CIPFA highlights challenges of business rate localisation

30 Sep 16

Government plans for business rate localisation imply a major redistribution of resources on the first day of the scheme that could create financial uncertainty for councils in the rest of the decade, CIPFA has said.

In its submission to the government’s consultation on how the business rates scheme will operate, CIPFA said the proposal is a positive step towards greater financial autonomy for local authorities.

However, the institute warned the long-term opportunities come with a number of short and medium term challenges.

The consultation was launched by former local government secretary Greg Clark in June and called for views on the details of the government’s plans to fully devolve business rates revenue by 2020.

A fair funding review will set of the baseline funding level in 2020, which will then be met by either topping up or top-slicing each local authority's business rate income. Authorities will then retain all local revenue growth.

In its submission to the consultation, which closed on 26 September, CIPFA highlighted this could lead to “a potential major redistribution of resources on day one of the launch of the new 100% scheme in 2020”.

Given the risk of financial volatility for individual councils as a result, CIPFA urged government to consider how to minimise the uncertainty so councils do not feel forced to set money aside to deal with “the day one risk”.

Sean Nolan, CIPFA’s director of local government, stated the move to 100% business rates retention represents a step-change in how local government services will be funded in future.

“The long-term opportunities for local government come with short term challenges and trade-offs will need to be made if the reforms are to succeed,” he said.

“The launch of the scheme could coincide with a major shift of resources between councils and thereafter, at the heart of those challenges, is the trade-off between those areas with strong local business rates prospects and those where the reverse is true.”

In order to find the right balance, a number of questions need to considered, CIPFA stated.

The submission supported periodic resets to rebalance differences in business rate growth and need between councils over time, but there was need for a debate about what is an acceptable level of divergence in spending power between different areas and councils over time.

The institute also called for a significant proportion of the additional quantum of money that comes from 100% retention of the £26bn in business rates revenue to relieve existing service pressures, and also to allow local government to deliver improved growth and social outcomes for citizens.

Ministers have said that responsibility for funding services would be devolved in order to make the plan initially fiscally neutral. Among the areas proposed in the consultation are public health, early years, youth justice and the attendance allowance paid to help meet care costs.

CIPFA said new responsibilities should be focused on areas where local government can directly influence improved economic growth and better social outcomes, and not “a high risk portfolio of new demand-led services that outstrip business rate growth”.

“We must also consider the risks and challenges around the volatility of business rates income,” Noland concluded.

“The final design must be thoroughly stress tested, not just on day one, but over time, so that changing pressures and business rate profiles can be fully assessed.”

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