At the Labour Party Conference in Brighton this week, it was clear that cities are back. Over the last decade, we’ve seen the revival of our urban economies: output and employment are up, and people are coming back to live and work in our city centres. British cities have a new confidence and profile. They used to be a problem for the government. Now they are part of a solution.

The government has recognised that the UK’s biggest cities are economic hotspots that drive our regional economies. When Manchester does well, so does the North-West. The big question for ministers, and in particular Gordon Brown who sees them as economic engines, is how we can unleash the potential.

There are hurdles. Our cities suffer from high concentrations of poverty, unemployment and underinvestment. Their potential remains constrained by excessive centralisation of power and outdated local government structures. Our cities are not kitted out to make the most of their strategic position.

First, Whitehall needs to step back and devolve. Government needs to do more to align control and funding of areas such as transport, planning and skills around our biggest cities. Cities themselves need to take more responsibility, and make hard decisions over priorities and funding. Devolution will ultimately allow cities to design and deliver their own distinctive development.

Second, the big cities need to connect with both their own deprived areas and with their surrounding urban areas. Yes, smaller cities and towns have a role to play, but they can’t just mimic Manchester, Leeds and Sheffield. Instead, Burnley, Bradford and Barnsley need to build on their own assets, and then link up with the big-city economies.

For too long, governments have thrown lots of money at deprived areas with disappointing results. Area-based initiatives isolate these areas and make them overly reliant on central government. The answer to their problem is not another grant scheme or tax break. It’s transport and skills.

So what is the government doing? Urban policy is in a state of flux. As cities rise up the agenda, the concerns of electorates, businesses and local authorities about regional policy – the legacy of both Prescott and Brown – have become more significant. So where next for the Regional Development Agencies? How much more can they do without elected assemblies? Are city-regions the way forward?

RDAs are here to stay, largely because Brown and Prescott are wedded to them, but they need to do a better job. They need to capitalise on their big cities, which can help regions emphasise their distinctiveness. That in itself will help investors understand the benefits of locating in particular areas. Being distinctive helps investors make decisions.

City-regions are a helpful concept, but the policy thinking behind them is still developing.

One crucial reform on the horizon is of local government powers. A David Miliband-ordered enquiry into local taxation has now been widened to review the role and functions of local government, as well as its funding. Government advisor Michael Lyons has until the end of 2006 to report, and his final recommendations could include new local government powers over training budgets, planning and transport. This would allow developers to work more quickly with local government.

All this will inform the Comprehensive Spending Review in 2007, which will set out a spending strategy for a future Brown government. This is likely to be a real opportunity for change in local government – increased devolution, stronger accountability and more effective economic development. That’s good investment in our towns and cities.

Dermot Finch is Director of Centre for Cities.