Freedom to keep business rates 'smokescreen for more cuts'

25 Feb 11
Government plans to allow councils to keep more of their business rates and eventually become independent of central government funding have come under major fire – from those that stand to benefit as well as those that would lose out

By Lucy Phillips

25 February 2011

Government plans to allow councils to keep more of their business rates and eventually become independent of central government funding have come under major fire – from those that stand to benefit as well as those that would lose out.

The proposals, trailed this week ahead of the government’s delayed Local Government Resources Review, aim to make between a quarter and a third of local authorities ‘free councils’ by the end of the current Parliament in 2015.

Business rates would no longer be centrally pooled, putting an end to richer councils subsidising poorer ones, although ministers say some form of redistribution would be retained.    

But the London Borough of Camden, which stands to profit hugely from the move, warned it was ‘a smokescreen for government withdrawing from national social policy around deprivation’ – leading to ‘a race to the bottom in terms of services’.

Theo Blackwell, Labour Cabinet member for finance at Camden, told Public Finance: ‘Of course [keeping] business rates would help us as a borough, it gives us flexibility on these social challenges around schools and council housing. But you do wonder what price this apparently free lunch comes at.’

He added that there was likely to be some form of ‘central government dampener’.

Labour-led Barnsley Metropolitan Borough Council, which estimates the move would reduce its £220m budget by £45m, on top of £46m of existing cuts, was equally damning.

Council leader Stephen Houghton told PF: ‘It will be absolutely catastrophic. What we have seen so far in public funding cuts will look like small beer compared to what is to come.  It’s a huge danger to the economy, services and individual citizens. The most deprived communities will be devastated by this.’

Houghton said the council would be ‘forced into trying to raise business rates’ which would have the opposite effect of the government’s aim to stimulate local private sector growth.

But some councils reacted enthusiastically. Westminster City Council, which collects £1.2bn in business rates every year on behalf of central government – more than any other local authority – welcomed the move. Cabinet member for finance Melvyn Caplan said it would ‘act as an incentive for local authorities to work with business to create jobs, invest in roads and transport and be more responsive to local needs’.

He added: ‘These proposed new freedoms will create a new culture of civic growth which will lead to the sort of innovation and improvements that would transform urban centres.’

Surrey County Council was also positive. Leader Andrew Povey said: ‘By keeping a greater share of what we collect in business rates we can go it alone and Whitehall can keep its grant. This would be the ultimate expression of localism.’

Surrey collected £466m in business rates in the 2009/10 financial year and got back £153m for its own services, a net contribution of £313m to Whitehall.

Anna Turley, deputy director at the New Local Government Network, agreed that the move would be ‘fantastic’ for councils, giving them ‘a lot of freedoms and incentives to grow and develop businesses in their area’. But, she cautioned, there was an issue of fairness, with ‘a danger’ than rich councils would stay rich and poor ones stay poor.

‘No one wants to keep the top councils down and limit their ambition. But there is a degree of responsibility from areas that through natural reasons have more investment from business to rebalance the economy throughout the country and support business where it’s hard to do that,’ Turley said.

The move is likely to form the central strand of the Local Government Finance Review, which was due to begin in January but has yet to be launched.

The delay is due to wrangling between the coalition partners. The Liberal Democrats are pushing for more wide-ranging local finance powers while the Conservatives want to look only into repatriating business rates.

Turley said the delay was ‘a sign of how controversial it is – not just between the coalition partners but also the issues around fairness and redistribution’. 

She added: ‘I understand the LibDems have given ground. It does not sound at the moment that [the review] is set to go much wider.’

A spokeswoman from the Department for Communities and Local Government said ministers were currently making ‘the finishing touches to it’ and the terms of reference would be announced shortly. The inquiry is due to last for six months. 

The localgrowth white paper, published in October, gave some indication of what is to come. It says the review would need to take account of significant variations in need and current business rate yield in different parts of the country. 

The issue of what to do with upper-tier councils, which do not collect business rates, will also be addressed.

Houghton said he hoped the review would bring about ‘a local government finance system based on need, not based on rewarding success’.

The Local Government Association will consult with its members shortly on options for a suitable model of redistribution of business rates. Any system would need to include some kind of mechanism that takes into account the differing levels of need among different authorities, a spokeswoman said.

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