Councils worry over business rate reform

27 Jan 12
Councils have lobbied hard to keep the income from their business rates. But some are worried that the new system will increase inequality in services. Richard Johnstone reports

30 January 2012 | By Richard Johnstone

Councils have lobbied hard to keep the income from their business rates. But some are worried that the new system will increase inequality in services.

Barnsley ISTOCK

You’ve heard of the West Lothian Question, now get ready for the Barnsley Question.

This newest political poser arises amid the government’s latest efforts on town hall finance reform. After years of local government  lobbying, ministers have finally taken notice and agreed to allow English councils to hold on to the rates they collect from businesses in their areas. But their rate bases will not be equal and therein lies the rub.

Neil McInroy, chief executive of the Centre for Local Economic Strategies, poses ‘the Barnsley Question’ in its most succinct form: as councils begin to retain rates, and some grow more slowly than others, what can be done to ensure services are not hit?

Councils with weaker business rate bases will no longer be able to rely on central government cash to help them meet demand for local services.

These councils might not benefit from the proposed system, McInroy warns. ‘Barnsley doesn’t have a good business rates base, whereas Westminster City Council has the business rates of a medium-sized country.’

If rates grow much faster in Westminster than in Barnsley, ‘without proper equalisation’, the system will exacerbate existing inequalities, he says.

The government has moved quickly since Deputy Prime Minister Nick Clegg announced business rate localisation last June. Since then, there has been a consultation, a government response in December, and the legislation began its committee stage in January.

The government is proposing to introduce a system of top-ups and tariffs to ensure a fair starting point. Authorities with weak business rate bases will be given a funding ‘top-up’, paid out of a central pot funded by tariffs paid by more prosperous authorities. Once localisation is under way, a levy on the growth of rates will pay for a safety net to share some of the growth.

Communities Secretary Eric Pickles says that his plans will remove some of the barriers to growth that result from the current formula grant system, through which business rate revenue is pooled and redistributed nationally.

For Pickles, councils have been ‘hamstrung and discouraged by a system that failed to encourage and reward economic success’.

Jonathan Carr-West, director of policy at the Local Government Information Unit, agrees that the reformed system will give councils ‘real powers and incentives to shape local economies’.

He tells Public Finance: ‘As localists we have to accept that there will be different outcomes in different areas.’

Carr-West urges town halls to be ‘on the front foot’, planning now for the changes. ‘Their destiny will be in their own hands, which we should welcome – councils have wanted this for local government for years.’

But he acknowledges the concerns.

‘People are clearly worried that the top-up system won’t really work and that a lot of councils will predominately be losers. Also there’s concern that those with a low level of business rates will have permanent top-ups, that won’t retain value over time.’

The fear is this could lead to a permanent two-tier system of top-up and tariff councils.

The Local Government Association shares this concern. It has long backed localisation, but warns that the devil could be in the forthcoming detail. It wants more information to ensure that the new scheme incorporates safeguards for authorities with low rate bases.

A proposed safety net, formed from the levy on gains, will provide extra funds for councils whose baseline funding falls by a set amount in a single year, but the level for both of these has not yet been confirmed.

Local Government Yorkshire and Humber, a group of 22 local authorities, has also raised problems with the differing levels of growth and the April 2013 starting point.

Speaking for the group, Peter Simpson, chief executive of Hambleton and Richmondshire district councils in north Yorkshire, tells PF the proposed system may be unfair as economic growth is influenced by a lot of factors outside ‘our control’.

Simpson says that the current formula grant takes some account of changing needs, but under the new system there will be no link between rates and council services. Top-ups and tariffs will only be linked to inflation.

One way to connect business rates to need is for more frequent revisions of the system and regular re-examinations of top-ups and tariffs. The Department for Communities and Local Government has proposed that this ‘reset’ will happen every ten years. But Simpson insists it is too long and could cause uncertainty.

‘Most [local government] people are saying five years is the right time. If it’s ten years you could get into a situation where there’s business rate growth that you’re dependent on, and that could be taken away by a reset.’

Fears have also been raised that funding services from business rate growth could hit rural communities.

Graham Biggs, chief executive of the Rural Services Network, warns the changes could increase the existing disparity between urban and rural England, as business rates will grow more quickly in cities.

Biggs, whose group represents more than 100 rural authorities, is also doubtful that the reform will reduce nimbyism: ‘Most people think that business rates are already retained by councils, so I don’t think it will remove objections.’

The government’s response to the consultation also revealed that in two-tier areas, district councils will retain 80% of business rates. The DCLG says that, as these authorities have the greatest control over planning decisions, they are the ‘right councils’ to be given the greatest growth incentive.

Daria Kuznetsova, a researcher with the New Local Government Network, predicts that this will lead to ‘a political shift in power between districts and county councils’.

She urges the districts to pool rates between them in certain cases, to ensure that any cross-district infrastructure investments needed take place.

There is currently no incentive to pool business rate income, but the DCLG is urging it to be considered.

Whether this happens is one of the remaining questions ahead of implementation.

Other issues, like setting tariffs and safety nets, will be key to answering McInroy’s Barnsley Question and determining localisation’s success.

Simpson concludes: ‘The new system is not a lot different in places from the formula grant: the general taxation element of grant will go and the top-up and tariff system will be in its place.

‘The big issue then is establishing a fair starting point and keeping business rates up with changing services. Without knowing how these two will work, it’s difficult to make a clear judgement about whether there’s a fair system or not.’

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