Memorandum by the Confederation of British
Industry (CBI) (LGR 19)
OVERVIEW
1. The CBI welcomes the opportunity to contribute
to this important inquiry. Business has a major stake in this
debate—as a taxpayer, user of services and in many cases
also through direct involvement in the delivery of services.
2. Effective and efficient local government
is vital. Businesses rely on local government action in areas
such as transport, planning and education to enable them to create
wealth and jobs—which in turn are central to local government's
success in helping communities to grow and prosper.
3. In England, companies pay £16 billion
directly for local government services every year through business
rates. Business also contributes via national taxation which is
redistributed to local government in central government grant.
Business further inputs finance, time and expertise through a
broad range of initiatives such as regeneration schemes and town
centre management partnerships.
4. It is right that businesses should play
an active role in our communities, and initiatives such as Business
Improvement Districts (BIDs) show that business is prepared to
contribute more in time and resources where it is convinced that
this will deliver genuine improvements. Importantly with BIDs,
there is agreement about what problems need to be tackled and
how this should be done.
5. We recognise the importance of improving
engagement between business and local government and are keen
to help develop mechanisms to achieve this. But we must also raise
awareness of the progress that has already been made.
6. However, we are concerned that some of
the proposals put forward for reforming local government funding
could damage the vital relationship between local authorities
and business as well as seriously undermining business competitiveness.
7. In the Balance of Funding debate, there
appears to be much focus on proposals for extra taxation and charging,
but little substance on improving efficiency and the quality of
public services. We must ensure that the emphasis is on delivering
better value for money for all taxpayers—whether individuals
or business. Significant progress needs to be made in this area
ahead of any suggestions for imposing additional taxation on businesses.
8. There has been significant debate about
possible reform of the business rate, in terms of localisation
and removing the RPI cap. These would have serious implications
for business and the vitality of local economies. As well as being
extremely damaging, localising the business rate would also fail
in practice to achieve many of the objectives of those pressing
for it.
LOCAL GOVERNMENT
FUNDING
9. It is often suggested that gearing is
the key problem, and localisation of the business rate a potential
solution. But this would tackle a symptom rather than the underlying
problems. The main issues are a lack of clarity about what services
local government is expected to deliver; how much these services
cost; who funds them and how much the local taxpayer should be
expected to pay.
10. Local government is clearly facing challenges
which are exacerbated by the gearing situation. But last year's
large increases in council tax can be attributed to various factors,
none of which are necessarily related to the operation of the
Uniform Business Rate (UBR). In its report, Council Tax Increases
2003/4, the Audit Commission argued that there were three
main causes for the 12.9% increase in England:
— The level of support the government
provides in its annual finance settlement, which is based on assumptions
about what local government will spend to meet local and national
needs.
— Decisions by councils to spend more
than the government assumed when determining grant distribution.
— The gearing factor which means any
variations from the assumptions in the grant settlement are magnified.
11. It is notable that gearing only enters
the equation at the final stage as a magnifier of other decisions.
As the Commission states: "The analysis of components of
council tax increases shows that the most significant element
was increases in local government spending compared with the assumptions
in the local government finance settlement. The impact of additional
spending on council tax was reinforced by the gearing factor."
12. There are a number of factors that suggest
the large increases in 2003-04 were anomalous. Between 1998-99
and 2002-03, council tax increases had tended to range between
6%-8%. There are signs that this equilibrium has been re-established
this year, with Council Tax rising by 5.9% on average in England.
13. In 2003-04, councils were particularly
affected by the decision to reorganise the local government finance
system, which meant a wave of funding changes across the country.
Councils also faced an increase in national insurance and other
employment costs.
14. Indeed, the chancellor's decision to
put additional funding into local government services in 2004-05
could be seen as a tacit admission that too much was being expected
of the local taxpayer. Finally, the Audit Commission observed
that: "In 2003-04, authorities appeared collectively (although
not necessarily individually) to feel less pressure to keep down
spending increases than they had in previous years."
15. An overarching priority is to ensure
that local government is delivering efficiently rather than simply
resorting to levying new taxes or charges. The interim report
of the Gershon efficiency review suggested that roughly 4.5% could
be saved from the government's non-transfer spending. If councils
made a similar saving, they would free up more than £3 billion
for re-investment, a sum equal to around 15% of the council tax.
Businesses—many of which are operating within tight financial
constraints and have to deliver year on year efficiencies—will
rightly question the need to raise taxes when such substantial
savings are possible.
16. While the current situation can lead
to problems for local authorities—particularly if responsibilities
set by national government are not fully funded—it can also
help to promote financial discipline. A high gearing ratio actually
provides a powerful incentive for local authorities to keep their
bills low through innovation and efficiency.
THE BUSINESS
PERSPECTIVE
17. While business rates will be just one
of a range of factors influencing business decisions, a 2002 CBI
survey found that the level of business taxation tax was a key
influence on business location decisions for 91% of senior executives.
18. Increases in a company's total tax bill
can affect profitability and competitiveness, particularly where
the tax falls on inputs. Since 1997, the overall business tax
bill has risen by £39.6 billion and we estimate that by 2006,
the increase will be £54.2 billion. This money represents
a substantial investment in public services—at the local
and national level. It is vital that the balance of funding debate
is set firmly within this wider context.
19. In this context, the pressure to remove
the RPI cap on business rates is extremely worrying. While locally
council tax has risen sharply, at the national level it is business
that has borne the brunt of tax increases. Over this period, changes
to the personal tax regime—including tax credits—have
left the national tax burden on individuals broadly unchanged.
20. The LGA is pressing for the localisation
of business rates as a means of dealing with the issue of gearing.
If this is seen as a "solution" to contain council tax
increases, it will inevitably mean an increase in business rates
and the overall business tax burden. In essence, local authorities
would only be able to "solve the gearing problem" by
raising the level of the business rate—reinforcing the fears
of business that localisation will inevitably lead to yet more
increases in taxation.
21. A local rate would shift the balance
of funding from 75/25 to roughly 50/50. If this had been the situation
in 2003-04 and local government had decided to divide its spending
increase between business and households, this would have resulted
in an increase of more than 6% for the business community—at
a cost of £500 million above inflation. The effect on some
businesses if rates become "too high" will be reduced
profitability and investment, non-expansion or ultimately "going
out of business".
22. It is also important to highlight that
a number of new charges have already been, or are in the process
of being, developed. These are also increasing the amount business
is paying. For example:
— Business Improvement Districts—one
large CBI member is currently budgeting £1.5-£7.5 million
to meet its likely commitments.
— Congestion charging—already
in place in London and may spread to other parts of the UK.
— Infrastructure funding—one
of the proposals for Crossrail is likely to involve a levy on
the business rate.
— Windfall taxes on property development—currently
being considered by the government following the Barker review.
23. These are in addition to the many other
ways in which business has traditionally contributed at the local
level such as through Section 106 (around £2 billion per
year), town centre management schemes and so forth.
THE BENEFITS
OF THE
UBR
24. The nationally set and RPI-capped rate
poundage brings significant benefits to business and the whole
economy. It gives business vital protection against unaffordable
rate increases and eases planning over both the short and long
term. The UBR has also achieved a fairer distribution of rate
liability, with the national poundage ensuring that bills are
more closely aligned to ability to pay than they would be if companies
were exposed to arbitrary local variation.
25. At present, the national business rate
poundage means that a company's bill is closely tied to the size
and value of its premises. A local business rate would introduce
arbitrary variations into this scheme, meaning that companies
occupying premises of the same worth in two different parts of
the country could pay widely varying sums of money.
26. We also do not believe that the proposals
will meet the oft-stated aims of reformers. Given the inevitable
constraints—particularly in terms of equalisation—a
localised system would not solve the fundamental problems identified
by local authorities. Without radical changes to the wider redistribution
system, localisation would merely result in marginal change—it
would certainly not represent the freedom for local authorities
that some envisage.
LOCAL AUTHORITY—BUSINESS
RELATIONSHIP
27. It is argued that councils would become
more accountable if they were able to set the business rate locally,
but it is hard to see why this should be the case. Since local
councillors depend for re-election on council taxpayers, there
might be little incentive to minimise the business rate or respond
to business concerns. Indeed, localisation could create a perverse
incentive for councillors to use the business rate to subsidise
personal taxation.
28. Local businesses would have no real
means of influencing the setting of the rate and are likely to
feel more used than valued, creating tensions rather than closer
relationships. This is also likely to jeopardise the willingness
of local businesses to engage in partnerships such as BIDs, undermining
collaboration between the two constituencies. The end of annual
debates over the rate poundage has actually helped to improve
the climate for co-operation between business and local councils.
29. Even if some new form of consultation
was introduced, firms of all sizes simply do not have the resource
to handle this. Small firms are obviously constrained. But so
too are larger firms, which would not be geared up to handle numerous
district-level consultations. The previous arrangements with locally
set rates did not work effectively and created significant bureaucracy
without delivering accountability.
30. An important link already exists, of
course, in the substantial direct contribution to local government
finance made by business ratepayers. Unfortunately, too often,
there is a perception that the only sources of local government
finance are council taxpayers and the Exchequer. A greater sense
of local government accountability to its business ratepayers
would be enhanced by efforts to ensure that explanations of local
government finance always separate out the business rate revenue
from the Exchequer Grant and through a perception of greater efficiency
of expenditure.
31. It is right that taxation requires some
form of accountability, but the proposition that it is a means
of achieving accountability is not convincing. It is far from
obvious that good civic relationships are furthered by one party's
ability to levy taxation on the other.
PROBLEMS OF
LOCALISATION
32. As well as increasing the overall business
tax burden and damaging relations between the two sides, localisation
of the business rate would:
— Create over 350 different business
rates—for example, in 1985 rate poundages varied by more
than 196 pence on the pound, with Gillingham charging 151p and
Newcastle-upon-Tyne 347p.
— Increase volatility, exposing businesses
to the risk of large annual increases.
— Reduce the ability of businesses
to plan—there would be little advance warning of the charge
(as local authorities set their budgets near the beginning of
the financial year).
— Bring no extra value to the business
community—it would simply represent paying more, and in
a more cumbersome way, for what companies already receive.
— Leave UK business facing even higher
property taxes when we are already at the top end of international
comparisons—in 2000 the UK raised 18.4% of its main internationally
comparable business taxes through business property taxes, more
than three times as much as Germany, France, the Netherlands or
Ireland.
33. Moreover, depending on the equalisation
regime, it is likely that localising the rate would create little,
if any, extra incentive for local authorities to develop their
business rate-base. In the 1980s, the revenue increases from growth
were redistributed through the equalisation system, meaning that
the council did not keep its extra revenue.
34. However, Local Authority Business Growth
Incentives (LABGI) will allow local authorities to retain some
of the extra revenue from business growth. This is a positive
step.
Variations between Councils
35. The average figures for the impact of
localisation on the balance of funding conceal wide variations.
High need, low-resource councils will still have a relatively
poor balance of funding. If the business rate had been localised
in 2002-03, and if all councils had spent at SSA (retaining their
current contribution to the national business rate pool), the
effect on the balance of funding for the following councils would
have been:
— South Tyneside: 31.7% raised locally
36. We are concerned about how a local rate
might affect the ability of different councils to raise revenue.
Local authorities in areas of greatest economic and social need
will tend to have the weakest tax-base, and the gap between the
wealthiest and poorest councils could grow. Low resource areas
might find themselves in a longer-term "vicious circle"
in which, by trying to raise extra money, they drive away new
business and damage their tax base.
HOW THE
LOCALISED RATE
FAILED IN
THE PAST
37. The history of the localised NDR was
not a happy one. The rate often rose faster than other business
costs. In a 1983 CBI analysis of rate increases from 1979 to 1982,
the business rate was shown to have increased at a significantly
faster rate than RPI, average earnings in manufacturing, price
of manufacturing output and costs of materials and fuel:
| Year | Industrial rates
| Cost of material
and fuel | Average earnings
in manufacturing
| Price of
manufacturing
output
| RPI |
| | |
| | |
| 1979 | 100 | 100
| 100 | 100 | 100
|
| 1980 | 125 | 120
| 118 | 116 | 118
|
| 1981 | 152 | 136
| 134 | 128 | 132
|
| 1982 | 176 | 145
| 148 | 140 | 143
|
| | |
| | |
| |
| | | |
38. Rate-setting often bore little relation to the condition
of the economy. In 1982, rates had grown to represent around 40%
of profit for industrial and commercial companies—more than
double the figure for 1978.
39. A series of surveys by Chambers of Commerce in 1982
found that business was deeply dissatisfied with the local business
rate:
— In London, 38% of businesses had reduced staff
and 17% had relocated to minimise the rate burden.
— In Sheffield, half of companies blamed rates for
cuts in their workforce and 30% were considering moving.
LOCAL TAXES
40. The objectives and rationale for any proposed new
taxes / charges must be clearly—and honestly—set out
and any proposals need to be fully assessed in terms of their
implications for business and for UK competitiveness.
41. While we support the general principle of "user-pays",
we are concerned that the proposed charges are not about business
getting any specific, new or enhanced services but merely about
paying more into the general expenditure pot.
42. While some of the proposals, such as congestion charging,
may be acceptable in principle, the objective of such schemes
must be to reduce congestion and not to raise revenues.
43. We are opposed in principle to some of the proposals
highlighted such as workplace parking levies which we believe
will have little direct impact on congestion and are likely to
be economically damaging.
44. With some proposals, it is unclear how they could
operate in practice. For example it would be impossible to have
different local sales taxes given that businesses and consumers
would merely vote with their feet.
CONCLUSION
45. We believe that the local government finance system
needs to be underpinned by transparency from Government, efficiency
from local authorities and stability within the system. These
factors will reduce the need for large tax increases in future.
46. We do not accept that gearing is the primary problem
in the local government finance system and, in this context, localisation
of the business rate can only ever be a "sticking plaster
solution". It would also have serious wider implications
for business and regional economic development.
47. There should be a focus on tackling the ambiguity
about local government's role, particularly the way that central
spending decisions are translated to the local level. The following
areas may warrant further examination:
— Is the balance of funding more important than
the balance of control? Is it more desirable for a council to
have total control over a central grant, or limited control over
locally-raised funds?
— Could a scheme like LABGI be developed to provide
a longer-term incentive for economic growth?
— Is there potential for changing the way business
rates are perceived in terms of allowing local authorities to
retain directly more of the revenue collected locally?
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