Nick Clegg's announcement of additional powers for councils to use Tax Increment Financing is on the face of it welcome news. But the deputy prime minister has said that Tif will operate within a ‘carefully designed framework of rules’ agreed in cooperation with local authorities.
So will those rules actually manifest in new freedoms for local authorities to ‘participate in the growth dividend’, that is allow them to capture incremental value in local tax revenue generated by new developments, or bog them down in red tape?
The power to retain long-term local tax revenues would clearly be a step forward and test the coalition government's commitment to practical localism. However, Tifs will probably work better in those areas of higher value than lower value. It is important to recognise that the principle of equalisation (which has underpinned grant distribution between local authorities for many years) will not necessarily be acknowledged in how Tifs will operate; maybe that is inevitable and if Tifs are implemented at least some investment will be generated.
Previous surveys have shown that a high percentage of local authority, local business and third sector representatives agree that the Tif mechanism is much needed in generating local infrastructure. The problem remains that it is those areas with acute local economic problems that need the infrastructure most and they may not have the higher value development on a sufficient scale to produce the revenue to underpin a successful Tif programme.
Presumably the government will require various local authorities or sub-regional groups to make a case justifying the application of the powers – and will Tifs be linked to other forward funding initiatives such as local authority asset backed vehicles (Labvi)? Maybe there is a need to join up both property-led initiatives as well as revenue-raising powers within an approved Tif.
The ability of a local authority to use Tax Increment Financing to finance infrastructure (and possibly local authorities combining to do so) potentially could make a substantial difference in the way in which local economic recession and regeneration projects are programmed. A sub-regional approach where a local authority with higher values can support those with a lower valuation base (or in an extreme case where no development is taking place at all due to a longer local recession) is an issue that may need to be addressed in any emerging guidance.
Malcolm Iley is a partner in the public sector group of Trowers & Hamlins
