The stench of unfinished business: how George Osborne’s financial reforms pose a threat to local government

A perfectly normal picture of George Osborne. Image: Getty.

The year is 2015. Local government minister Kris Hopkins is asked to explain the growing gaps between council’s spending powers. He answers by claiming the government has been fair to all parts of the country, concluding: “There is no magic money tree.”

Amidst all the unfortunate political developments of the last few years, the entry of this phrase into the popular lexicon is particularly depressing. Deployed liberally by commentators to whom sorcery, macroeconomics and botany are all patently perplexing, its prolific spread belies its analytical redundancy.

Where it does come into its own is as a tool of political doublethink – as can be seen in the matter of council expenditure. Hopkins raised the spectre of mystical foliage, knowing the formulation of local government finance left some authorities languishing under the weight of austerity (Knowsley was over £400 per head worse off at this point compared to 2011) while others had seen their spending power miraculously increase (like Elmbridge in Surrey). But it was wheeled out anyway: relieving the stragglers was unfeasible, anyone saying otherwise was a spendthrift.

Financial inequality between councils was a problem two years ago. Now disparities in their revenues are well into the realm of the ridiculous, and running further apart all the time. The question is: why?

Coalition cuts had been eating away at council budgets long before 2015. But, after the Conservatives gained a slim majority that year, the issue took on a new intensity. This can all be traced back to then-Chancellor George Osborne, two elections and (roughly) four jobs ago, when he came up with a bold scheme to overhaul local government funding.

His plan was to empower councils by allowing them to set and keep 100 per cent of business rates. The only downside to this sweet deal was that the Revenue Support Grant, worth £18bn, would be phased out over the following five years. It was all part of Osborne’s devolutionary bonanza against the backdrop of the fabled Northern Powerhouse.


A few problems stuck out with this scheme. In the short run, it would very likely cement existing inequalities between councils. Poor authorities rely the most on central grants, rich authorities contain wealthier businesses – thus the latter would rake in revenues while the former’s ebbed away.

To tackle this problem, a system of top ups and transfers remained in place to make up shortfalls for poorer councils. But these would be frozen, reducing their value over time and allowing already growing councils to tear ahead. In the longer run, the new setup could spark a race to the bottom as councils competitively cut rates in an effort to attract enterprise, piling further pressure on balance sheets.

Despite these drawbacks, it was a system that would have gone some way towards remedying the UK’s status as one of the OECD’s most centralised nations. But when Osborne eloped to the Evening Standard, he left a most unpleasant stench behind him: the stench of unfinished business.

By June of this year councils found themselves in limbo. Fiscal devolution was missing from the post-election Queen’s Speech (although there have been some pilot schemes), but cuts to central grants remained on schedule. Whether this is attributed to incompetence or pure evil, the result is the same: almost half of councils will receive no central funding by 2020, leading to a black hole estimated at £5.8bn by the Local Government Association.

On top of everything else, Brexit looms largest over particularly impoverished areas. Investment from European structural funds, worth around £8.4bn between 2014-20, have been thrown into doubt. The Treasury has promised to match all pre-Brexit investment agreements on the dubious condition that they are “in line with UK priorities”. Presumably these are only the most important and essential priorities, like shoving hundreds of millions at Conservative authorities to ease the pain of funding cuts as in 2016.

With the poorest councils most reliant on grants, inequality between authorities will deepen significantly without decisive action. Does Theresa May even know all this is going on? Between leaving the EU and trying not to get stabbed in the back, she has plenty of other worries occupying her time. Assuming she finds a spare moment and/or some political astuteness, how might she deal with the impending crisis?

One choice would be to get on with the reforms as they were initially intended: not ideal, perhaps, but at least allowing councils to keep their business rates would get the ball of devolution rolling again. This could be an important precursor to reversing unchecked inequality.

Empowering councils to borrow to deal with their most pressing problems (like housing) or promoting local finance initiatives like community banks would do more to put authorities on an even footing than piecemeal proposals like fiddling about with council taxes (which still disproportionately benefit wealthier areas).

Alternative inspiration could come from abroad. In Sweden, a redistribution grant kicks in whenever a local authority’s takings fall below a set threshold, partly funded by the highest earning areas. In France, large cities are in charge of their own transport provision, funded through specific business taxes. Firms’ contributions therefore give them a direct stake in infrastructural development. The Centre for Cities’ Beyond Business Rates report suggests different areas could use such powers to deal with local challenges – for example, housing in London and Oxford.

A more comprehensive solution would be out-and-out federalism. Highly unlikely, but potentially appealing: just imagine how much more time the Cabinet could spend on not sorting out Brexit if prosperity was a completely devolved matter. Giving regions complete control over their own affairs would at least mean the government could stop bothering with changes which manage to be both trifling and Kafkaesque.

None of these options are perfect. But all have a lot to recommend them, when the alternative is simply forgetting you were in the middle of overhauling local government funding, the Conservatives’ current strategy of choice.

The magic money tree is very much alive, contrary to Hopkins’ claims (and unlike his political career). It is burgeoning in Britain’s richest councils thanks to coalition cuts and two years of haphazard reform. These reforms need to be seriously reexamined, and soon – or the poorest areas will take the biggest hit.

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Everything you ever wanted to know about the Seoul Metro System but were too afraid to ask

Gwanghwamoon subway station on line 5 in Seoul, 2010. Image: Getty.

Seoul’s metro system carries 7m passengers a day across 1,000 miles of track. The system is as much a regional commuter railway as an urban subway system. Without technically leaving the network, one can travel from Asan over 50 miles to the south of central Seoul, all the way up to the North Korean border 20 miles north of the city.

Fares are incredibly low for a developed country. A basic fare of 1,250 won (about £1) will allow you to travel 10km; it’s only an extra 100 won (about 7p) to travel every additional 5km on most lines.

The trains are reasonably quick: maximum speeds of 62mph and average operating speeds of around 20mph make them comparable to London Underground. But the trains are much more spacious, air conditioned and have wi-fi access. Every station also has protective fences, between platform and track, to prevent suicides and accidents.

The network

The  service has a complex system of ownership and operation. The Seoul Metro Company (owned by Seoul City council) operates lines 5-8 on its own, but lines 1-4 are operated jointly with Korail, the state-owned national rail company. Meanwhile, Line 9 is operated jointly between Trans-Dev (a French company which operates many buses in northern England) and RATP (The Parisian version of TfL).

Then there’s Neotrans, owned by the Korean conglomerate Doosan, which owns and operates the driverless Sinbundang line. The Incheon city government, which borders Seoul to the west, owns and operates Incheon Line 1 and Line 2.

The Airport Express was originally built and owned by a corporation jointly owned by 11 large Korean firms, but is now mostly owned by Korail. The Uijeongbu light railway is currently being taken over by the Uijeongbu city council (that one’s north of Seoul) after the operating company went bankrupt. And the Everline people mover is operated by a joint venture owned by Bombardier and a variety of Korean companies.

Seoul’s subway map. Click to expand. Image: Wikimedia Commons.

The rest of the lines are operated by the national rail operator Korail. The fare structure is either identical or very similar for all of these lines. All buses and trains in the region are accessible with a T-money card, similar to London’s Oyster card. Fares are collected centrally and then distributed back to operators based on levels of usage.

Funding

The Korean government spends around £27bn on transport every year: that works out at 10 per cent more per person than the British government spends.  The Seoul subway’s annual loss of around £200m is covered by this budget.

The main reason the loss is much lower than TfL’s £458m is that, despite Seoul’s lower fares, it also has much lower maintenance costs. The oldest line, Line 1 is only 44 years old.


Higher levels of automation and lower crime rates also mean there are fewer staff. Workers pay is also lower: a newly qualified driver will be paid around £27,000 a year compared to £49,000 in London.

New infrastructure is paid for by central government. However, investment in the capital does not cause the same regional rivalries as it does in the UK for a variety of reasons. Firstly, investment is not so heavily concentrated in the capital. Five other cities have subways; the second city of Busan has an extensive five-line network.

What’s more, while investment is still skewed towards Seoul, it’s a much bigger city than London, and South Korea is physically a much smaller country than the UK (about the size of Scotland and Wales combined). Some 40 per cent of the national population lives on the Seoul network – and everyone else who lives on the mainland can be in Seoul within 3 hours.

Finally, politically the biggest divide in South Korea is between the south-west and the south-east (the recently ousted President Park Geun-Hye won just 11 per cent of the vote in the south west, while winning 69 per cent in the south-east). Seoul is seen as neutral territory.  

Problems

A driverless train on the Shinbundang Line. Image: Wikicommons.

The system is far from perfect. Seoul’s network is highly radial. It’s incredibly cheap and easy to travel from outer lying areas to the centre, and around the centre itself. But travelling from one of Seoul’s satellite cities to another by public transport is often difficult. A journey from central Goyang (population: 1m) to central Incheon (population: 3m) is around 30 minutes by car. By public transport, it takes around 2 hours. There is no real equivalent of the London Overground.

There is also a lack of fast commuter services. The four-track Seoul Line 1 offers express services to Incheon and Cheonan, and some commuter towns south of the city are covered by intercity services. But most large cities of hundreds of thousands of people within commuting distance (places comparable to Reading or Milton Keynes) are reliant on the subway network, and do not have a fast rail link that takes commuters directly to the city centre.

This is changing however with the construction of a system modelled on the Paris RER and London’s Crossrail. The GTX will operate at maximum speed of 110Mph. The first line (of three planned) is scheduled to open in 2023, and will extend from the new town of Ilsan on the North Korean border to the new town of Dongtan about 25km south of the city centre.

The system will stop much less regularly than Crossrail or the RER resulting in drastic cuts in journey times. For example, the time from llsan to Gangnam (of Gangnam Style fame) will be cut from around 1hr30 to just 17 minutes. When the three-line network is complete most of the major cities in the region will have a direct fast link to Seoul Station, the focal point of the GTX as well as the national rail network. A very good public transport network is going to get even better.