; if the idea of regional banks is to catch on in the UK the core principles need to remain and the institutions need to be tailor made to our political, economic and administrative system. Public banks in Germany have local knowledge of their economy which informs their long-run investment mentality and ensures local economic growth is championed above short-run profit.