24 May 2011
A fresh dispute is emerging over the way business rates should be distributed among councils ahead of the shake-up of the local government finance system.
Ministers are consulting over plans to introduce a new system from 2013/14 in the Local Government Resource Review.
The intention is to scrap the central government formula grant and allow councils to be self-financing through business rates and council tax. Some form of ‘equalisation’ would remain.
But some major players are calling for business rate growth to be pooled regionally, while others want individual authorities to be allowed to keep the lion’s share.
London Councils is proposing to its 33 members that a share of business rate growth from each council should be pooled for later use across the capital. A share would also be retained locally and another would continue to be paid to the rest of England.
Hugh Grover, director of fair funding, performance and procurement at London Councils, told Public Finance that their model ‘would not allow any one authority to become excessively cash rich’.
He said the model, yet to be agreed by the leaders’ committee, ‘shared risk and reward’, recognising that business rate yield would fluctuate and that it was ‘fed by resources that come from other boroughs’.
The model created incentives for pan-London development and could easily be applied to other cities or regions, he said.
But the City Finance Commission, a panel of representatives from Birmingham, Manchester and Westminster councils, say that individual authorities should be allowed to retain the bulk of their business rates.
Their recommendations for the government’s review, published yesterday, say any equalisation pooling ‘must not diminish the power of the tax base incentives [for growth]’.
A spokesman for Westminster City Council, which collects the highest business-rate yield in the country, told PF: ‘Westminster’s view is that it works better in London at a local authority by local authority level rather than a London-wide system.’
Meanwhile, the think-tank Localis is proposing that councils should be allowed to voluntarily ‘buy out’ of the formula grant system for a fixed period. Having committed cash to the national pool, those that opted out would then be able to retain a larger share of their business rates during that period.
Alex Thomson, chief executive of Localis, told PF its model would allow London boroughs to work with councils outside of the capital’s boundaries too.
He added: ‘The problem with any kind of pooled model is free riders. You can benefit without putting any effort in.’
