Last October, George Osborne told the Conservative Party conference: ‘I am embarking on the biggest transfer of power to our local government in living memory. We’re going to allow local government to keep the rates they collect from business. That’s right, all £26bn of business rates will be kept by councils instead of being sent up to Whitehall’.
Recent Government figures predict a £400m increase in business rates income, to £23.5bn after reliefs and adjustments. But what lies behind the exuberant rhetoric and the big numbers?
From 1990 to 2013 English councils just collected the rates and passed them on to the government, which redistributed them according to its assessment of spending needs. In 2013 authorities were allowed to keep half of what they collected, with the rest redistributed by government as before, including a system of “tariffs and top-ups” to enhance the redistributive effect. The idea was to encourage local authorities to promote economic growth by giving them a share in the additional rate income.
In principle, the £400m increase does reflect growth. The business rate multiplier is pegged. Additional business rates can only be levied for ‘business improvement districts’ if local businesses agree, and through a ‘business rates supplement’ scheme for new infrastructure (only one exists, for Crossrail), and the review of rateable values has been put on ice until 2017.
Local authorities have pressed for fiscal devolution. Supported by a 2014 Select Committee report, London and the core regional cities have sought a variety of new fiscal freedoms, and these figured in many of last years’ devolution bids and deals.
The new plan is for local authorities to be able to fix their own business rates - up to a point. They will be able to cut the rates. City regions with elected mayors will be able to increase their chunk of the rates up to a cap, probably 2p on the rate. Government retention and redistribution will be phased out from 2020, although there will be some tariffs and top-ups to protect authorities with low levels of income or who would suffer a big drop in income, and eventually non-specific government grants will be phased out completely.
Local authority associations welcomed the proposals. The city regions, including the ‘Northern Powerhouse’ cities, were more cynical, and the emphasis in the 2016/17 local government financial settlement on protecting rural authorities has fanned the flames.
Whatever labels you use, the components are the same. Council tax income increases are limited to 2%, with an additional 2% for social services. The scope for income generation from fees and charges or municipal trading is limited, and government support will continue to reduce. National business rate income will not increase – the change will be ‘fiscally neutral’ – so the only variables are the system of redistribution and growth from new or bigger businesses.
But the city regions have higher levels of deprivation, greater demand for services, and lower levels of economic growth than the South East and the shire counties. In principle, allowing councils to keep business rates, or business rate increases, will favour those parts of the country where the economy and economic growth is strongest.
Two things follow. Firstly, local authorities will have to concentrate on real economic growth, competing with each other to attract new businesses and struggling with the planning and environmental implications. Secondly, though, the tariffs and top ups will be crucial, and the details have not yet been published.
It is good news that the business rate cake is a little larger than it was, and promoting growth will be at a premium, but the real debate will be about how the cake should be sliced. We will see how powerful the Powerhouse is when that debate begins in earnest.
Simon Goacher is a partner and Graeme Creer a consultant at national law firm Weightmans.
