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NLGN warns against business rate grab to pay for deficit reduction

By Richard Johnstone | 27 October 2011

Plans to localise business rates could end up with the government clawing back funds to pay down the deficit, a local government think-tank has warned.

In its response to the Local Government Resource Review, the New Local Government Network said allowing councils to retain locally raised business rates was welcome and could help boost the UK’s lacklustre economic performance.

But it argued that this could only be achieved ‘if ministers prioritise the growth incentive over concerns about fairness’ by letting councils keep most of the money.

The NLGN also warned that the current proposals could create an overly complex system for redistribution of business rates increases while allowing the Treasury to siphon off billions of pounds to reduce the government’s deficit.

The consultation on Local Government Secretary Eric Pickles’ plans ended on Monday. Under the proposals, business rate revenue will be devolved to councils from 2013/14.

A system of tariffs or top-ups will be put in place to ensure a fair starting point for all councils when the system starts, and there will also be a levy that would provide the government with a share of any ‘disproportionate gain’ in rates by a particular council.

This week, there have been calls for London councils to be allowed to retain up to 60% of future business rate growth. The NGLN calls for the cap on ‘disproportionate gain’ to be higher, at 70%.

To address what it calls ‘legitimate concerns that some councils will lose out’, it also called on ministers to provide clear principles and reassurances that any top-sliced rates money will be returned to local government rather than be used to help pay down the deficit.

Arguing that the business rate is ‘legally a local tax’, the NLGN recommends that part of the proposed levy be used to pay for lump sum transfers to areas with less potential for growth. There should also be a capital fund to support public investment in lower growth areas.

This would link the collection of the disproportionate gains to the redistribution of the funds, it argued.

NLGN director Simon Parker said: ‘These reforms represent a significant step towards giving local government more financial independence, but only if they provide a clear incentive for growth that is uncluttered by complex redistribution mechanisms.

‘Councils will not respond to the growth incentive if they are uncertain of what will happen to any extra money, and the Treasury must be clear from the start about how it will use any top slice. While fairness and need must remain core concerns for any local government finance system, the worst possible outcome of this reform would be a muddled system which produces no real change.’

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