100% Business Rates retention should support local economic growth
The government’s Local Government Finance Bill 2016-17 is set to make some radical changes to the way local government will be financed through local business rates (BRs) within England. At present, local government can retain 50% of business rates (BRs), which are essentially a tax on non-residential property (such as shops, offices, pubs, warehouses, factories etc.), and are calculated using a ‘multiplier’, set by the UK government. But the Bill would allow local government to retain it all by 2020. These plans are part of Whitehall’s drive to make local authority financing self-sufficient.
The new reforms are problematic and fail on their own terms. After a decade of massive cuts, the Bill risks not only failing to plug the black hole in local government funding, but also exacerbating inequality across England. The TUC is calling on the government to rethink its current Bill on 100% business rates retention.
So what prompted the Bill? In 2010, the coalition government set out its desire to substantially reform the current business rates regime. Former Deputy PM Nick Clegg, announced the plans in a speech to the LGA, he said:
We will localise the retention of business rates… At the moment you [councils] have no financial incentive to promote economic growth and prosperity in your area. You are not rewarded for success. By localising the retention of business rates you are given a dramatic new incentive to work with business and with others, in order to boost economic prosperity in your areas.
The ring fencing of BRs are then seen as a shift towards greater devolution. The TUC agrees that the move to incentivise local authorities to grow local economies by full retention of business rates revenue is positive. There are a number of limitations with this Bill, two of which I outline below:
Proper funding of local services
Money generated from BR is planned to be invested back into local economies. But the figures don’t stack up: councils face a £5.8bn shortfall by 2020, including a shortfall of £2.6bn in adult social care. The LGA estimates that between 2010 and 2020 local authorities will have had their funding cut by 79%. All the while, demand for services is set to increase, putting more pressure on local budgets. The Local Government Chronicle notes that:
In any case social care demands are likely to increase faster than income from business rates. If we rely on income from BR to fund social care in the long term, there is bound to be growing disparity.
NAVCA agrees, they commented that local authorities which are already supported by the BR safety net (‘to avoid excessive losers’), lack the finance to support existing public expenditure from business rates. Local communities are already experiencing the impact of demand rising faster than local tax resources.
Put together, the state of local government finances means authorities will have inadequate capacity to grow their local economies. This would drastically undermine the government’s plan to transfer powers locally to enable fiscally self-sufficient local authorities.
Creating regional inequalities
Non-deprived Local authorities will see their economies grow stronger from larger revenues, given their stronger starting position. Authorities in deprived areas, where there is the highest social need, by contrast will bear the brunt of the inequalities caused by the reforms. In its current state, the Bill will only serve to perpetuate the imbalances in local growth and public services.
This is illustrated well by the NAVCA example:
Local authorities… will struggle to be financially dependent on their local economies for the revenue that they need to deliver local services. This is particularly true for areas with a historically low tax base. For example, Blackburn may have problems due to de-industrialisation, but Kensington and Chelsea will be starting from a strong position of growth and will have the resources and capacity to use the 100% business rates scheme to create economic growth.
We need an alternative
The TUC believes business rate revenue should not be used to plug the funding gap faced by local authority services, as a result of a decade of spending cuts.
The Bill is currently indicative of a perturbing move away from a ‘needs-based system’ which was designed to fund services according to the specific needs of communities, rather than by depending on business growth.
The TUC recommends the government consider a more redistributive approach. This should give all local authorities equal incentive to grow. It is based on the IPPR’s ‘growth first’ system, which multiplies percentage growth in business rates by funding need. We see this as a socially just and efficient use of public money.