Devolution should mean regions competing for investment
The next phase of devolution should focus less on how funding is distributed and more on how growth is rewarded, says Gus Wiseman
For more than 30 years, governments have tried to rebalance England’s economy by directing funding towards regions outside London and the South East. Many of those programmes have delivered worthwhile projects, but the basic model has remained unchanged. Local leaders still spend too much time competing for Whitehall funding when they should be competing to attract investment.
That matters because the two incentives are fundamentally different. Winning government funding is episodic. Attracting long-term investment is constant. It creates jobs, expands the local tax base and strengthens the local economy over many years.
The next phase of devolution should therefore focus less on how funding is distributed and more on how growth is rewarded. Places that deliver new homes, attract employers and grow their economies should retain a greater share of the value they create. Doing so would encourage local leaders to think more like long-term stewards of their local economies.
England is unusual in the degree to which local economic success and local fiscal reward are disconnected. Germany provides an interesting contrast. Local authorities receive property tax alongside a share of national tax revenues, allowing communities that attract investment to benefit directly from the growth they generate. A robust equalisation system continues to support less prosperous regions, but successful places also retain a meaningful share of the additional value they create.
Incentives matter
The result is a different relationship between the public and private sectors. Local government has a stronger incentive to support development because economic growth directly benefits local finances. For institutional investors, that creates greater confidence that planning, infrastructure and local leadership are working towards the same objective.
England has recognised parts of this challenge before. Greater Manchester’s additional fiscal freedoms, together with Enterprise Zones and City Deals, have shown how stronger local incentives can encourage investment. Yet these remain exceptions rather than the foundation of the system.
The timing is now right to go further. Metro mayors have stronger mandates and increasingly ambitious economic strategies. At the same time, initiatives such as the Mansion House reforms, the National Housing Bank and the Sterling 20 are encouraging more long-term capital to invest in the UK. Local Government Pension Scheme funds are also placing greater emphasis on place-based investment, creating a natural alignment between local growth ambitions and patient institutional capital.
This is significant because investment decisions are increasingly made city by city rather than through broad national strategies. Investors look for capable local partners with credible development pipelines and want confidence that projects can be delivered. Cities that can offer those conditions will increasingly differentiate themselves in the competition for capital.
The UK has no shortage of places with world-class universities, innovative businesses and highly skilled workforces. Too often, however, investment has lagged behind economic potential. Better incentives will not solve every challenge facing regional growth, but they would give local leaders a stronger reason to accelerate development and create places where institutional capital has the confidence to invest.
Much of the debate around devolution has focused on where power should sit. The more important question may be how local leaders are rewarded for using it. If England can create a stronger connection between economic growth and local benefit, it will create a more attractive environment for long-term investment and give devolution a much greater chance of delivering on its promise.
Gus Wiseman is UK Director at Patrizia and former Global Head of Investor Relations at the Office for Investment