Wide support for rates retention

Author: James Illman, Local Government Chronicle   |  

Councils should be allowed to ‘buy’ themselves out of the national business rates system and retain local tax revenues, to encourage them to stimulate economic growth, a thinktank said this week.

Localis said councils should broker individual deals with the Treasury, based on their projected net contributions to the current national rates pool, which would allow them to retain all locally collected rates.

Councils could then benefit from the net difference between the business rates that are collected over that period, initially three years but moving up to five, and the payment to the Treasury, which would give them a huge incentive to drive up business growth within their boundaries. Conversely, councils would lose out if rates dipped.

The report, The Rate Escape: Freeing local government to drive economic growth, was written in partnership with Ernst & Young and comes as lobby groups prepare responses for the local government resource review, which centres on rates localisation and is set to unveil proposals in July.

Localis said: “If any council manages to beat its projection growth in business rates revenue by even a small percentage, it will obtain a considerable financial reward on top of what it would have received if it had remained within the existing system.”

Exceeding the projection by a compound percentage of 1% would mean a council with a mid-sized initial base of £120m would receive an additional £6.9m over three years, while an authority with a £320m base would receive £18.4m over the same period. This would rise to £14.7m and £39.1m respectively if a compound 2% increase on projection was achieved, the paper said (see box below, for examples).

Councils would not be able to set their own rates locally – a scenario fiercely opposed by the business lobby. Instead, the current system of five-yearly revaluations and a national non-domestic rates multiplier would be maintained.

Localis said the buy-out option circumvented other thorny issues. Keeping an equalisation mechanism, it said, would negate concerns raised by deprived areas, which are unable to raise as much in business rates.

Councils that are currently net beneficiaries would keep all of their business rates, and any growth in them, with a fixed top-up from central government. Report author Tom Shakespeare described this as “crucial”, because it meant “that net beneficiaries will have exactly the same opportunity to benefit from growth as any other council”.

Finance experts raised challenges to the model. Centre for Cities chief executive Alexandra Jones said the model provided “a strong incentive for growth which is very positive”. However, it did not address the issue that local economic areas do not always match council boundaries, she added.

She said: “The proposals focus on local authorities reaching deals with the government and this does not allow any pooling of business rates across real economic areas or local enterprise partnership boundaries, which could be a way of encouraging authorities to work collaboratively to boost growth in their areas.”

“Councils depend on each other economically and real economies tend not to be constrained by local authority boundaries.”

She added that individual negotiations between councils and the Treasury could also be a challenge.

The model has attracted support from a broad church, including Sir Michael Lyons, junior local government minister Bob Neill and, crucially, business groups such as the British Chambers of Commerce.

Sir Michael, author of the last major review of local government finance, said: “I urge anyone interested in finding a solution to the nagging issues of local government finance to consider this report’s proposals.”

Mr Neill said: “We want to put elected local councils back in control, by letting them retain their business rates and in doing so give them a real stake in their local economy, creating jobs and supporting local firms.”

How would it be for you?

These examples illustrate both net beneficiaries and contributors to the current national pool can benefit under the buy-out model.

Westminster City Council, a net contributor of £950m per year, could benefit by up to £114m over a three-year period during a period of strong growth (2% above projection). Even with modest growth (0.75% above projection) the benefit would still be £18m for the same period.Birmingham City Council, at the other end of the spectrum, (a net beneficiary of £440m annually), could similarly achieve a benefit of up to £39m during strong growth and £6m during a modest growth period.The benefits are not only felt at the extremes of the spectrum. Stockport MBC, a net beneficiary of £9.8m a year, could see a benefit of £9.1m over 3 years with strong growth and £1.4m with modest growth over the same period.Analysis by Ernst & Young

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