County council leaders have warned the Government about the risks of 100% retention of business rates as a new analysis reveals the policy could ‘worsen the financial plight’ of county authorities.
The Department for Communities and Local Government (DCLG) is currently encouraging bids from all parts of the country to pilot full retention of business rates during 2018-19.
The policy is intended to replace the central Government grant as a source of funds, making councils more self-sufficient.
However, an analysis undertaken by Pixel Financial Management for the County Councils Network (CCN) found that county councils would be financially worse off under full business rate retention - and far from self-sufficient.
The study, which modelled the impact of 100% retention in England, found the funding gap for county authorities could widen over time, increasing by £700m by 2029 on top of any existing gap at that point.
CCN said the study showed a potential divergence between what counties would retain in rates and their cost pressures, with business rate growth failing to keep pace with acute demographic and service pressures.
This is in contrast to other parts of the sector, such as London boroughs and district councils, who could disproportionately benefit, they added.
The CCN also warned that, in contrast to the previous round of pilots, the DCLG has not included a ‘no detriment’ clause which means only the wealthier counties are likely to come forward to pilot retention.
This, coupled with only a year to test out the policy, could mean that the risks are not properly trialled.
Pixel’s modelling shows a higher share of rates for county councils – potentially as high 80% – would help reduce the funding gap by £150m and ensure what the CCN describes as a ‘more balanced system’ between tiers and types of local authorities.
There would also be less redistribution required through top up and tariffs, they added.
The research also suggested that retaining a reformed levy on growth would be advisable because it would ensure no authority was able to build up disproportionate retained rates above their needs base.
The modelling provided some support to pooling arrangements too. It found that partners managing business rates together across a whole-county area could help to reduce unnecessary risk for individual councils.
CCN argued possible options for Government to consider could be for a mixture of retained rates – higher than the current 50% – and grant funding to ensure there is enough money in the system to ensure sustainable funding for all.
‘CCN is looking to set the pace in discussions over how local government could be funded during this reflective period,’ said CCN finance spokesman and leader of Leicestershire County Council, Cllr Nick Rushton.
‘Our research does not aim to dissuade counties from taking part in the pilots, but as a supporting body of evidence to inform their decisions.
‘The modelling we have released shows the unique challenges facing county authorities in implementing 100% business rates retention.
‘CCN is supportive of moves towards greater local retention, alongside wider fiscal devolution, but we must ensure the system provides sustainable long-term funding and a platform to truly incentivise growth and self-sufficiency.
‘Therefore, we believe more options should be on the table, something which ministers have indicated is the case in halting the legislation.’