Business rates retention: time is running out for answers

19 Dec 16

More pilots of full business rates retention have been announced, but it is difficult to see localisation as a sustainable funding model for local government

After the announcement of the local government financial settlement last week most people focused, as we did, on the impact on social care funding.

Less remarked upon were the announcements about business rates. But of course this is central to the not entirely trivial question of just how local government will be financed post 2020.

It’s over a year since George Osborne pulled this particular rabbit out of a hat, announcing at the 2015 Conservative conference that councils would retain 100% of business rates with the formula grant phased out entirely.

Progress towards this has not been entirely smooth. Last year many district councils found themselves underfunded as their formula grant allocation shrank quicker than their business rate retention increased.

Cue hurried introduction of transitional funding to assuage the ire of conservative district councillors.

And of course there’s been little detail on how this will actually work. Will there be some sort of equalisation mechanism? How will this differ from the current tariff and top up system? Who will administer it and at what spatial level? Despite an extensive consultation, which closed in September, we still don’t have any answers.

Following Sajid Javid’s statement last week we’re still none the wiser but we do perhaps have a road map towards finding out with the announcement of 100% retention pilots in Greater Manchester, Liverpool City Region, the West Midlands and Cornwall to begin in 2017.

The sub-regional scale of these pilots is in itself interesting. Hopefully they will give us a sense of how the policy will work in practice and how risk and growth can be pooled across groups of councils.

In broad terms local government should welcome the opportunity to have more control over its own financial destiny but two major areas of uncertainty remain.

First, how much failure are we willing to tolerate? The logical endpoint of 100% retention and zero central funding is that some places will fail financially. This could be the result of some unexpected major event – a big employer pulling out for example – but is more like to come as the result of a slow accretion of costs such as social care outstripping growth.

But it’s not clear that a Detroit-style fail and rebuild is politically acceptable in this country. But short of this it’s not clear how a 100% business rate retention policy would be really meaningful.

And of course there are questions about the sustainability of business rates as a funding mechanism. As a tax on the bricks and mortar presence of a business, they feel increasingly like they reflect the economy of the past and not the future. As more businesses move online and as value generated and physical size become increasingly disconnected it is likely that business rates will be limited as a source of revenue and will not accurately reflect the rate of economic activity or growth in an area. Essays in our recent Future Local collection considered a range of tax options that could be localised but these are not currently under discussion.

We will watch next year’s pilots with interest but it’s hard to feel confident that this really represents a sustainable funding model for local government. The secretary of state acknowledged this when he announced a Fair Funding Review “to thoroughly consider how to introduce a more up-to-date, more transparent and fairer needs assessment formula.”

So we are to have yet another review and yet another period of consultation, but you can’t help feeling that reality is moving much faster than the policy process. 2020 is not far away.

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