Councils should keep up to 60% of business rates, says think-tank

The Centre for Cities today published its recommendations for the Local Government Resource Review, which is currently out for consultation.

The report, Room for improvement: creating the right incentives needed for economic growth, argues that allowing councils in England to retain a fixed proportion of between 40% and 60% of their business rate growth would provide the strongest incentive for commercial development. This would be a better option than introducing a rebasing system, growth cap or sliding scale of deduction, it says.

The think-tank also argues that the remainder of local business rates growth, which will be pooled centrally and redistributed, should not be linked to a council’s budget position, which would distort incentives for growth. 

Instead the central pot should be allocated according to a deprivation basis or used to pay for an enlarged New Homes Bonus, another new government initiative aimed at ensuring local authorities benefit from accepting additional housing. 

The report’s authors accept that a strong incentive for growth ‘will inevitably create winners and losers’, but add that ‘the overall benefits to the national economy make this trade-off acceptable’.  

Their evidence suggests that 55 English cities increased their business rate growth between 1999 and 2010, suggesting a financial incentive for growth ‘could work positively for almost all cities’. Milton Keynes, Cambridge and Preston were among those experiencing the biggest gains.

Joanna Averley, Centre for Cities chief executive, said: ‘The government must not miss this opportunity to be radical in revising the business rates system, and we welcome the political backing given to this process by Nick Clegg last month.

‘Reviewing this system will not only reward councils for being pro-growth, but it will also make a real difference to the people they represent; because the money raised from the business rate could be ploughed straight back in to the community, into things like roads and schools.

‘In this challenging economic climate, it is more important than ever to encourage buoyant cities to grow.  Because the current tax system offers no direct financial incentive for cities to develop their business base, it does not encourage them to achieve their full potential.’

Responding to the think-tank’s findings, local government minister Bob Neill reiterated that central government would continue to support areas with poor business rate bases.

He said: ‘The government is considering options to enable councils to retain their locally raised business rates that will allow them to break free from dependency on central government funding. We will set out proposals shortly for consultation.

‘We are absolutely committed to providing effective incentives for all authorities – of all types and in all areas – to benefit from delivering growth. We have made clear that more deprived areas will continue to benefit from government support.’