William Eichler 24 April 2018

Business rates retention should not replace grants for councils, MPs say

The further retention of business rates should be an extra source of funding for local authorities squeezed by Whitehall cuts and not a replacement for existing grants, MPs say.

The Housing, Communities and Local Government (HCLG) Committee today published their report into Government plans to allow councils to retain 75% of their business rates in 2020-21.

The committee said that any business rates retention should be in addition to - and not a replacement for - existing sources of revenue due to the ‘huge’ financial pressures currently faced by the local government sector.

It is estimated that 75% business rates retention could generate £6bn for the local government sector.

‘Many councils across the country are in a difficult financial position, with huge pressures on a whole range of provisions from children’s services through to road repairs,’ said the committee chair Clive Betts.

‘After many years of financial constraints, the Government now has an opportunity to go some way towards protecting vital services for taxpayers by ensuring that any extra revenue from the retention of business rates can be kept by councils on top of current funding.’

The committee’s report also urged Whitehall to spell out a ‘detailed timetable’ for funding reform.

‘The current uncertainty,’ Mr Betts said, ‘means councils are being pessimistic about their financial futures, which risks impacting on the frontline services that residents rely on.’

Local government leaders have welcomed the committee’s report, arguing the extra money business rates could bring in would help plug the £5bn funding gap facing councils in 2020.

‘The money local government has to maintain vital services is running out fast,’ warned Local Government Association (LGA) chairman Lord Porter.

‘Councils will see their core funding from central Government further cut in half over the next two years and almost phased out completely by the end of the decade.

‘Delays to when business rate reforms will be implemented mean councils are facing a financial cliff-edge in two years that the Government has to address.

‘Introducing a fairer funding system and allowing local government to keep every penny of business rates collected to plug funding gaps is now the only way the Government can ensure local authorities are able to protect the services communities rely on into the next decade and beyond.’

Cllr Paul Carter, chairman of the County Councils Network (CCN), also welcomed the report. He emphasised that county councils had a projected funding black hole of £2.54bn by 2021.

‘This report clearly illustrates that increased business rate retention will not be the saviour for local government alone,’ he said.

‘CCN has long argued that the “additional quantum” from increased retention should be used to alleviate the significant demand-led pressures the sector faces rather than going on existing grants or new burdens.’

‘Government should listen to this cross-party group of MPs, and let local government keep a significant proportion of the remaining £6bn in retained rates to address the significant funding gap it faces and ensure upper-tier councils are protected from spikes in service demand by regaining some element of grant formula,’ Cllr Carter continued.

‘It is also crucial that the report’s central recommendation on setting out a clear timetable for the fair funding review is adhered to, which will bring clarity to the sector and allow councils to effectively plan for the future.’

The HCLG committee’s report also insisted any new responsibilities placed on councils from further business rate retention should be ‘linked to stimulating and promoting economic growth’ - a point welcomed by Cllr Sharon Taylor, finance lead for the District Councils’ Network (DCN).

‘We are pleased that the HCLG committee has recognised our call on the importance of business rates growth being incentivised, by explicitly recommending that the Government should consider coming forward with new powers for councils to grow their local economies,’ said Cllr Taylor.

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