Business rate retention: best when it's boldest

24 Oct 11
Andrew Carter

The LGRR presents a historic opportunity to devolve some level of local financing back into the hands of local authorities. London, in particular, stands to gain

The Local Government Resource Review consultation closes today - four months on since Eric Pickles announced plans for a major overhaul of the UK’s local government financing system.

The LGRR may not sound like the most exciting of reforms, but it does have significant potential to change the way councils are funded and how they think about investment in their local economies. Now the onus is on the government to take the next steps to get this right.

Earlier this year, Centre for Cities published research arguing that, in order for this legislation to make a real difference to the UK’s economic future, councils need financial incentives to invest in local economic development. Government needs to keep things simple by charting a course that creates strong and long-term incentives for growth by allowing local authorities to retain between 40% and 60% of future business rates growth. We don’t want another LABGI!

Recently, in collaboration with Future of London, we have built on our national level research to examine how these changes to local finance could play out in the authorities of London. Similarly to the picture for UK’s cities, we found in our report, Capital Gains, that London as a whole would be set to fare well if the changes in the LGRR are bold enough.

Between 2000/01 and 2010/11 most of London’s authorities experienced growth in their business rates with places such as Camden, Tower Hamlets and Southwark seeing significant increases. If these authorities were allowed to retain a fixed portion of their future business rates growth, they would have new resources to support the economic growth of their local businesses and communities.

Inevitably, any major changes to an existing system will see some authorities fare better than others. We argue that one way to ensure that all councils gain from business rates retention is through pooling.

Under this system, a portion of each authority’s business rates gains would be put into a central London pot to be used to support those places where budgets would be squeezed, as well as to fund strategic projects that would benefit all of London’s businesses and communities. Examples of this might be transport upgrades similar to Crossrail or the Northern Line extension to Battersea.

The LGRR presents a historic opportunity for the government to devolve some level of local financing back into the hands of local authorities. If the incentives are bold enough, councils will have the resources to support their communities and invest in projects that would benefit both their business base and local residents. London in particular, could see significant benefits from a radically different finance system.

With the consultation now closed, all we can do is hope that the government will design the reforms to be significant, clear and targeted in order to provide the incentives and resources necessary for growth.

Andrew Carter is director of policy and research at Centre for Cities




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