23 May 2011
City councils should be able to retain the bulk of their business rates while Whitehall funding should be devolved to create ‘area growth budgets’ for local services, according to a report published today.
The report by the City Finance Commission, a panel of local government experts enlisted by Birmingham, Manchester and Westminster City councils, calls on ministers to use the Local Government Resource Review to cut local authorities free of Whitehall financial controls.
The panel, chaired by property developer Sir Stuart Lipton, says city councils should be allowed to retain a greater share of business rates generated from new commercial projects, giving them incentives for growth and reducing their reliance on the formula grant.
Local authorities currently collect £21.6bn worth of rates, which is sent to central government and redistributed around the country.
The report, Setting cities free – releasing the potential of cities to drive growth, also says Whitehall budgets should be devolved to local cities to create a single pot, or ‘area growth budget’, for providing services such as employment, adult education, health and housing.
In many cities, up to 30 different organisations are involved in providing such services, resulting in duplication from government and local government, the report claims.
Lipton said: ‘Government needs to break out of its control zone and trust local cities.
‘A new system of local government finance is needed to support economic growth, deliver self-sufficiency and would work in the national interest. A fundamental way of injecting energy into our major cities is through reform of the business rate system as it is widely acknowledged that the current system is flawed.
‘There may be some risks and these need to be taken with responsibility and accountability that goes with them, but local knowledge must be used rather than the current one-size-fits-all from Whitehall.’
The report also supports the government’s intention to introduce tax increment financing powers for local authorities.
CIPFA chief executive Steve Freer, former local government minister Nick Raynsford and London School of Economics Greater London Group director Tony Travers were among the commissioners enlisted by the councils.
Commenting on the findings, Colin Barrow, leader of Westminster City Council, said: ‘Without radical reform of the way local authorities are financed, no matter how hard ministers try, their vision of true localism will not become a reality.
‘For as long as councils remain so dependent on central government money – mostly raised through rates – government will continue to impose rules, hand down targets and compel local authorities to spend that money in certain ways.’
Sir Richard Leese, leader of Manchester City Council, added: ‘Handing over more control over business rates to local authorities will give us the capacity to make sensible business decisions and allow us to reinvest the benefits to further promote growth.’
The government’s Local Government Resource review is currently open for consultation, with ministers due to publish their findings in July.
