When a Conservative government is presiding over unfair cuts to tax credits, chaos in the NHS and an unnecessary and ideological attack on trade union rights, it is natural that many in the Labour party should be sceptical of Tory talk on devolution – sceptical, even of government deals with Labour-led local authorities. All the more so when much of its talk of a “northern powerhouse” is style over substance and industries in the north – such as the Redcar steel plant – are closing down.

With George Osborne trumpeting his latest deals with northern cities and the government’s cities and local government devolution bill making its passage through parliament, we must hold the government to its rhetoric and take it to task when it falls short. But this alone is not enough. We in Labour must also face up to a tough reality. Yes, Osborne’s prospectus contains a lot of spin. But, despite the strides forward we made in the last parliament in this policy area, the fact remains that the chancellor has made a big bid for a cause on which Labour should be leading: the decentralisation of this country in which, for far too long, power has resided overwhelmingly at the centre. So as well as criticise, we should do something bolder: outflank the government and challenge the Tories to keep up with us.

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For Britain needs much more than the drip-drip devolution of conditional powers. This country needs nothing less than wholesale federalisation. The reasons are threefold: economic, democratic and cultural.

First: the economic rationale. In an age of globalisation, investment and good jobs increasingly flow to cities and regions with distinctive strengths and specialisms. These cannot be built up from Whitehall. They require local expertise, knowledge and dedication. That Britain remains far more centralised than other countries in the OECD group of developed economies is unquestionably a brake on our growth and on the aspirations of our people.

Second: the democratic case. For decades this country has muddled through rather than making comprehensive constitutional changes. Individually these changes – piecemeal reform of the House of Lords, a slow growth in the number of city mayors, the devolution of power to Edinburgh, Cardiff and Belfast – have made sense. But together they add up to an unsatisfactory and uneven settlement. Just witness the debate over English-only votes in parliament, the charge that what the northern powerhouse has brought to Manchester has not been matched elsewhere, the ongoing democratic outrage that is our upper chamber and, most of all, the fact that many of us distrust politics and government and thus feel both powerless and under-consulted.

Third: the cultural imperative. We are all proud to be British. But we also feel more local and regional allegiances. We define ourselves by where we live, or where we work, or where we grew up. We care deeply when a nearby hospital is struggling, or when young people in our town are struggling to find good jobs, or when our local park is dirty or unsafe – we certainly feel this in Lambeth, which I represent and is where I grew up. We want the best for people on the other side of the country, but we also have a special bond with our neighbours and co-workers. That is not “conservative”. It is community; the profound desire for a sense of belonging and security for our family and friends. To devolve power, to give people more control over the places where they spend most of their lives, is to recognise this essential fact.

What would such a move to a federal Britain look like? It would mean drastically slimming down central government: fewer ministers, fewer departments and less meddling in how local places run their services. It would mean transforming Whitehall into more of a centre of oversight and coordination rather than direct policy making and implementation.

It would mean a system of what I call “devo default”: the assumption that power should be devolved from the centre unless there is a good reason to do otherwise. It would mean making Westminster a place where strong regional and city authorities meet to discuss and decide on matters affecting the whole country; perhaps with the House of Lords as a senate of sub-national representatives. It would mean accelerating devolution deals not just with the big cities but also with suburban and rural areas, moving Britain towards a system of regional and urban bodies with their own education, health, business, science, environmental and transport policies, like Germany’s Länder or America’s states. The ongoing establishment of combined authorities across England should mark the very beginning – not the end – of this process.

And to those who worry this will compromise our ability to pool and share resources and redistribute, I point to less centralised EU partners that have federal systems and are economically far more equal than us.

So let us cheer our Labour local government leaders who are all fighting for the interests of their electorates. Let us take on the Conservatives for failing to live up to their talk. And most of all, let us lead the way in charting the course to a Britain in which the organic communities to which people owe their first loyalty are the level at which the main decisions affecting their daily lives are made.

The Tories claim they are now the party of decentralisation. They are not. Labour can, should, and will be bolder. Our mantra should not be to oppose the break up of central elites but to say bring it on and empower the people.