Poor areas ‘hit by business rate plan’

Author: Lucy Phillips, Public Finance   |  

The government’s system for repatriating business rates could put public services in poorer areas at further risk, while richer local authorities may lack the necessary incentives for growth, Public Finance has been told.

Ministers published their proposals for business rate retention on July 18. A consultation will run until October 24, with draft legislation published later this year and the changes expected to take effect from 2013/14.

The new model involves a system of fixed ‘top-ups and tariffs’ that will be established according to next year’s formula grant allocations and redistributed among councils each year as baseline funding. Beyond that, local authorities will be able to retain business rate taxes to spend on local services, although another levy will be imposed on any council with ‘disproportionate’ gains and pooled centrally as a ‘safety net’.

Councils will also be encouraged to voluntarily club together in groups, such as Local Enterprise Partnerships, to pool receipts for regional economic development.

A ‘reset button’ will be factored in to account for changes in local circumstances, but it is yet to be decided if this would be for a fixed period of up to ten years, providing another incentive for long-term development by councils, or whether it would be subject to a ministerial decision.

Unveiling the proposals, Communities Secretary Eric Pickles said they were ‘balanced, fair and equitable – creating self-sufficiency, the right incentives for all areas to grow and protecting the most vulnerable places’. But commentators have disputed these claims.
James Kirkland, corporate networks manager at the New Local Government Network, told PF that it was ‘implausible’ that after the guarantee of funding in the first year all councils would get enough growth, above inflation, to ensure local services were maintained. He also warned that the funds generated in the ‘safety net’ might not be big enough to help areas in long-term decline or see off the effects of a sudden economic shock.

Similarly, Ed Cox, director of IPPR North, said: ‘There still needs to be some quite careful consideration as to what the impact of the changes will be over a longer period of time. The tariff and the top-up process might look to include a degree of fairness in the short term, but in the long term there’s a danger of widening disparity between poorer and richer local authorities.

‘Unless we can find some long-term rebalancing mechanism that is more progressive than what is currently on offer, there will be a danger that certain local authorities over a period of time will fall further behind and that means public services could potentially be hit.’

Meanwhile, London Councils, which is lobbying for business rate growth receipts to be pooled across the capital’s 32 boroughs, cautioned against the secondary levy on disproportionate gains. Director of fair funding Hugh Grover told PF: ‘It’s clear from the government’s consultation that a pooled model is their favourite option… However, I am concerned that the consultation does not give sufficient detail about the incentives for growth.

‘It appears to me that the government is proposing to take away a large amount of London’s growth through a levy that they would hold nationally as a rainy day fund. This would, of course, significantly reduce the reward that councils would see for their efforts.’

But Alex Thomson, chief executive of the Localis think-tank, denounced the London Councils model and said it was vital that pooling arrangement were voluntary to deter any ‘free riders’.

Thomson is largely supportive of the government’s moves, calling the proposals ‘carrots rather than sticks’ for growth. ‘Given the financial situation most councils find themselves in, why would they not ask to pursue growth? The planning and housing system is going in that direction too,’ he said.

Westminster City Council, which stands to be one of the biggest gainers from the plans, described both the tariff and extra levy as ‘reasonable’ but maintained that any cross-borough pooling arrangements should be on a voluntary basis for the occasional project.

Denying it was a ‘winners and losers game’, Conservative leader Colin Barrow said: ‘Councils who do not do anything to promote and develop their business investment will find themselves falling behind councils who do. That’s the point of an incentive, you don’t all wind up in the same place.’

Barrow added: ‘The big important thing is the first tranche of growth will be passed to the council. That will for the first time provide a connection between business growth, jobs and councils.’

The government’s consultation also confirms ministers’ intentions to give councils Tax Increment Financing powers, allowing them to borrow money against future business rate revenue. But there will be no changes to the way business rates are set, it states. Ministers will publish further technical papers in August.

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