By Prof. John Bryson, City-Region Economic Development Institute, University of Birmingham
The UK developed a centralised economy during the 1940s in response to a major crisis. The fall-out from World War II led to a period of shortage and restrictions on raw materials that were finally removed in 1954. The centralization of the British state that intensified in the 1940s continued. In 2011, the Localism Act (c. 20) altered the powers of local government in England and facilitated the devolution of decision-making powers from central government control to individuals and communities. Policy-makers in local government are trying to negotiate the transfer of powers from Whitehall to the regions via City Deals and the more recent ‘Devolution Deals’. There are difficulties here in that many of the core powers will remain in Whitehall and also Brussels. These powers include the regulation of labour markets, national taxation and the negotiation of trade agreements. This also includes policy interventions that impact on exchange rates.
The challenge faced by the UK regions is to encourage wealth creation via the development of local businesses and by attracting and retaining Foreign Direct Investment (FDI). Local powers of attraction are heavily reliant on funding that flows from Whitehall and also the wider framework conditions that are determined by national policy. A key question is: how to encourage local growth? The answer is complex but includes connectivity or the quality of the local infrastructure network and the links to national infrastructure (airports, ports, the motorway network), the quality and quantity of skills in the location labour market, the quality of life in the area (schools, housing, arts) and local taxation. Encouraging local economies must also consider innovation; new product and process innovations create new business opportunities, but have the potential to destroy existing firms, products and processes. The British high street has been subjected to gales of creative destruction that include the rise of out-of-town shopping centres, e-commerce and the shift in emphasis towards the purchase of more services. These innovations have undermined the profitability of many British high streets leaving empty shops, but also the emergence of shopping areas that are dominated by charity shops. There have been many newspaper articles and radio and television programmes that have proclaimed the death of the British high street. On the one hand, many major retail chains have failed through a combination of new forms of competition, but also through business models that relied on excessive gearing or too much borrowing. On the other hand, there is an on-going process of restructuring that is one of the features of a capitalist economy – change creates and destroys. The high street has always been in a continual process of change and adaptation. Nevertheless, one thing that has not changed is the perception that retailers are wealthy and are able to support two related industries.
First, we need to consider the property investment companies, pension and insurance companies and other long-term property investors that hold retail property as a core investment asset. The difficulty is that British property leases are constructed on the assumption that rents will only increase and never decrease. Large failing retailers have tried to persuade their creditors to accept Company Voluntary Arrangements (CVA) as part of a formal process of business restructuring. A CVA is a formal insolvency process between a company and its creditors which binds all unsecured creditors that exist at the time of the approval of the CVA, including those that may have voted against the proposal. Currently, BHS is trying to negotiate such an agreement with the landlords of 87 of its 164 stores.
Second, retailers must pay the national business rate which was introduced in the 1988 Local Government Finance Act. Local Authorities have wanted greater flexibility in the setting of the rate to encourage economic activity in places that are having problems. For some retailers their business rate will be three times the cost of their annual rent. In the 2015 Autumn Statement, it was announced that local authorities would eventually be able to retain the £26bn raised in business rates in exchange for taking on new responsibilities. Councils will be able to cut the business rate if they consider that by doing so they will be better off as a result of new firms coming to their areas. Authorities with elected mayors will be able to raise the business rate to provide finance to improve local infrastructure and to support local business. But, an upper limit will be set nationally.
Business Rates are an important cost for business and are also an important revenue resource for government. The gales of destruction that are being experienced by the British high street may be partially ameliorated by innovative approaches to business rates. In 2015, Rochdale introduced a £100,000 innovative business rate reduction pilot. This scheme reduces the rate by 80% in the first year and 50% in the second and covers 23 empty units in Rochdale’s main shopping area. This pilot has seen the vacancy rate in the town centre fall from 27% to 11%. Under the current business rate scheme, Councils can apply local discretionary business rate discounts over and above any put in place by Whitehall, but have to cover some of the cost. In Rochdale the discount has been an important factor influencing entrepreneurs considering opening a retail business.
The Rochdale experiment indicates that business rates are a constraint on local business. It also provides an interesting example of differential business rates being used to encourage economic activity. There are important local multipliers that come from a prosperous high street and contribute to the success of a local economy. First, there are direct and indirect multipliers related to job creation. Second, a prosperous high street with very few vacant units is a major contribution to local living and lifestyles. An empty high street with boarded-up shop fronts is not a positive contribution to a place’s image. This second multiplier is very difficult to measure, but places that appear to be successful attract and retain skilled and talented people. Such successful places have positive feedback loops that enhance the sustainability of a local economy. The Rochdale pilot tells us something else about devolution or localism – understanding a place or a locality plays an important role in formulating appropriate place-based policy interventions. These place-based policies have the potential to transform the national economy through thousands of locally nuanced policies. This is a call for the development of bespoke policy interventions – policies that lead to better outcomes for people and also produce better outcomes for the United Kingdom.