Our cities are fighting to grow – with one hand tied behind their backs. Want a tram? Ask Whitehall. Want to regenerate the centre or link people to jobs? Then you have to hammer it out with a half-dozen quangos, departments and the European Union. Want to do it yourself? No chance. Cities don’t have the freedom, money or power to control their own destiny.

Yet this is where most people work, where deals are done, and where economic activity is concentrated. English cities need to make a strong contribution for the national economy to succeed. But in a system where they have to go cap in hand to London or Brussels whenever they need major investment, this won’t happen.

England is one of the most centralised countries in the developed world. Many observers of local government argue that giving cities greater financial autonomy would help to boost their performance and improve their political and managerial leadership. The IPPR agrees. City leadership, published by its Centre for Cities this week, argues that England’s major city-regions could drive growth if they were equipped with more spending flexibilities and revenue-raising powers. Currently, too many decisions are taken at the wrong scale, by bureaucrats lacking democratic legitimacy and local accountability.

But the report also argues that financial devolution needs to be at the appropriate scale. Economic development policies are best delivered at a city-regional level. Evidence suggests that urban areas perform better when administrative and economic areas match up. Regions are too big; local authorities too small – only city-regions can deliver the dynamic, thriving urban areas that our economy needs.

In government, Labour has talked a lot about devolution – but it’s had a hard time letting go of economic development powers. Attempts to devolve to the regional level came to a swift halt with the failure of the Northeast referendum in November 2004. And financial devolution has been piecemeal and less than effective. Central government has taken some tentative steps, but these have lacked ambition, and their implementation is proving problematic.

There’s a window of opportunity for more radical moves on financial devolution. For starters, policy-makers now agree that cities need more powers. Even more importantly, they recognise that local authority boundaries have little relation to where economic activity takes place. Even a small business in Birmingham has clients stretching from Wolverhampton to Coventry, and workers from Tamworth or Bromsgrove, far beyond the boundaries of the city.

This year, the local government white paper, the Lyons inquiry, and the early stages of the Comprehensive Spending Review will have a major impact on the way economic development works in our major cities and city-regions. Now is the time to make the case for more devolution to this level.

But how would city-regions work? They already exist as economic areas, defined by the geography of economic activity. Commuters, business deliveries and airport customers define city-regions every day by where they go and what they do. The challenge, then, is to match economic development policy-making to this reality. City leadership argues that despite these challenges, city-regions offer significant potential benefits, such as the effective delivery of public spending, strategic decision-making and real accountability.

Currently, there is little scope for strategic thinking at this level. There is also a bewildering array of agencies. We call on government, central and local, to have the courage to experiment. The creation of two city-regions around Birmingham and Manchester would strengthen the economies of the two largest urban areas in England outside the capital. Led by directly elected mayors, these should be given control over economic development spending, along with modest revenue-raising powers.

Too much of the debate to date has centred on who gets to tax what. The most important issue is that regeneration, transport and skills money earmarked for city-regions is not being spent in an efficient or accountable way.

City leadership proposes the creation of contracts for Greater Manchester and Greater Birmingham, giving them control over their own budgets for regeneration, transport and skills. The contracts are designed to lock in central, regional and local governments – and to devolve more than £600m per year in economic development spending to each city-region. This includes funding from regional development agencies, transport and housing boards and the Learning and Skills Council. Through the contract approach, the city-regions will get money, power and freedom, and be directly accountable to their residents and to Whitehall.

They should also be given two modest revenue-raising tools: supplementary business rates and a City-Region Growth Incentive. Taken together, these serve a number of purposes. First, they provide additional revenue for major economic development projects. Secondly, they re-establish the link between the relative success of the local business community and the size of the tax take. Thirdly, and perhaps most importantly, the additional revenue offered by these measures provides a strong incentive for local authorities to embrace city-regional working.

Supplementary rate powers would allow each city-region to place a levy of up to 5% on the business rate – provided that revenues are hypothecated directly to specific transport projects that benefit the local economy. A 2p rate levy, for example, would raise about £35m per year – not earth shattering, but a substantial new resource to finance long-awaited transport infrastructure.

The growth incentive, meanwhile, would refocus the Local Authority Business Growth Incentive on city-regions, allowing Greater Manchester and Greater Birmingham to retain increases in business rate revenue resulting from growth. In each city-region, up to £200m could be made available as an incentive over a five-year period. This would promote cross-boundary collaboration and reward city-regions for growing their business base.

Such radical financial devolution would require a major shift in accountability. Directly elected mayors are best placed to take on this level of spending and revenue-raising freedom. They would have a direct mandate and be highly visible and able to take strategic and tough decisions across a large urban area. They would be held to account by boards composed of local authority, business and community leaders.

City-region mayors pass four vital tests. They offer democratic accountability, clarity and visibility, strategic oversight and the strength to deliver. The same cannot be said of the Executive Boards, composed only of existing local authority leaders, proposed by Manchester, Birmingham and Sheffield. Executive Boards could be a step in the right direction, and might usefully serve as transitional vehicles on the way towards directly accountable city-regional entities.

Ultimately, though, directly elected mayors would provide the best governance framework for the economic success of our city-regions. What’s more, Whitehall is unlikely to devolve substantial powers and budgets without an elected mayor in place.

Yet there’s still a lot to do if we are to move city-regions from theory to reality. First, we need to build a consensus throughout Whitehall and within urban areas themselves. There are a number of vested interests that fear the impact of city-regions on their turf. In Whitehall, some departments have refused to engage with the agenda. At local level, many council leaders want to preserve their current powers. And regional quangos – which have taken over many economic development budgets in the past two decades – see city-regions as a threat to their existence.

Second, we need to give city-regions the powers they need to succeed. Since 2000, London’s mayor has had more powers than any English city council, and the on-going Greater London Authority Review will give him even more. If our big city-regions outside London gained similar powers, they would be able to perform better.

Third, we need to create the institutional arrangements to help the Birmingham and Manchester city-regions achieve their economic potential. These two should blaze a trail for a small group of other big urban areas – such as Liverpool, Newcastle, Sheffield, Bristol and Leeds – to follow. In smaller urban areas, many of the same principles apply. More flexible funding streams are needed, and greater discretion over regeneration spending would have better results. But radical financial devolution is for a small group of city-regions. This is asymmetric devolution, with different places having different degrees of financial autonomy, proportionate to their economic importance.

The status quo is not an option. When it comes to economic growth, regional policy and area-based initiatives have failed to deliver. It’s time for a brave and bold experiment. Financial devolution to city-regions will help all levels of government to achieve their economic targets, and release the growth potential of our largest urban areas. Even more importantly, it will bring local businesses and communities closer to economic development policy and key investment decisions.

Empowered city-regions will make a difference to people’s lives. Financial devolution will make it easier to regenerate large vacant sites, providing homes and jobs. For everyone who’s dreamt of catching a tram to work, city-regional spending and revenue-raising powers could help bring that dream to life. And for companies seeking a workforce with skills that match their needs, city-regions can provide more effective training programmes than remote Whitehall agencies.

So let’s loosen the bonds that hold our biggest cities back – and give city-regions the power to grow.