Guy Ware: The business rates retention row of ducks

Business rates retention is delayed but is this an opportunity to put the funding of local services on a sustainable footing for the foreseeable future? Only if four key questions can be answered, argues Guy Ware.

At a recent housing, communities and local government committee session on business rates retention, witnesses from across local government were asked about the impact of the delay following the fall of the Local Government Finance Bill.

There followed some scepticism about the original 2019/20 deadline for implementation (I think the word “heroic” passed my lips) and much well-justified teeth-sucking about the “cliff-edge” we all face in April 2020 when the current “four year settlement” ends and a new Spending Review, a new funding formula, a new retention system and even — who knows? — a new arrangement for adult social care all come into effect at once. Pity the poor finance firector who has to project a medium term financial plan past that.

And yet, and yet…. aren’t we trained to see every threat as an opportunity?

So, I said to the committee, the delay gives government a chance to do what it so often struggles to achieve: a coordinated and coherent set of reforms that will provide a sustainable basis for funding local services for the foreseeable future. I think I may even have said it with a straight face.

Why is such coherence unusual? In part because it requires courage, which is a rare commodity in political life; in part because fragmentation is built into the fabric of our civil service, in which no task is too small to be sub-divided and allocated to separate policy makers. All too often the result is what the academic literature refers to as “path dependency” — the tendency to reach for familiar, easily-available policy solutions to urgent problems (and not to deal with any problem until it is urgent).

Properly to get our ducks in a row would require resolution of (at least) four fundamental questions.

How to fund adult social care?

Redesigning local government finance without resolving the future of its largest budget is not a recipe for long-term sustainability. We’re promised a green paper from the Department of Health and Social Care in the summer, of course. But that will only cover care for the over-65s (which, it turns out, only account for 45% of current ASC spending).

The majority of the budget is spent on working age care, the subject of a rather less-publicised “parallel process” review being jointly conducted by Health and MHCLG.

In which century do business rates belong?

Local government has long argued for the retention of business rates, and is right to do so. But we have also argued for the need to reform the basis of the tax, not just its allocation.

The recent Institute for Fiscal Studies (IFS) report questioned not just the distributional impact of retention, but the lack of correlation between economic growth and increases in retained rates — and therefore the effectiveness of the incentives for local councils. That, at least in part, is because the system is currently designed to reward councils for an increase in business floor space – not an increase in productivity. As they stand, business rates risk taxing — and incentivizing — the wrong things.

Needs v. incentives.

Since the General Election was called, the balance of the government’s business rates rhetoric has shifted from rewarding growth to greater local control over the revenues raised. But the issue is at the heart of the local funding and devolution debate and will not go away.

As the IFS report pointed out, the response to a poor incentive might not be to abandon incentives, but to create better ones. Giving local control over a broader range of taxes, including a share of income tax, could help tackle the UK’s over-centralisation that, as the OECD has argued, exacerbates regional disparities.

What to do about council tax?

We need to build 300,000 homes a year, the government says. And when all the dust settles on the “needs” side of the Fair Funding debate, the spending power of each council will still be adjusted to reflect its capacity to raise a local domestic property tax based on the notional value of those properties in 1991. The amount that individuals pay will be driven by a combination of history, government capping, local political decisions and a deeply-regressive Council Tax Support Scheme in which those on the lowest incomes pay by far the highest proportion of that income. The Poll Tax caused riots because it was simple, and its unfairness obvious. The Council Tax is deceptively complicated but should not, in any well-governed society, be allowed to continue unreformed.

So, that’s easy, then.

What are the odds?

I’m more of a reader than a gambler. But, without making any political point at all, on this I think we can all get behind Antonio Gramsci, the Italian Marxist’s call for optimism of the will, pessimism of the intellect.

Guy Ware is director of finance,
performance and
procurement at London Councils.

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