Business rates devolution: welcome move but questions remain

28 Oct 15

How business rates decentralisation will work needs clarifying – especially for high-need councils – and the chancellor should remember Robert Maxwell when reforming pensions

The decision to allow local authorities to keep all the business rates they raise was applauded by many councils and given a cautious welcome by businesses. CIPFA shared its support. My own view is that the nationalisation of business rates in 1990 set back local authority financial autonomy more than any other sole act, and it’s good to see this reversed, albeit 25 years too late.

But, as is the nature of high-profile political announcements, the devil is always in the detail. As details are yet to be clarified, we are left wondering how the move will work in practice, especially in the case of high-need authorities that rely on funding from central government.

The level of business rates is uneven across England and, in general, councils that collect the most have lower levels of need. It therefore seems unlikely that self-sufficient councils will keep all their business rates unless the others receive some form of supplementation.

These plans are intended to boost local economies by giving councils an incentive. So, first, this means local authorities and businesses engaging with each other more and forming collaborative relationships with local
enterprise partnerships to develop business activity.

As business tax yield is linked to local and national economic health, periods of recession will put councils financially at risk. Ministers must state what would happen in worst-case scenarios.

Clarification is also needed on which services local authorities will have to fund. Currently, areas such as the police and public health are funded from other sources, but it may be that business rates will be used to finance these.

The Treasury’s local government spending cuts remain in place. Over the course of the last parliament, the government cut funding by reducing the revenue support grant (RSG), which the revenue from business rates feeds into. However, with local authorities keeping all of their business rates, so ending RSG, how the government would implement cuts to the Department of Communities and Local Government is unclear. Ideally, a new system might see councils accept more risk on business rate retention but be inoculated from the deepest Whitehall cuts. Without such reform, decades more of cuts would see local government simply fall over at some point. In terms of economic cycles, we are now closer to the next recession than the last one.

Meanwhile, little has been said about British wealth funds. Chancellor George Osborne has revealed plans to use pooled Local Government Pension Scheme (LGPS) funds to invest in infrastructure but, as with housing and right to buy, failed to consult the local government sector beforehand.

Local government is the only public sector pension scheme that holds fund assets. At last count, these amounted to £200bn of investments, which generate £7bn a year for current and future pensions. In the rest of the public sector – the NHS, civil service and for teachers – growing liabilities are met from cash budgets.

Investing LGPS funds must be approached with caution to ensure good returns from investment-grade proposals, not vanity projects where the returns may be less certain; it would be shameful to kill a goose that keeps laying golden eggs. Put bluntly, the chancellor must remember – unlike Robert Maxwell – that this is not his money but held on trust for those who have contributed to it. They are not “British wealth funds” as billed but pensioners’ trust funds.

That said, as long as investment criteria are sound, pooling funds can reduce administrative costs. But big is not always beautiful or successful and the acid test must be performance, performance and performance, not change for form’s sake. We must ensure each council still sets a clear asset allocation strategy matched to the maturity of its LGPS scheme. Councils may become more removed from the administration of pooled funds, but the government must respect that each authority must still set the strategy for what it expects its funds held on trust to achieve.

  • Rob Whiteman

    Chief executive of CIPFA since 2013, after leading the UK Border Agency and the Improvement & Development Agency. Previously, he was CEO at Barking and Dagenham council.

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