Devolution is a great opportunity.  After years of oppressive centralisation, devolution deals offer local authorities a chance to break free and forge their own approaches to economic development.

As it stands, however, the devolution agenda encompasses myriad risks and challenges for local authorities, with city deals characterised by unnecessarily conservative ambitions, a series of policy missteps and, at root, a flawed economic philosophy.

George Osborne was right to push for devolution as forcefully as he did – but his “my way or no way” approach to city deals seriously jeopardised the agenda’s credibility. If new prime minister Theresa May means it when she preaches inclusion and rebalancing, then Osborne’s departure is an opportunity to reset regional policy in a more sustainable direction.

But if devolution is to succeed, several things will have to change, and quickly.

Where Osborne went wrong

Above all, local authorities need to be unshackled from austerity. As I argue in Austerity Politics and UK Economic Policy, local government is perhaps the one area where austerity really has meant austerity, with local public services having been cut to the bone. Devolving depleted budgets is self-defeating.

City deals have to date also focused rather too much on devolving the responsibility to deliver national policy, rather than the responsibility to decide on how best to support local economies. And too often, delivery requires local authorities to outsource the actual administration of, for example, employment support programmes, relying on many of the same firms hitherto contracted by central government.

Osborne’s legacy is arguably one of centralisation rather than decentralisation, especially in relation to fiscal policy. Councils have been permitted to raise the largely regressive council tax – but only if they intend to spend the proceeds on replenishing squeezed adult social care budgets.

Similarly, the government has outlined plans to allow councils to retain all of the business rates revenue raised in their area, but offered very little freedom to redesign the tax, even though rates revenue is intended to replace central grants to local authorities over the medium term. The result will inevitably be greater inequality between areas with a highly developed private sector, and those looking to build one. All the while, much-needed additional borrowing powers for local authorities are nowhere to be seen.

A generous interpretation is that city deals have encompassed the devolution of micro-economic policy. Of course, macro-economic policy, almost by definition, cannot be devolved – and there is no evidence that national policy-makers take the needs and interests of different localities into account within making macro-economic policy.

In other words, the devolution agenda remains indebted to neoclassical ideas around “agglomeration” and self-sustaining markets, which implore government (at all levels) to simply get out of the way. It is a perspective which chimes with “Treasury view” traditions, and it is revealing that the Treasury has been almost solely responsible for the devolution agenda within central government. It has led to a deal-making process typical of Treasury statecraft, not least because the Treasury, insofar as it controls all public expenditure, always holds the strongest hand.

The configuration of devolution deals around city-regions is, in general, the correct approach, insofar as city-regions represent meaningful economic spaces. Yet it has been too rigidly applied, with some incredibly messy results, with too many square pegs have been forced into metro-shaped holes. Officials have paid insufficient attention to the risk that devolution done badly can increase geographical inequality, or to the opportunities inherent in enabling large cities with different strengths to work together.

We need a real deal for progressive devolution. Given the extent to which the growth plans in operation in almost every Local Enterprise Partnership area depend – often just implicitly – on increased exports to Europe, and the extent to which public investment in deprived areas was underpinned by EU structural and investment funds, Brexit underlines this imperative.

How to fix it

My report The Real Deal: Pushing the Parameters of Devolution Deals, co-authored with colleagues at the Sheffield Political Economy Research Institute and the Centre for Local Economic Strategies, argues that it’s a mistake to focus  on what local government needs to do, or how local government needs to change. Rather, the first step to devolution is reforming the centre.

The current devolution agenda answers the question, “What should be devolved?” A progressive approach to devolution would instead ask, “Where should power reside?” Let’s rethink from first principles the powers that central government has, rather than simply gobbling up the ones it is willing to give away.

It needs to be underpinned by a new constitutional settlement on centre-local relations. We also need a meaningful industrial strategy – something else May is promising – informed by the local, but led by the centre. Industrial policy involves the mobilisation of economy-wide resources in support of strategically important industries; by definition, local economies cannot do industrial policy alone.

Our report goes on to outline 11 sets of ideas around specific areas of policy relevant to the devolution debate (housing, transport, local banking and so forth). We seek to go with the grain of existing devolution deals, but broaden out their scope.

The devolution of employment support programmes, for instance, should see local authorities allowed to use these programmes strategically to support local economies, and not to force individuals into “any old job”. Councils should also be given more powers – including over tax – to shape how land within their jurisdiction is used, and see planning veto powers supplemented by the ability to shape local housing markets.

The scope of progressive devolution, however, goes beyond local authorities. All “anchor” institutions, particularly large public sector employers, could be doing more to support the local economies in which they are situated through procurement. Universities, in particular, should be better integrated into local economic governance – although this would require a decentralisation of research funding.

Underpinning all of this is the need for devolution to be a genuinely democratising moment. To succeed over the long term, the process will require much greater levels of citizen engagement in local politics, so strings-attached city deals have to be suspended while residents are consulted.

Many parts of the UK demanded the right to “take back control” on 23 June. Let’s give it to them where it really matters.

Craig Berry is deputy director of the Sheffield Political Economy Research Institute at the University of Sheffield. He has previously worked at HM Treasury, the International Longevity Centre-UK and the Trades Union Congress.

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