DISCUSSION PAPER

 

UK FINANCING OF MUNICIPALITIES AND URBAN REGENERATION

International Symposium

Institut für Städtebau und Wohnungswesen
der Deutschen Akademie für Städtebau und Landesplanung

Des McConaghy:

B Arch (L'pool), Dip TP (Edin), MRTPI
University of Liverpool

Ursula Haeckel
MA (München)
Liverpool Business School

LANDSHUT GERMANY

1 October 1991

We were very grateful for the invitation to join your symposium - and for the chance to discuss such an important topic. This morning we offer a summary view of the financing and control of British urban regeneration agencies. It might be useful also if we make comparisons with your more corporate system, especially as it takes the strain of German unification. Certainly the British situation is complex because, while our municipalities retain an important role, urban funding is largely in the hands of central ministries or their many agencies; a fragmentation leading to loss of accountability at local levels.

PARTICIPATION, LOCAL INITIATIVE & CENTRAL CONTROL

 

It is worth emphasising this at the outset because one priority must be to find ways of reinforcing public participation - and that means the role of elected municipalities. This task is by no means unique to Britain - nor is it a simple one. And perhaps the most difficult question for us all is this: how can central governments respond to local initiatives and the demands of diverse municipalities while, of necessity, retaining effective control at the centre?

Only a lunatic would claim we have the right balance. Last month some of our cities were again torn by urban riots. None of these riots was on the scale of the 1981 riots in Liverpool and London. But they were a robust reminder of the astronomical distance between government and the governed; a reminder of a serious dislocation in central/local relationships; and a reminder too, that communities are likely to erupt when people feel economically and politically excluded.

Our unruly communities are those which face large scale unemployment. In last month's riot areas the average male unemployment rate is 30% - and much higher among 18 to 24-year olds. But overall unemployment is still rising in Britain - and the overall crime rate has more than doubled over the past decade. Perhaps it is an accident that Mrs Thatcher raised the market economy to the status of an ideology in the same decade. It certainly is no accident that the same decade saw a massive centralisation of power in Britain and a devaluation of constitutional politics.

CONSTITUTIONAL DISSIMILARITIES?

 

Of course Germany has been a "role model" for the prosperous liberal democracy. And certainly your federal constitution appears to guarantee decentralised government. Britain, on the other hand, has always been a highly centralised unitary state with no regular patterns of regional authorities, with no guaranteed powers for local institutions and - above all - with no written constitution. Direct Anglo/German comparisons are can therefore be misleading.

And yet, well before unification, Germany also saw power shifting from local authorities to the Länder and from the Länder to the Federal Government [1]. Now nobody can say for certain if the financial mechanisms of German democratic federalism, which on the whole served your old Länder so well, will survive intact the much wider disparities of united Germany (GEMU). If not, can they be adapted? And can adaptations be extended (as Spain suggests in the current Intergovernmental Conferences) to deal with the yet more extensive regional disparities that must follow European Monetary Union (EMU).

These German questions - and German budgets decisions and the vice-like grip of ERM - are now crucial to the future of distributional politics in European Community - and therefore to all our programmes of urban and regional regeneration.

British physical planners have taken little interest in these public expenditure patterns - and their decisive nature. And yet to spend is to choose - and the rest is relatively rhetorical. Let us quote a key point from Heclo and Wildavsky's seminal book on British administration: "Money talks: it speaks to the purposes of men and nations" ..."surely little the State does - short of war - is more important than constantly using so much of the nation's work and wealth. The hidden politics of public spending is a unique window into the reality of British political administration" [2].

We would add "a unique window into the reality of any political administration". But for that very reason it is often difficult to open the window - and London is the "secrecy capital" of Europe. Now it is difficult to avoid the impression that such obscurantism is also a growing problem in Germany, in spite of (or perhaps because of) your constitutional guarantees.

CO-ORDINATION OF URBAN RENERATION

 

In any event the annex to this paper provides a list of the main resources available to English urban regeneration agencies and municipalities; money provided under a whole array of Acts (Finance, Housing, Local Government, Inner Areas and Planning Acts) and operated by diverse financial regimes. We can only refer to a few - but don't hesitate to ask for details during our visit or even afterwards in correspondence. The annex also includes a short note on the British Treasury's central planning system which governs the lot - and which "turns the screw" at the centre of Europe's most centralised system.

And so let me warn colleagues from the new Länder that while we British talk a lot about "local democracy" (especially when advising in Eastern Europe!) our central government does exactly what it likes. Even at Westminster - at the centre - the absence of Parliamentary control of expenditure is notorious.

It is the same locally. The annexed statistics show that while municipalities (i.e., local governments) account for a quarter of state gross public expenditure they can only raise and determine between 10% and 15% of their budgets. But even this is deceptive. In fact the central government effectively determines each budget by progressive application of financial penalties or, simply, by making an order. All the cities in last month's urban riots had to make financial cuts following "capped" budgets; budgets determined by central government.

The annexed statistics also refer to direct spending by central government agencies on services crucial to urban social infrastructure and renewal; urban development corporations, housing associations, training and higher education, income maintenance and health services. And when the budgets of all these key life-support services are thrown into the local pot, the percentage of local budgets determined by elected municipalities can drop to as little as 3%. So diverse central bodies are financing 97% of the action.

Obviously municipalities should have a more pivotal role in urban regeneration - and some make great efforts to fulfil it. But as a practical matter they face a bewildering complexity of central government agencies all working within an impenetrable "budgetary haze". Nobody - including government ministers - can say what is really going on in anyone area - or if it all adds up to coherent policy. Municipalities themselves are too hard-pressed to monitor overall spending in their area and central ministries are often reluctant - and sometimes refuse -to release details of local services. Indeed Mrs Thatcher's Inner Cities Minister, when criticised at a CBI conference for lack of co-ordination, replied that he knew the problem but we should nevertheless avoid any sort "of mindless rationality" [3] !

PRIVATE SECTOR PARTICIPATION

 

Of course our Minister was really advocating a passive ("hands off") governmental stance and market-led strategies. All our public agencies are now correctly aware of the need to encourage private investment. And those of us who worked on British new towns in the '60s will remember developments - and whole new towns - that could well have been left to the private sector, or implemented through partnerships.

Opportunities like Sachsen-Anhalt's new High-Tech city near Magdeburg are indeed exciting - and the private sector needs little encouragement to invest on virgin sites and in such optimum locations. Our best new towns also exploited natural growth points. However they attracted the younger and more mobile people from existing centres and probably left older cities worse off.

Liverpool has the dubious reputation as being one of the poorest cities in Europe. And after our 1981 riots Environmental Secretary Heseltine filled the place with advisers lent by our main financial institutions. But this intellectual capital soon drifted away when they discovered that the one thing certain about poor areas, and poor people, is that they haven't got much money! For example, there is not - and there never will be - any profit in providing good housing for poor people.

Our more recent experience is patchy. For example we annexed a note on our £ 50 million 1991 "City Grant" paid direct to developers for urban projects that would not otherwise be profitable. It recently replaced a similar "Urban Development Grant" after criticism by our National Audit Office about grant going mainly to two cities - Birmingham was one - for projects that could well have been profitable without grant - and which created few new jobs [4].

Heseltine now expects cities to bid for limited funds in competition with each other. Prizes in his "City Challenge" are awarded for the most imaginative combination of projects from both private and public sectors. Liverpool is the 1991 winner and this new competitive bidding element has added zest. The other innovation is to encourage some thoughtful municipal participation and local coordination - even though granting authorities at central government level remain as stubbornly un-coordinated as ever.

RESOURCE PLANNING

 

So the main British lesson is the need for a collaborative framework of discussion embracing central ministries and the subservient levels of government. Our Treasury's central planning system is a top-down aspatial budgetary sum - and territorial implications are not an overt part of the sum.

That means that our central planning lacks any systematic feedback; systematic feedback from municipalities, financial institutions, management and labour. Here we have a dramatic contrast with your German consensus model; the model which Mrs Thatcher condemned as so corporatist and bureaucratic.

And so it is! The role of your Business Cycle Council (Konjunkturrat) and your Fiscal Planning Council's (Finanzplanungsrat) help in co-ordinating public budgets at all levels does suggest a degree of fiscal and budgetary coordination that is indeed bureaucratic and corporatist. But it has bulwarked the wider German consensus and economic success. One cannot have both "local autonomy" and "partnership": the words means opposing things.

Thus arriving at this most prosperous heart of Europe we find the Bavarian Government seeking new powers for even tighter controls of municipal budgets. As a senior official in the Bavarian Interior Ministry once told us: "in this business it is everyone's duty to complain"! Indeed the emerging generality is that, in spite of all the popular decentralisation rhetoric, most Finance Ministers in the Community countries are finding ways of exercising central control - one way or another.

Thus the search for new sources of municipal taxation - for example Mrs Thatcher's "Poll Tax" disaster - is a digression. The very variety of European taxation systems speaks to the difficulty of devising fair and efficient local taxes - partly because the political economy of local government is so completely intertwined and determined by central government that almost any example of municipal problems leads you back to the door of central government itself. So the key to modern municipal participation lies in effective resource planning with the centre.

HOUSING EXAMPLE

 

British housing policy is one example of this planned and unplanned interdependence. German colleagues have envied the British rate of private owner-occupation - which grew from 54.7% to 67.8% over the past decade: our "property-owning democracy". The limits of action are set by an annual tax expenditure £ 8 billion (i.e., tax relief for owner occupiers) and, in 1991, £ 1.5 billion to a central Housing Corporation which finances local housing associations and all municipal housing screwed down to all billion running costs subsidy.

Thus construction of housing for rent has fallen from 250,000 a year in the 1970s to 26,000 in 1989 - and output of municipal housing is now lower than in the 1920s. As a result homelessness has doubled over the last decade [5]. Thus personal savings which should have created jobs by financing productive industry have, instead, poured into an already over-valued housing stock. In just seven years, between 1982 and '89, average British house prices rose 170% - pushing up inflationary wage demands [6]. Thus our domestic construction industry crashed in the absence of local (counter-cyclical) programmes of municipal housing. Thus unemployed workers cannot seek alternative work elsewhere through lack of cheap rented housing - and so on.

So economic policy is the condition of improving the environment and itself constitutes the priority! Thus, with unemployment now rising steadily, 280 owner-occupied houses are being repossessed by mortgage lenders every working day. This means another 256,000 people will swell our tide of homeless this year; more than the entire population of Derby - or two Heidelberg's - losing their homes in 1991!

CONCLUSION: FAIR WEATHER FEDERALISM?

 

In conclusion, British urban regeneration lacks an objective financial planning framework - and this contrasts sharply with your model of fiscal co- ordination and resource planning. In this respect we come to learn from your consensus model - and in particular to see how it is now being adapted to cope with wider disparities.

However if the financing of British urban regeneration resembles a "budgetary haze", the financing of your new Länder looks more like a "dense fog". So far we have only seen one new Land budget but that had little in common with any principles for financing the old Länder - and indeed looked like a recipe for bankruptcy. Of course these are early days. But it seems clear that both German and European unification place a new question mark over the future of distributive politics. It could go either way!

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NOTES

 

  • [1]   "The decline of autonomous financing has become a sad certainty": see Richard Klein and Engelbert Münstermann: "Gemeindefinanzbericht" 1978. Der Städtetag: Januar 1978.
  • [2]   Heclo and Wildavsky, The Private Government of Public Money, Macmillan 1974.
  • [3]   Tony Newton: author's transcript, Confederation of British Industry Conference, 24 November 1988.
  • [4]   National Accounts Office (Report by the Comptroller and Auditor General), Regenerating the Inner Cities, London, HMSO, 24 January 1990.
  • [5]   For a recent critique of UK housing policy see Duncan Maclennan, Kenneth Gibb and Alison More, Fairer Subsidies. Faster Growth, 1991, from the Joseph Rowntree Foundation, York, GB-Y03 6LP.
  • [6]   Those entering the market can now pay 40% of income on house loans. However in 1987 -'88 owners took £ 25 billion out of their housing equity to finance a consumer spending spree.

 

ANNEX

FINANCING OF URBAN RENEWAL

 

This summary refers to 1991-'92 planned expenditure for England. Arrangements for Scotland, Wales and Northern Ireland are similar but can vary in important respects. E.G., nearly all local functions in Northern Ireland are operated by central government or centrally appointed boards. One (English) billion is a thousand millions.

STRUCTURE OF RESOURCES

 

Responsibility for urban regeneration and renewal is shared by municipalities and State/Central Government (CG) departments. Municipalities account for a quarter of State gross governmental expenditure but only determine from 10% to 15% of their budget through a local Poll Tax ("community charge").

Overall Local Government Expenditure £ 39.82 billion
Net amount raised from local Poll Tax £ 5.93 billion

The State (CG) decides annual Standard Spending Assessment (SSAs) for each municipality. SSAs have 13 elements, eight of which are population based. The general Revenue Support Grant (RSG) and nationally determined business property tax (NNDR) are designed to result in a standard level of local tax if municipal spending is within the State's SSA.

The CG can also determine overall municipal budgets directly - or indirectly through a complex system of specific grants, general grants, credit and capital receipt controls. Thus, while municipalities have an important part to play in urban regeneration, action generally depends on availability of CG specific grants and direct action by various CG departments and State agencies.

Main CG departments explicitly involved in urban regeneration are Environment, Employment, Transport, Trade & Industry, Education & Science - and the Home Office which has overall responsibility for ethnic minorities, immigration and police. Health and Income support also remain nationally administered services - as is all public Higher Education. But telecommunications, power generation and distribution, water supply and sewerage have all been recently privatised.

MAIN GRANTS & CG EXPENDITURE

 

1.1  Inland Revenue tax expenditure on housing loan subsidies for owner occupiers: £ 7.80 billion

2.1  Department of the Environment (DOE) Revenue Support Grant to local authorities (LAs): £ 9.67 billion
2.2  DOE allocation of non-domestic (commercial property) tax (NNDR above) to LAs: £12.40 billion
2.3  DOE Poll Tax Grants to LAs: £ 2.74 billion
2.4  DOE Extra Poll Tax Grant to LAs: £ 4.83 billion
2.5  DOE Grant to LA Housing Revenue Accounts: £ 1.15 billion
2.6  DOE rent subsidy to LA tenants: £ 2.34 billion
2.7  DOE rent subsidy to private tenants: £ 1.65 billion
2.8  DOE Specific Grants to LAs: £ 3.97 billion
  of which;

  (a) Slum Clearance Grant £ 30m.
  (b) Renovation Grant £ 280m.
  (c) Urban Programme (75% grants to 57 LAs submitting programme bids) £ 130m.
  (d) Derelict Land Grant to public bodies, firms and individuals of net cost (from 50% to 100% of net cost depending on agency); £ 70m.
  (e) "City Challenge". Competition between 15 LAs for a share of £ 412.5m. five year programme: £ 82m.

2.9   DOE "City Grant" direct to private developers towards preparation and implementation of projects not otherwise profitable: £ 50m.
2.10   Grants to the 10 DOE appointed Urban Development Corporation (in London, Merseyside, Trafford, Black Country, Teeside, Tyne & Wear, Manchester, Leeds, Sheffield and Bristol): £ 430m.
2.11   DOE Grant to the Housing Corporation. The Corporation finances housing associations which are now seen as main providers of new social housing: £ 1.45 billion
2.12   Other DOE initiatives are grant aided in various ways. For example, "ENGLISH HERITAGE" (grants towards conservation areas and historic monuments), "ESTATE ACTION" (some grant, but mainly credit approvals, for new approaches to run-down council housing areas), "HOUSING ACTION TRUSTS" (HATs) (grants for improvements and running costs where municipal housing tenants agree to transfer control to a local Trust). There are also a number of CG "TASK FORCES" and "CITY ACTION TEAMS" (CATS) which attempt to "co-ordinate" action: app. £ 153m.
2.13   Other DOE initiatives not involving grants include:
  (a)   Enterprise Zones (areas excluded from local taxes and planning restrictions - largely discontinued);
  (b)   Land Registers (Registers of unused and under-used land whereby DOE can make an order disposing of such land); and,
  (c)   Simplified Planning Zones (designed to speed development by giving advance planning permission for specific types of development).

3.1   Department of Employment (DE) grant to 82 Employer-led Training Enterprise Councils: £ 844m.
3.2   DE Employment Training Schemes: £ 888m.
3.3   DE Career Development Loans: £ 5.3m.
3.4   DE "Compacts"; 30 Inner City "Compact Partnerships" (incl. 4 in Scotland) for agreements between schools and local firms: £ 12m.
3.5   DE Small firm service & loan guarantee scheme.

4.1   Department of Transport's Transport Supplementary Grant to LAs for local road spending: £ 318m.

5.1   Department of Trade & Industry (DTI) "English Estates"; provides advance factory and offices - and works with private-sector to provide managed workspace for new small businesses: 1991:self-financing
5.2   DTI Regional Assistance Programme, grants and incentives to small firms in 22 of the above (2.8c) 57 Urban Programme areas: £ 255m.
5.3   DTI Local Task Forces: £ 10m.

6.1   Department of Education & Science (DES) "Compacts": with DE (3.4) above.
6.2   DES "City Technical Colleges": new secondary schools independent of LAs and directly funded by DES: £ 12m.

7.1   Home Office "Section 11 Grants" towards the costs of assisting families of Commonwealth origins. £ 117m.

 

PARTICIPATION, PLANNING & THE TREASURY

 

Land-Use Plans: Local authorities prepare development plans for their areas. Municipalities in metropolitan areas are responsible for Unitary Development Plans (UDPs) which have regard to DOE regional guidance. Commencement orders for preparation of UDPs have been made and it is hoped 85% may be adopted by 1993 (Cm 1508).

Final approval by the DOE Secretary covers only the land-use implications of plans; Development Plans have no direct implications for the various spending plans of other public agencies.

Public participation exercises accompany various stages of development plan production - and with respect to some separate initiatives. For example, participation is necessary for some "Urban Programme" schemes (2.8c) - but not all. HATs (above) cannot proceed if a majority of tenants actively vote against the proposal. This has stopped most HATs to date.

Financial Planning by the UK Treasury is a continuous budgetary operation without an overt territorial dimension. This results in "top down" bilateral negotiations with various central departments including those responsible for municipalities and urban regeneration. There is little opportunity for effective prior consultation with local government associations or other public forums.

Thus in spite of very large financial transfers UK urban regeneration presents a bewildering picture; a financial "kuddelmuddel"! No department or agency has an overall view of what is happening in anyone area. On the other hand ministers are free to respond to specific problems directly - and in a flexible and opportunistic way.

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Figures compiled from Government Expenditure Plans Cm 1520, Cm 1508 and Cm 1514,
from AMA, from IoH & from Hansard 23 April 1991, cols 391-392:

Des McConaghy, 25.09.91

 


ANNEX B

 

 

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Contact to Des McConaghy:

 

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