By Ben Lucas
The immediate headlines from the Spending Review 2015 will be all about how George Osborne escaped from the straightjacket he had put on himself. This is particularly true with the U-turn on tax credits and the decision not to cut the police and FE budgets. He was hugely helped in this by the OBR happening to find £27bn of extra revenues as result of revised forecasts - proving the old adage that there's always something to be found at the back of the sofa.
But the real significance of the Spending Review lies elsewhere. Two substantial and important shifts are taking place, from the state to the private sector, and from central government to cities. The state may be shrinking to 36% of GDP by the end of the Parliament, but it is business that is being asked to pay for this. This is a fairly ruthless appropriation of Labour policy before the last election. Business will pay the cost of phasing out tax credits in the future through the introduction of the Living Wage and yesterday we learned that the Apprenticeship Levy will raise £11.6bn over the next four years.
At the same time, we are seeing what George Osborne is calling a 'devolution revolution'. Where these two shifts intersect is over business rates, and in particular the new power that City Region Mayors will now have to raise an extra 2% on the business rates to fund infrastructure spending. Whilst there were no major new eye-catching moves on devolution in the Spending Review, what was more significant is that this has now become a mainstream priority for Government. It's no longer seen as a gimmick, but instead an underlying imperative.
One of the longest sections of the Spending Review report was on devolution, with a full 12 pages of the report given over to this. The Chancellor announced four overarching priorities: health and social care integration; spreading economic power through devolution; widening social inclusion and opportunity; and improving national security. Not only was devolution one of the four priorities, it's also at the heart of achieving two of the others - health and social care integration and spreading social opportunity through better skills training.
Devolution to Combined Authorities has been moving at a rapid pace in the past few months. Most people have probably not yet noticed this, as this process has largely taken place below the national media radar - the devolution revolution has not been televised. But this is a very significant development. Around 11 million people in six City Regions will now be covered by new arrangements that will include directly elected mayors, new investment funds, and local control over transport, and skills, and a big say over housing, health and some other public services. The Spending Review confirmed the intention for there to be a Cardiff Capital Region deal and deals for Aberdeen and Inverness, The door has also been left open for City Region Deals in Bristol and the South West, Leeds and West Yorkshire and for Nottingham and Derby.
By the Budget in 2016 we could see every major urban area covered by devolution and new governance arrangements, add in what we already have in London, and most of metropolitan England will have Mayors by 2017. This does of course raise an interesting question about the future of counties, the Spending Review had nothing to say about County Deals, even though a large number of the 38 devolution submissions to government were from Counties.
Accompanying this policy devolution is a process of gradual fiscal devolution. By the end of this parliament the intention is for local government to be largely self-financing, with 100% retention of business rates and the phasing out of the Revenue Support Grant. Yesterday we had several new announcements that add to this. Councils will now be able to raise an additional 2% of Council tax to fund social care (raising upwards of £2bn) and they will be able to retain 100% of asset sale receipts. But, as my colleague Sarah Whitney has pointed out, partial fiscal devolution on business rates can increase risk for local government. The best way to mitigate this is to widen the scope of fiscal devolution, so that the critical mass of local finance and borrowing is greater and therefore the impact of one off changes (for example in relation to appeals) is less.
However, there are still some big questions to ask about the devolution journey. One glaring inconsistency is to give City Regions power over skills budgets and responsibility over area reviews of post-16 education, whilst at the same time removing responsibility for education from local government. The two are surely connected. In the North East, for example, the devolution deal is based on an integrated approach to human capital development from early years to FE and beyond. This has to involve a greater co-ordination role for local government in relation to schools, which cannot sit outside a local strategy to improve skills and life chances.
Housing is another area where more should be done through devolution. George Osborne echoed, in more prosaic form, JFK's famous commitment when he said "we choose to build". But all he has really chosen to do is to stimulate demand, through additional help for people to buy homes. Whilst this will undoubtedly help, if he really chooses to build then we need to see much more on supply. Councils need to be able to build more and to use their land assets to boost housing supply and at the same time to provide proper skills and apprenticeship opportunities for local people.
And, of course, the biggest caveat of all should be to not to rush to final conclusions about the Spending Review before the ink is dry on the statement. Reading the small print is always necessary and there will be further details published by Departments which could well change initial verdicts, as well as spell out the detail of cuts.
But what the Spending Review confirms is that a large part of the future will be local. This is a big opportunity for cities, even though they will have to cope with yet further cuts to local government funding that will imperil many local services. The challenge for city leaders will be to fashion a new future for their places, based on mobilising their local social and economic assets in the knowledge that there will be fewer barriers put in their way by central government, and a lot less Government funding.