Business rates reform: View from the experts

The chancellor’s statement on business rates has caused a stir in local government. Speaking at the Conservative Party Conference George Osborne revealed new reforms allowing local authorities  to retain their business rates revenues. Councils will also be allowed to vary the levy to compete for business. A third element in the changes will allow some councils to raise the rate level to pay for infra structure projects.

The changes would place the £26bn raised from rates back in the control of local government. Currently only 50% of rates raised from business is distributed back to local authorities with the rest retained by central government.

But reaction has been varied. Room151 invited comment from a range of local government finance experts.

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

“We asked for it, and the chancellor’s statement is to be welcomed. Of course, the devil will be in the detail. Isn’t it always?

“Individual councils won’t keep all the rates they collect; there will be a redistribution system that limits the potential rewards from business growth. A host of detailed issues needs resolving – but we should seize the opportunity to help develop solutions that work.

“The chancellor also announced the death of “core funding”. It was dead already: on current plans Revenue Support Grant would disappear by 2020, and business rates will raise around £11bn more than we would be allowed to spend – which is exactly why the chancellor is looking to give us ‘additional responsibilities’.

“Some interesting questions follow: Which transfers can best ‘soak up’ the surplus? How might that support devolution proposals across the country? And might fixing this bit of the machinery open the door for more fundamental fiscal reform?”

Chris Buss
Director of finance and deputy chief executive, London Borough of Wandsworth.

“The announcement by the chancellor localising business rates, together with the extra responsibilities promised, should come as no surprise.

“It was clear, by projecting the unprotected reduction in government expenditure to 2020 there was no longer any cash for general grant and, by then, rates income will be at a level where they had to be spent on something extra.

“As many other commentators will say, the devil is in the detail and it will be particularly interesting to see how it works out for areas, such as London, where there are areas like the City and Westminster with major surpluses on business rates and others, currently in receipt of major top ups.

“Some form of scheme will be required to deal with this otherwise when this is added to the next round of cuts, as RSG goes, we will be looking at an English local authority with the finances of Detroit.”

Paul Woods
Chief finance officer, North East Combined Authority

“This year, councils estimate that £23bn of rates is collectable.  Of this £11.5bn is paid to central government which, with inflation and growth, councils as a whole would be able to keep.

“Core Revenue Support Grant of  £9.5bn, less spending review cuts, would end.   To deliver austerity savings, Treasury would need to cut other funding (such as New Homes Bonus and public health funding) and transfer additional responsibilities to local government to be funded from business rates.

“Business rates are unevenly distributed around the country (e.g. Westminster council generates £1.8bn, over fifty times that of some of the poorest councils) and bear little relation to the demands on councils to provide statutory services.

“The current grant system also compensates for inequality of councils tax base including the compensation for council tax exemption for student housing.

“So any effective and fair redistribution adjustment will need to take account of the need to equalise for differences in business rates and council tax base earning potential.  If it is does not, then fears that this change will further widen the funding gap between resources and service demand pressures in rich and poor areas would become a reality.”

Stephen Fitzgerald
Local government finance consultant

“The government views its policy on business rates as a considerable success.  Having introduced localisation in part, the chancellor’s latest announcement means they are now going the whole way.

“This is something the representatives of local government have been arguing for, at the national level, for some years.

“Those local authorities in areas with a high business rate base, and potential for further growth, will be celebrating. However, for councils with a low business rate tax base and high reliance on revenue support grant the position looks difficult.

“Essentially, we are seeing the final act in a move away from a ‘needs based’, formula driven, local government finance system, to one based on rewarding economic prosperity.

“It remains to be seen how resource equalisation fits into this picture, which will be made clearer when announcements on the detail are made.

“The government will need to think carefully about its equalisation approach so that the new arrangements will not simply mean that the rich get richer and the poor become poorer.”

Frank Wilson,
Strategic director for resources at West Oxfordshire District Council and Cotswold District Council

“The announcement made by the chancellor that he will move to fully relinquish the Treasury’s grip on business rates is a welcome step in the devolution of local government finance.

“Indeed, the abolition of the levy, and ability to keep 100% of business rates above the baseline, formed the cornerstone of a number of devolution proposals so, by agreeing this upfront, the chancellor has already signalled his intention to give councils one of the big levers of growth.

“Of course, we all recognise that giving us the full business rates take comes at a price. The DCLG portion was merely recycled back to us via the RSG system, so this goes too as part of the deal. There will be no new money – at least initially.

“Having lived through the birth of the current retention of business growth system we know broadly how a mechanism will be devised to get us to a ‘fair’ starting point with a system of tariffs and top up’s – but with the abolition of the levy without the loss of the safety net this part seems a positive step.

“The start up point sounds like it will be another zero sum game – there will be winners and losers from where we stand now – but thereafter it seems that, subject to seeing the detail (where the devil will be), winner takes it all.

“Personally I think this is right. The seven years between the start of the new system and reset in 2020 seemed too short. If we really want to generate business growth with bold decisions around infrastructure we need to be able to think long-term financing and seven years is woefully inadequate in this respect. This announcement seems to signal no reset in the future, but time will tell, along with any implications it has for the existing reset.

“The spending review was going to be interesting anyway – it just got a whole lot more interesting.”

Richard Harbord
A local government consultant and former chief executive of Boston Council

“The Chancellor’s speech had very little detail and we will need to wait full comment can be made. It is a re-run of Eric Pickles speech to the Local Government Association when he said 100% of rates would be retained by 2017-18.

“There are a number of questions. There is reference to continuing tariffs and top ups, but no clues as to how that will be financed. No detail of the five-year transition or what happens to areas that do not have growth. No clue as to how the central list will be dealt with. This is very important as it is so large. It should be apportioned between authorities, not go to the centre.

“Osborne said it would be fiscally neutral so Whitehall Grants would cease. No clue as to the grants would go other than the block grant, which is fading away now. If that is not enough, new duties will be transferred. Might this be police or public health?  The speech showed no understanding of the situation in two tier authorities.”

Photo (cropped): Gareth Milner, Flickr