The role of cities in economic prosperity is limited

Municipalities have control over very few of the elements that determine their economic attractiveness

Ben BrunnenCALGARY, AB, Jan 27, 2014/ Troy Media/ – It is often argued that cities are the engines of economic growth, and that the quality of life offered in a city is critical to enhancing its global economic competitiveness and its ability to attract talent. This is generally the basis on which municipal elected officials justify higher spending levels on infrastructure and services and demand additional revenue tools and authorities.

But it is important to stop and consider the role that municipal governments actually play in the economy, in the quality of life of a location and in the mobility decisions of the best and brightest to help guide public policy in this area.

From an economic development perspective, the biggest contribution of cities is what is known as agglomeration economies. This is basically the economic benefits that result from having a lot of businesses and people locating in a central geographic area (e.g. a city). From a business perspective, the benefits of agglomeration economies include access to deep labour pools, integrated local supply chain linkages and localized knowledge spillovers.

While municipal governments don’t play a direct role in agglomeration economies, they do contribute indirectly through the provision of strategic spatial design, quality residential amenities, efficient mobility of people and goods, and an unencumbered business climate.

It is these elements – as well as the cost effectiveness of providing them – that determine the economic attractiveness of a city.

From a labour perspective, while quality of life factors do play a role in mobility decisions, municipal public amenities are only one component. The 2013 livability index produced by the Economist Intelligence Unit, which ranked Calgary as the fifth most livable city, did so on the basis of stability, healthcare, culture and environment, education, and infrastructure.

While Calgary deserves credit for its favourable culture, infrastructure and local stability rankings, other metrics such as education, healthcare and environment (e.g. climate) are well beyond its control. For high skilled individuals specifically, one of the strongest drivers is the presence of a comparatively educated population – which is the purview of our universities and technical institutes, not necessarily municipal governments.

By and large, the primary reasons people decide to move are job and income levels. Simply put, people need to meet their basic economic needs first and foremost; otherwise migration decisions are not viable. These fall under the purview of the private sector, not municipal governements.

It is key that municipal governments understand how they stack up in the areas where they can make a difference and what they can do differently. While providing high-quality public amenities, infrastructure and services is generally the go-to approach for most municipalities, it is important to exercise caution when financing them.

Municipalities will often justify higher taxes on the non-residential (business) base because of the perceived indirect benefits associated with quality of life and other infrastructure investments that benefit businesses. However, this can and does deteriorate to a subsidization of the residential base, which could actually end up working at cross-purposes for the municipality.

After all, high skilled and capable individuals are likely to earn the highest incomes, and are the most likely to start a business or work for a high value company. Imposing an excess tax burden on the non-residential sector can only serve to diminish their prospects for economic success and, correspondingly, the overall economic attractiveness of the city.

Moreover, removing or reducing the property tax subsidy to the residential base will not necessarily prevent the provision of quality of life goods and services in the community. Rather, it simply shifts the burden of payment towards the residential base.

This could result in a more efficient city, with residents more engaged in spending, service delivery and consumption decisions to ensure they are getting value for money – a more civically engaged form of quality of life if you will.

While it is important to ensure businesses pay for the indirect benefits they receive, the subsidization of the residential base to the benefit of some industries amounts to an implicit tax on all other businesses in the economy. The key for municipal governments is to find a balance between maximizing indirect benefits while creating a competitive tax climate for all businesses to thrive, while at the same time recognizing the limited role that municipalities can actually play.

Troy Media columnist Ben Brunnen is a policy, economic and advocacy consultant with over 10 years of experience working on public policy, economics and government relations issues.

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