Business rates devolution: a step in the right direction on fiscal autonomy

15 Oct 15

Credit to George Osborne for the progress made on fiscal devolution by setting out a plan to localise business rates, but this must only be the beginning, not the end.

A former colleague of mine once compared local government finance reform to the Schleswig-Holstein question for its complexity, intractability and capacity to test the sanity of those involved. And like the Schleswig-Holstein question it has for the most part been a somewhat obscure and arcane debate.

Public Finance readers will need no convincing of the importance of this debate, but even they may be surprised to have seen it emerging as the breakout story from party conference season.

Yet that is exactly what George Osborne’s announcement on the localisation of business rates achieved. All £26bn of business rates to be retained by local government, authorities to be able to reduce business rates to make their area more competitive and elected mayors, under certain circumstances, to be able to raise business rates by up to 2%.

There is lots to say about this of course.

But we should start by acknowledging that it’s a step in the right direction and one which responds to calls from within the sector. At LGiU we have long argued for more local fiscal autonomy; every year we run a survey of lead members for finance and chief finance officers and they consistently tell us that to ensure the economic sustainability of their authorities they need to retain a greater proportion of business rate growth. They now get that and more.

The second thing we should say is that the chancellor’s announcement is radical. Only a few months ago, Treasury officials were briefing that it was inconceivable that local government would be given the power to vary business rates and the announcement was greeted with scepticism by some business groups such as the British Chambers of Commerce.

In a country in which up until now 98% of taxation has been set by one man, allowing local authorities to vary business rates concedes an important principle.

And in opening up the possibility of tax competition between different areas it also crosses an important Rubicon, one with the potential to fundamentally alter how we think about a ‘national’ economy.

The fact these announcements in themselves are radical does not mean, of course, that we could not go much further towards full fiscal devolution. We know from our member surveys that councils also want the ability to raise local taxes, such as tourism or environmental taxes, to borrow more easily and to have single local budgets.

So the ‘devolution revolution’ the chancellor announced is a radical step and a broadly welcome one. It feels churlish then to quibble and it feels trite to observe, along with everyone else, that the devil is in the detail. But of course that is where the devil always is; and there remain fundamental questions about how all this will work.

We know from the chancellor’s speech and from the Treasury’s announcement that by 2020 local government will keep the entire quantum of business rates, that existing transfers will be in place on “day one” and that individual authorities will get to keep the whole of any subsequent business rate growth. And there will be an end to the Revenue Support Grant.

But that’s about all we know. We don’t know for certain whether the current system of tariffs and top ups will continue, as some reports suggest, or whether there will be new forms of redistribution or safety net.

That matters because claiming to have reformed local government finance except for determining the redistribution system is a bit like claiming to have achieved nuclear fission except for splitting the atom.

There are also some practical considerations that may prevent councils reaping immediate benefits from growth, notably the huge backlog in the Valuation Office Agency that means that there can be a delay of up to two years in some cases before councils receive the rates from new businesses.

Finally, it is important to note that control of this system still resides in Whitehall. It is central government that sets the level of redistribution and the frequency of its re-evaluation. If we were really serious about fiscal devolution would we not want to establish an independent body, perhaps made up of representatives of local government and business who would set the appropriate level of redistribution, just as the Bank of England’s Monetary Policy Committee sets interest rates? Basing that body somewhere, anywhere, that wasn’t in central London would send a powerful message.

So credit to the chancellor for the progress we have seen towards fiscal devolution, but let’s be clear that this is the beginning, not the end.

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