The MJ is running an interesting survey this week reporting local government’s view of the planned 100% retention of business rates. Almost 90% of chief executives and finance officers surveyed considered that giving local government control of the business rate still didn’t go far enough in terms of fiscal devolution.
First some history. Prior to 1 April 2013, business rates were collected by local authorities and then remitted to the Exchequer. The Exchequer then redistributed the rates back to local authorities, on a needs-basis, through the Formula Grant System. In that context, variations in business rates, which total approximately £23 billion per annum, were dwarfed by the £548 billion of other tax receipts central government receives.
On 1 April 2013, all this changed. Local authorities retained 50% of their business rates with the balance remitted to the Exchequer for redistribution. The Chancellor of the Exchequer then announced a further change on 5 October 2015, allowing local authorities to keep their full business rate. Under these proposals, central government grants would also be phased out, and councils would take on extra financial responsibilities to make up for the extra cash they were receiving from business rates.
This is good news for many local authorities – but less so for others. Business rates are a volatile income stream for local authorities. You just have to ask Tewkesbury Council which is having to deal with the consequences of the recent award to Virgin Media of £10.7 million in back-dated business rates. Or Hartlepool Borough Council which has lost £3.9 million per annum on the revaluation of its power station (equivalent to the income from the creation of 2,740 small businesses or 2,700 new homes according to the Hartlepool finance team). Or Redcar & Cleveland Borough Council, which is dealing with the closure of its steel works.
Central government can manage the risk of volatile business rates – after all, business rates account for less than 5% of the Government’s total tax receipts. However, for individual local authorities, they amount to a much larger proportion. For example, Hartlepool’s gross business rates for the current financial year were expected to be just less than £40 million. That would equate to almost 30% of Hartlepool’s total funding last year.
The real issue here, is that unlike central government, local government can’t run a deficit to deal with a shortfall in business rate income. It can’t borrow to fund its day-to-day spending, nor does it have much scope for increasing other taxation streams to compensate for the shortfall (or better still, reduce other taxes should it receive a windfall business rate increase).
Our concern is that in the face of a volatile income stream, with the move to 100% retention, we will see two things happen: first, the Government will extend the existing system of checks and balances to such an extent that it weakens the incentives for local authorities to invest in economic growth; and secondly, local authority treasurers will have to set aside reserves to provide downside protection for business rates income. Either way, the Government’s aim of allowing local government greater freedom to set and spend business rates in such a way as to promote local economic growth would be frustrated.
The way round this is, of course, greater fiscal devolution for local government and that brings us back to the recent survey in The MJ. Local authorities could manage their business rate risk far more effectively if they could spread that risk over a broad portfolio of devolved taxes, fees and charges. As council chief executive and finance officers understand only too well, local authorities need a wider range of financial freedoms and flexibilities than just those offered by business rate retention. Whilst very welcome, business rate reform should be the first of many measures devolved from central government to give councils the fiscal tools they need, and deserve, to enable them to play their full part in growing their local, and our national, economy.
Chancellor, local authorities will be listening with interest to what you have to say on this point on Wednesday...