Detroit, formerly a global economic powerhouse, has filed for bankruptcy in the face of crippling loan repayments. While an equivalent collapse in the UK is unlikely any time soon, if certain voices in the local government sector have their way we could be about to allow our cities to make the same mistakes.
Detroit’s decline over the last few decades is a familiar story, but the gravity of the announcement still took many by surprise. This is the place, after all, that redefined manufacturing through Fordism - the economic model driven by Henry Ford’s assembly lines in the city’s once-booming automotive industry. How Detroit could fall so spectacularly, but seemingly inevitably, from grace is becoming clear.
The city suffered massive industrial, and then socio-economic, decline. Its population has fallen by 48% from its peak in the 1950s, with many former residents escaping urban decay for the suburbs. Detroit has now amassed some $18 billion in debts, around $9 billion of which is owed to the municipal pension fund, paying for former city employees in their retirement. The nature of this debt has resulted in the legality of this bankruptcy declaration being questioned, leaving the city in a state of limbo.
The basic ingredients for a UK Detroit are already in place: several northern cities have similar economic characteristics, with massive industrial decline and assembly lines where machines have replaced humans. Similarly, as traditional manual jobs have disappeared, so have the residents in many UK cities. Liverpool’s population loss, for instance, has been markedly similar to Detroit’s over a similar period, at 47%.
However there are fundamental differences in how cities are financed in the two countries. Foremost of these is the difference in the scale and scope of services that US cities are responsible for. In the UK, and much of Europe, central government provides the principle source of funding for cities. Specific areas then supplement this through some locally levied taxes such as business rates.
Reflecting their different funding model, US cities are expected to directly finance a lot more local services. Detroit must pay for its own fire, police and paramedic services - all of which are controlled and funded centrally in the UK. The inability to adequately fund these services has seen the murder rate reach a 40-year high, and has resulted in more than half of Detroit’s fire engines being uninspected and only able to use their hydraulic ladders in life-or-death emergencies.
If a UK city were to go bust, we would not see this level of meltdown. However, we would see our schools affected, a decrease in the quality of local infrastructure (half of Detroit’s streetlights are broken) and local employees would face similar lay-offs or massive pay decreases.
The Detroit question is especially pertinent given the recent debate on local government funding in the UK. Westminster Council leader Philippa Roe, for instance, has argued that local governments should be given powers to raise funding against city assets, as these extra funds would be “key to building more houses, getting more people into work, saving money and delivering better public services.” Of course, this comes at a cost to financial stability. Roe herself even states that this would involve government “turning their back on existing safeguards that curb council borrowing”.
This is a dangerous proposal, akin to remortgaging the house to keep the lights running. Borrowing along these lines is, principally, how Detroit became unstuck. Indeed the city has been characterised by catastrophic mismanagement, taking on excessive, and cumulative, bridging loans - essentially kicking problems down the road for somebody else to solve. But now the music has stopped playing and current mayor Dave Bing is the one left standing.
Although, at present, UK cities do not appear in immediate danger of bankruptcy, the same cannot be said for some cities elsewhere in the European Union. Last year, 10 Italian cities, including Naples, Palermo and Reggio Calabria were cited as being on the brink of bankruptcy.
The common thread that links these examples and Detroit is that of greater fiscal autonomy, as well as the catastrophic political mismanagement that has equally defined Detroit’s recent history. Countries with stronger mechanisms in place to prevent excessive municipal spending have not encountered the same problems. When it comes to debt, German cities have significantly less independence than those in the US or elsewhere in Europe, and the results are clear: 640 US cities bankrupt since the 1930s, zero German cities.
Despite well founded concerns about the nature of funding for our local governments, the prospect of even the most beleaguered local authority facing a Detroit scenario appears slim. That is not to say we should not heed the lessons as, with the wrong policies, it could happen on this side of the Atlantic.