NLGN warns against business rate grab to pay for deficit reduction
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
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
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
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.’