Funny old business rate, by Ciaran Guilfoyle

16 Mar 06
At first glance the Local Authority Business Growth Incentive scheme seems to be a good idea. But it does away with the principle of equalisation, distributing funds regardless of councils' needs or incomes

17 March 2006

At first glance the Local Authority Business Growth Incentive scheme seems to be a good idea. But it does away with the principle of equalisation, distributing funds regardless of councils' needs or incomes

The announcement of the Local Authority Business Growth Incentive payments to local authorities might be a huge boost to business regeneration, but it is also another nail in the coffin of resource equalisation — the principle that places all authorities on a theoretically equal financial footing.

The Labgi rewards, amounting to more than £115m nationally, are funded from the business rates and have been distributed to authorities collecting rates in excess of a floor set by the Office of the Deputy Prime Minister. Ordinarily, business rates income would be pooled and redistributed to authorities as part of the equalising formula grant. But now £115m of these rates are effectively being redistributed without regard to spending need or tax base.

Unfortunately, the Labgi announcement follows on from a series of remarks that have weakened the foundations of the equalisation principle. Sir Michael Lyons' interim report, published in December, acknowledged equalisation as 'extremely important' and 'integral' to the local government finance system but stated that it could be achieved only by sacrificing simplicity and accountability.

Given that Lyons' aim is to enhance simplicity and strengthen accountability, then the future for equalisation does not look bright.

In December 2004, in a consultation document on three-year settlements, the ODPM claimed that 'the underlying rationale for the formula system, that of “equalising” notional council tax levels at a particular assumed level of spending, no longer holds good'. In July 2005, its formula grant distribution consultation paper openly talked of dispensing with equalisation.

But why should this principle no longer hold good? Despite what is often said about the complexity of the local government finance system, this does not stem from resource equalisation. Indeed, nothing could be simpler than the formula 'Grant = Need — Resources'. The fact that the 'need' element of this formula employs linear regression and multi-level modelling is neither here nor there. Public trust in local government no more depends on an understanding of funding formulas than driving a car depends on knowing the chemical composition of petrol. The public rightly expects central and local government to get these formulas right without its involvement.

In fact, the most confusing aspects of the finance system have been the devices employed to counter the effects of equalisation. The grant floor mechanism, for instance, now requires such severe scaling to fund it that capital financing is becoming problematic; and the Labgi itself, though a simple enough concept, employs 'special' (the ODPM's word, not mine) data that is inaccessible to local authorities. The rewards are therefore unpredictable and, I will hazard, a matter of luck.

As for the lack of accountability that equalisation supposedly creates, it is worthwhile pointing out that mainstream formula grant comes with the least number of strings attached. It is neither compensation for costs incurred nor a reward scheme for a specific type of behaviour. It is not ring-fenced and a local authority is free to spend it as it sees fit. In other words, formula grant is as 'clean' as council tax income.

Notwithstanding this, many commentators are put off by the assumptions about service levels that necessarily underlie the needs formulas. They see these as proof of a centralism that places 'strong expectations' on local authorities, and forever prevents them from forging distinct identities based on local aspirations.

Instead, such commentators would prefer to see a 'new localism', financed by an enhanced range of local taxes and charges, accountable to local people, and free from the dictates of central government.

But this would not be true localism. Instead of expressing the will of local people, such a setup would subject local people to the domination of the accidental economic features of their areas. Local government would be constrained by the availability of local taxes, which would differ widely across the country. Contrast the fiscal pickings to be found in Westminster with those in the rural communities of the north, or the tourist destinations of the west. Under new localism, local choice would in reality be circumscribed by the national division of labour.

True distinctiveness will be forged by authorities only after the differential impact of local funding has been overcome, through equalisation. An equal financial footing will mean that differences between councils

will be a genuine reflection of local choice. And, standing shoulder-to-shoulder, authorities will be better placed to manage the 'expectations' of central government that sometimes arrive in the formula grant funding package.

In other words, only the equalisation principle can free councils from both central domination and local geographic accident. It must not be sacrificed too readily.

Ciaran Guilfoyle is principal accountant at Leicester City Council. He is writing here in a personal capacity


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