We need competition between Britain's cities to get the economy growing again. Here's how...

By Matthew Barrett
Follow Matthew on Twitter.

The Government's localism agenda so far has made positive, but limited progress. Directly-elected Police Commissioners are a good example of conservative reformism - handing the power over local policing to local people. But policing should be just one power handed back to local government. More powers, including powers of taxation and welfare spending, should be devolved to the largest British cities to help re-balance our economy and regenerate the regions outside the South East.

When our economy does well, our cities do well. This would seem to be an obvious statement, but it's not quite true. In reality, London and, to a lesser extent, Edinburgh, thrived over the last few years - because of the large financial services sectors in those two cities. But our reliance on London undermines our versatility as a global power.

Germany is a country we could learn a lot from in recognising the benefits of having a number of important cities, not just a very big capital city. Frankfurt is the biggest financial centre on the continent - despite being only Germany's fifth-largest city. Berlin, Germany's biggest city, is its centre of government, arts and culture. Hamburg is one of the busiest ports in the world. Munich is one of the wealthiest cities in Europe, with businesses like BMW and Siemens headquartered there. Stuttgart is well-known for its high-tech industry base with companies like Hewlett-Packard, IBM, Daimler, Porsche, and Bosch based there. There are a good number of other cities in Germany with specialised skills and industries. The same points can be made about the United States, where cities like New York, Washington, Los Angeles, and Chicago (and many more) can compete on a global scale and specialise in various industries.

With London as our centre of financial, business, cultural, creative and government activities, we allow ourselves to be disproportionately influenced by the needs and concerns of only one part of the country and economy. It would be healthier, and allow our economy to be much more robust, if we were able to fall back on industries and sectors in other parts of the country. If Britain was less reliant on the City, our economy might have bounced back more quickly than it is doing - as Germany's economy did.

The question is, how do we encourage cities to incentivise business investment? The first step is taxation. The Government should allow significant tax and spending autonomy, with the aim of allowing any business based in a regional city to see its tax burden fall - corporation taxes and employers' NI contributions could be halved or significantly reduced - as Northern Ireland Secretary Owen Paterson has recommended for Ulster. If cities wish to attract certain sectors of the economy, spending autonomy would allow them to award specialist grants and tax breaks. For example, Manchester is a leader in British science and engineering - so research and development grants could be awarded to maintain and expand this sector of the Manchester economy.

The second step is to reduce central government regulation in areas like planning and the environment. For example, in parts of the country where industry still exists - such as in the North East - energy regulations are killing businesses and forcing them to move overseas. These green regulations, which amount to the unilateral de-industrialisation of Britain, should be scrapped immediately.

The third, and perhaps most radical step is to devolve welfare spending policy to cities. This would force cities to work their hardest to attract business, in order to balance the books. It would encourage cities to get as many people off state benefits and into private employment as possible. It would introduce realism into the welfare debate, as even Labour-controlled cities would be forced to reduce the welfare bill or be left behind.

A crucial final step in delivering economic growth is the introduction of directly-elected mayors for every city in the United Kingdom with a population above 300,000. Mayors could tailor tax policy in their city by listening to the needs of business - something local bureaucrats have shown themselves not to be best suited to doing. Levels of taxation and pro-business policies in each city would be democratically endorsed with the election of a mayor, and ensure the changes outlined above are properly delivered by an accountable individual, and seen to be properly delivered, rather than relying on faceless schemes like the Regional Development Fund or Local Enterprise Partnerships to create any meaningful change.

Conservatives know the benefits of handing power back to the lowest sensible level. Elected mayors would understand the needs of the people they represent much better than a Whitehall mandarin or Westminster politician. They would know where public spending is best directed, how taxes would help incentivise the private sector in their city, and at what level welfare spending should be set.

Mayors should be encouraged to compete with each other - a race to the top to see which mayor (and indeed political party) could run the best city in terms of wages, businesses based in the city, and quality of life, would help increase standards across Britain. Competition between cities would also help establish which welfare and tax policies work, and which don't, allowing central government to learn from the most effective civic leaders (An added benefit: we could see the next generation of national leaders starting their careers in local governance - as statesmen like Joseph Chamberlain once did). Competition between cities would pressure local government leaders to stick to common sense policies; it seems unlikely that any mayor hoping to be re-elected would choose to invest in community empowerment officers when they could spend their citizens' money on something more useful.

There are clear political benefits to encouraging a better geographical distribution of our economy. One of the big problems for the Conservative Party is its current inability to compete in the cities outside the South. The only big cities we have any MPs in are Bristol and Cardiff. We have a handful of MPs in the outer suburbs and surrounding towns of Leeds, Bradford, Birmingham and Greater Manchester. This is plainly unhealthy if our aim is to represent the whole country. Earlier this month, Tim Montgomerie recommended selecting more Northern candidates as a step towards building a Conservative majority. It would also help if cities like Manchester, Liverpool and Nottingham had more of the kind of ABC1 voters who tend to vote Conservative - and those voters would exist in cities outside the South if there was a good economic incentive for them, or their businesses, to move or set up there.

Attracting people to the cities outside London would bring numerous social benefits. For Londoners, a less congested city, and an a reduction in the seemingly unrelenting increase in users of London's public services. For those outside the capital, the migration of better-paid workers to other British cities would encourage more of the kind of urban regeneration seen in areas of Greater Manchester, Birmingham and Glasgow. This would also raise standards for existing citizens. As well as drawing people away from London who are already there, better living standards and job prospects in other cities could end the unfortunate situation where people from across the country resign themselves to having to move to and work in London if they want to get a well-paid job. If jobs were better distributed, people from Stafford could aspire to work in a good job in Birmingham or Nottingham. People from Scunthorpe could aspire to work in Leeds, Sheffield or Hull, and so on. London would cease to be the all-important British city.

It might be feared that some regions of the country like the North East, or Wales, would find it a challenge to adapt to a new, pro-business atmosphere, but it should be remembered that Germany has managed to perform well during the recession - and before - despite the huge burden of having to bring East Germany's living standards in line with the rest of the economy. If West Germany can cope with East Germany's problems, even if gradually, surely the South of England and those British cities already equipped to become business-friendly could drag the under-developed regions of the country into economic stability?

Of course, there would be some upheaval caused by turning British cities into centres of enterprise - but the economy needs a radical shock to start growing again, and low-tax, business-friendly cities with an active workforce could re-awaken British business and encourage more investment in areas outside London. The plan also means a structure would develop that should make us more adaptable to changing economic conditions, by keeping the machinery of government, both local and national, lean and efficient.