England expects: Responsible capitalism from the ground up

We opened our analysis of the English deal last week with a discussion of how to hardwire devolution into the political process. We now intend to use this and next week’s essays to outline some of the benefits the principle of subsidiarity may bring.

The home front 

Bricks and mortar is a good place to start. As is well documented, Britain is currently undergoing a chronic shortage in house construction – the lowest levels since the 1920s when, after all, Britain was suffering from an acute shortage in such industries after the cumulative impact of the first world war.

To help address this the coalition government has introduced the New Homes Bonus, a policy extensively worked up by the Conservatives when in opposition. In essence, this policy pledges to match the council tax payment of any new build home (or one returned to use having been derelict) with a payment from central government to the local authority where the unit is built.

The government have contemplated tinkering with this format – in August 2013 the coalition announced that 35 per cent of New Homes Bonus monies would be top-sliced and allocated to the Local Enterprise Partnership in which the relevant council was located. This was subsequently reversed at the Autumn statement.

The overarching aim of the New Homes Bonus is laudable enough. But when examining it in early 2013 the National Audit Office ‘found little evidence that the influence of the bonus is reflected in increased planning approvals for housing.’ Given that the money is ring-fenced and redistributed from Formula Grant the NAO also noted that ‘some local authorities face substantial increasing financial risks from the overall reducing effect of the Bonus on their funding.’

The key problem facing local authorities is to get their developments approved by the local community – to tackle, in other words, the NIMBY problem. As John Denham MP has noted, there is often little incentive for communities to approve new housing since they or their children will be unable to purchase the properties themselves, or see any tangible benefit to their neighbourhood.

One method of addressing this is through stamp duty. In France the droits de mutation (stamp duty) will rise from 5.09 per cent to 5.8 per cent in 2014. Yet local authorities have been given the choice whether to implement the rise, or to decide against it. Meanwhile in the UK the 2012 Scotland Act will see the power to set and collect local stamp duty devolved to the Scottish Parliament for April 2015. They are expected to raise the minimum threshold at which the tax is paid from the UK figure of £125,000 to something closer to £200,000.

A similar power in England would seem to make much sense, is currently being considered by the CLG Select Committee, and has previously been raised by Bristol City Council. As a minimum, by giving local authorities the power to set a local stamp duty of up to two per cent on the sale (and subsequent re-sales) of a new build property, to be paid by the developer, central government could provide them with a much needed tax raising power.

Yet by going further and automatically hypothecating the receipt from this tax to the reduction in council tax bills potentially all sides could win. Residents would see lower council tax bills and therefore be inclined to approve developments more often. The council would gain more residents (and thus higher council tax receipts despite any upfront loss). Even the developer would scarcely feel the pinch given a five per cent average rise in house prices in 2012 alone. Authorities could of course choose to levy the local stamp duty at 0 per cent and thus keep the status quo, but for those who wish to take a different approach the option should be there. The power to taper the tax – raising the levy over time to encourage developers not to hold on to houses – should also be devolved.

Stimulating local economies to approve private sector development is one move any English deal should entail, but another is to get councils building properties again. In the mid-1950s under Macmillan and then again in the late 1960s under Wilson local authorities were building around half the new stock. Even in the mid-1970s, not exactly a period of economic boom, authorities still constructed over 150,000 homes themselves. Right to Buy caused a significant decline (why build a new unit if it could be sold and said authority lose most of the receipt) and by the early 1990s councils were more or less out of the house construction game. By 2004 local authorities across the UK built a total of just 130 homes whilst private sector construction slumped towards the end of the 2000s. It is this recent dip in supply that has so exacerbated the rise in house prices.

According to the head of a leading developer, Barratt’s, ‘my honest view is we will not get anywhere near the number of affordable homes we need [through private construction alone]. Local authorities need to build more affordable homes, and if I were the housing minister I would be pulling every lever I could to make that happen.’ Prior to the Autumn statement, the Chartered Institute of Housing called on George Osborne to raise the borrowing cap for local authorities by £7bn to enable them to build 75,000 new homes over five years, create 23,500 jobs and £5.6bn of economic activity.

The Autumn statement indeed raised the cap, but by just £300 million over two years – and this money coming with the requirement to sell off existing stock. This might deliver a few thousand extra units if carefully managed, but it is not going to solve the housing shortage alone. Even Sir Merrick Cockell, the Conservative councillor and Chairman of the Local Government Association, has argued that the ‘housing borrowing cap needs to be removed so that councils are on the same footing as any other social housing provider.’

When removing or raising the cap on the amount authorities can borrow against their Housing Revenue Accounts (monies received through rent), the fear is that authorities will borrow the money but not put it towards new stock. Any English deal between local and centre on this issue must therefore involve both carrot and stick. Authorities should bring forward rigorous plans for the amount of units they will build, and at what cost. These would be subject to Treasury or DCLG approval. Should they meet these targets their borrowing cap should be raised further, if however they fail to meet their promises their borrowing cap would be lowered. The risk and reward would be determined by the local authority itself, not the Treasury/DCLG who would merely take an oversight role on initial feasibility.

Availability of land is clearly an issue, and the idea to give authorities greater powers over instilling ‘use it or lose’ arrangements with developers has significant potential. But whilst 28 per cent of authorities responding to a 2012 local government survey suggested the availability of land was a hindrance to their plans, a far greater 46 per cent believed the lack of financial autonomy was holding them back. Unleashing the power of local authorities to borrow and grow their areas not only helps Labour on the difficult questions surrounding borrowing going in 2015, but it makes financial sense too.

Energy politics

The English deal can also contribute to the debate over the cost of living. Labour’s landmark policy on a 20 month energy price freeze has made much political headway, including forcing the government to act on cutting the green levies – that, in itself, generating a separate debate. YouGov polls indicate that two in three voters (including 52 per cent of Conservative voters) believe the energy market should be nationalised. Three in four voters believe the government should have the power to control the price of gas and electricity – slightly higher than the support for controlling rail prices (72 per cent) and significantly higher than the 45 per cent who would approve of controls over the private rented sector. Energy prices (22 per cent) out rank unemployment (14 per cent), the level of benefits (10 per cent) and inflation (10 per cent) as the biggest threat to the British economy. Breaking up the dominance of the big six and encouraging new providers is backed by 53 per cent of those recently polled for the Fabian Society compared to eight per cent against. In short, Labour’s emphasis on the cost of living is not just good policy, it is good politics.

Yet a vibrant English deal could help see off concerns that the price of wholesale gas is uncontrollable, and an energy freeze is ‘pure fantasy.’ It would help make the pledge – in essence – ‘TV debate ready.’ At present the coalition is meeting Labour’s flagship policy with the retort that opening up competition and creating a better informed consumer will achieve similar ends without recourse to 1970s style ‘Marxism’ – ill-informed as that challenge often is.

Energy is something most agree to be an imperfect market. If government intervention introduces a measure of real rather than crony capitalism – to borrow the Conservative MP Jesse Norman’s important distinction – then that is a pragmatic rather than an ideological step. As Norman notes of markets, politicians’ goals ‘should be to wake up and smell the coffee: to address the economic realities of the 21st century by changing some of the key features of our market economy and, especially, our culture over time.’ With regards to energy then, local authorities can shape the debate in two regards: by extending the collective switching schemes seen at present, and, more radically, by entering the energy market themselves.

On the first, collective switching schemes have been pioneered by local authorities like Norwich and Oldham. 38,700 homes have signed up across Greater Manchester to a scheme which is saving residents an average of £171 each year. And, on a wider scale, the Big Community Switch involves 77 local authorities managing a collective auction scheme whereby consumers sign up (from anywhere in the country) and energy companies bid for their business. The first round of auctions in November 2013 saw bids from Scottish Power, British Gas and Green Star Energy emerge successful. As of November 2013 consumers had seen £2.7m worth of savings at an average of £131 per home (including Ed Davey, who switched from EDF to Sainsbury’s Energy and saved £240 in doing so). Davey’s saving, as with many achieved through collective switching, far exceeds the government’s proposed £50 saving on bills through moving the cost of green levies into general taxation. If Labour’s price-freeze is delivered at the macro-level, many authorities are driving reforms of the energy markets from the bottom-up.

Writing in the mid-1950s the centrist thinker Tony Crosland noted that ‘we sometimes forget that the local authorities were considerable commercial undertakings before they lost their gas and electricity enterprises.’ Mentioning ‘district heating’ and ‘the retailing of domestic fuel appliances,’ he noted that ‘any efficient expansion in these directions would be welcome though it seems unlikely to occur on a lavish scale.’ But could it? There does seem scope for local authorities to go beyond collective switching schemes and enter the energy market themselves.

Consider the following scenario. A tower block of 100 flats is billed a total of £75,000 per annum for gas and electricity, at an average of £750 each. Because of underpayment however, let us suppose the energy companies only get £70,000 of this. At this point a local authority could insert itself between consumers and energy companies and act as an honest broker. The council could say to the companies that it will meet (or rather guarantee to meet) £71,000 each year for the block of flats. The council could then offer residents a reduced total bill of £72,000 (£720 each – a £30 saving). This would provide a real £1,000 dividend for the energy companies and a potential £1,000 dividend for the council. Bills would also be reduced by four per cent. Of course, such a scheme would rely on the council’s ability to recoup the monies but as part of an English deal it is at least worth exploring. Any monies left from the £1,000 after admin costs etc could be hypothecated towards insulation or fuel efficiency in that self-same block. The efficacy of this idea merits a longer consideration than this brief essay can afford, but it is worth considering where policy goes next.

Partnership with business

Concerns among the ranks of senior local government figures, parliamentarians and businesses about the proliferation of ‘isolationist’ local authorities since 2010, is increasingly clear. In the face of funding cuts and struggling local economies many councils have moved away from innovation and long-termism, and according to one senior Labour MP, ‘built barriers’ to partnership with the private sector. Instead, a sole focus on protecting front-line service delivery with what resources they can muster is seen as the only way. As part of an effective English deal, the opportunity to enable better partnership working with business at the local level – to the benefit of communities and local economies alike – is not to be missed.

Labour will need to work with business, particularly if it wants to be the ‘party of work’. Going further though, Labour should be seen to build trust and cooperation with business, harnessing the politics of positivity and rewarding those who genuinely are ‘responsible’ capitalists, rather than solely condemning the ‘predatory’ elements within the private sector.

Whilst the latter need to be tackled head on, the former have a vested interest in sustainability and thus the community within which they operate. We must not forget the growth of SMEs in the UK; as of 2013 99.9 per cent of the private sector was classified as SMEs – the very type of business to which place matters.

But the pool of responsible capitalists is not necessarily limited to this expanding group. As Stefan Stern notes, ‘the ‘responsible’ view is that a good global company has an interest in developing the local workforce and investing in place and community. Intelligent big businesses know they have to tread carefully when they operate locally.’

Indeed, businesses large or small often lead the way in recognising the value of sustainability and can facilitate change, both in terms of customer preferences and internal practices, faster than many public sector bodies. If a brave English deal can move power to local authorities to harness these qualities for the good of the communities they serve then it may yet bear fruit in those areas currently struggling to go it alone.

But then rhetorical shifts will not single-handedly facilitate better working relationships.  If place-based responsible capitalism is to work, then an English deal must ensure business on the ground is given room to demonstrate its worth. Dialogue has frequently hinged around empowering the citizen in order to grow community participation, but empowering local business is often overlooked as a means to the same end.

The Business Improvement Districts (BIDs) introduced under the last government are an interesting method to do so. BIDs allow the business community in an area to voluntarily bring forward referenda on raising their business rates in order to meet specific local needs. At present however they are constrained by lack of pooling across local authority boundaries, constraints over where their revenue can be spent, and a general lack of meaningful ‘buy-in’ from the centre. The English deal would allow local authorities to bring forward new proposals for BIDs, and potentially lean on the experience of LEPs to frame what these may look like.

Affording new powers to BIDs would let local government capture the essence of what Hazel Blears has termed ‘contracts with a conscience’. Councils have, in the past, considered the local social values of private sector partners before awarding service contracts. However, BIDs as an empowered forum would provide local authorities with access to the pooled resources, expertise and social value initiatives of local business through partnership rather than formal contract. As Blears notes, ‘by making social value the norm, we can make money go further and get the public and private sectors working together and with the community’.  Moreover, the resulting framework would be couched in positivity and reciprocity rather than a dependence on conditioning the business community.

The flexibility of a BID’s focus should be an additional motivation for any English deal to strengthen and reinvigorate the model. Beyond the direct local economic benefits, BIDs can help promote better public health, tackle crime and anti-social behaviour and prove an all-round tool for improving local social environments. Nottingham City Council’s Leisure BID, for instance, has been noticeably successful in creating a cleaner, safer city for visitors, employees and residents through concentrating on better management of the night-time economy.

Meanwhile Paddington BID, in London, provides co-mingled recycling schemes for around 350 businesses and a 24-hour recycling helpline to support the work. These are just two examples, but transferable lessons from partnerships at already in operation at the local level can be shared, creating what the Centre for Social Justice have termed a ‘national approach to localism’.

Local government can also nudge business to become socially conscious market actors, helping to deliver on the needs of communities. Through the framework of a broad-minded English deal changing the behaviours of the private sector from the comfort of the Cabinet Office may become a thing of the past. Instead, locally-focused and targeted nudge strategies could be led by councils or LEPs – those most in-tune with local needs.

Major local employers can be encouraged to think about recycling or the maintenance of the streetscape; resource for skills or educational programmes could be made available; councils could re-allocate budgets and think flexibly about business rates for health-conscious businesses or private fitness centres for those willing to muck in.

Helping local government to build responsible capitalism from the ground up through partnership with businesses that prioritise social value and sustainability, will surely act as a nudge in itself to the private sector predators Labour is set on rehabilitating. Responsible capitalism, after all, needs flagship responsible capitalists.