Brexit, business rates and the forecasting challenge
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Stephen Fitzgerald
It has been quite a period in politics since the EU referendum. We are seeing a paradigm shift in the national political and economic picture which is likely to have a fundamental impact on local government finance.
And it is business rates that rises to the top of the agenda. The move to 100% business rates retention to local councils over the medium term was beginning to look a positive development for wealthy areas. As economic recovery began to kick in, the potential business rate yields were beginning to outperform expectations.
Now, with the UK likely to exit the EU, the situation is uncertain. Some might say that the current economic turbulence will settle down once the post-referendum hysteria has subsided.
Others believe that we are now facing an economic Gotterdammerung with long-term recession an inevitable outcome of an exclusion from European free trade.
For local authorities endeavouring to budget on a long-term basis, this presents a real challenge in forecasting, particularly so far as business rates are concerned.
To develop accurate local scenarios which will be affected by international macro-economic events is a significant challenge, particularly in smaller local authorities where advanced econometric modelling capacity is likely to be limited.
Nevertheless, responsible chief financial officers who believe in an evidence-based approach to budgeting must attempt to take a view on future trends in business rate income.
This is perhaps, yet again, an instance where a major event gives the Local Government Association (LGA) a chance to both support and lead local authorities through a difficult period.
Both the Icelandic banking crisis and the austerity, ‘Graph of Doom’ period showed how work undertaken by LGA, at the national level, can significantly assist local authorities in dealing with a national or international financial turbulence.
Local Government CFOs will now need their best predictive powers to help guide their local authorities through this period of instability.
The sector needs to share its expertise at how best to approach the development of scenarios and it appears that LGA is well placed to add value by coordinating and supporting this work.
One can only hope that the impact on the economy and, consequentially, the growth in business rate income is not fundamentally detrimental.
However, we can be sure that if there is an economic decline with businesses quitting the UK for the EU, it can be guaranteed that the poorer areas will be hit the hardest in terms of income loss and will have consequentially the heaviest burden of the social consequences of unemployment. Another financial double whammy.
Stephen Fitzgerald is a management and financial consultant.
