Whitehall’s flagship policy of 100% business rates retention will lead to divergences in funding for English councils without necessarily delivering the expected growth, think tank argues.

A key policy of the current Government is to increase the share of business rates English councils retain from 50% to 75% in 2020. It is also piloting 100% retention in parts of the country.

The Conservatives hope that by cutting the grant from central Government and giving local authorities the powers to keep the business rates they raise in their areas, councils will be incentivised to grow their local economies.

However, a new report from the Institute for Fiscal Studies (IFS) questions whether this policy will be able to achieve its aim.

The report, entitled Spending needs, tax revenue capacity and the business rates retention scheme, shows 100% rates retention could lead to ‘significant divergences’ between councils.

The local authorities that would be able to raise the most through such rates retention, the IFS found, were not the ones experiencing the biggest increases in their spending needs.

In other words, the wealthiest areas would receive more money than the poorest, leading to an increase in inequality between councils.

It is also not clear the incentives provided by rates retention will translate into faster economic growth — the main aim of the policy.

The IFS found no relationship between changes in the councils’ business rates tax bases and local economic growth, employment or earnings growth in recent years.

There is a link between changes in the value of business properties when they are re-valued and local economic growth.

However, the report found most of the impact of these valuation changes is stripped out from the revenues retained by councils.

‘The lack of relationship between changes in business rates and economic and employment growth is important,’ said David Phillips, associate director at the IFS.

‘Areas seeing lots of new developments aren’t guaranteed strong economic growth. And growth doesn’t necessarily rely on large-scale property development.

‘This does not mean the incentives for councils to encourage property development that are provided by business rates retention aren’t useful.

‘But it does suggest that if the government wants to encourage councils to take a more active role in promoting growth, other incentives could play a useful role as well.

‘This could include allowing councils to retain part of other taxes such as income tax.’

Responding to the IFS’ findings, Cllr Claire Kober, chair of the Local Government Association’s (LGA) resources board, said: ‘With local government facing an overall funding gap that will exceed £5bn by 2020, we remain clear that councils must first and foremost be able to use extra business rates income to plug this growing gap.

‘A fairer system of distributing funding between councils is urgently needed and this distribution mechanism, along with the way the new system of business rates retention is set up, should take into account issues such as those identified in the IFS report.

‘No council should see its funding reduce as a result of this new system.’

For more on the IFS report visit The MJ (£).