Memorandum by the Chief Economic Development
Officers Society (CEDOS) (SBR 16)
INTRODUCTION
1. The Chief Economic Development Officers
Society (CEDOS) provides a forum for Heads of Economic Development
in upper tier local authorities throughout England. Membership
includes county, city and unitary Councils in non-metropolitan
areas, which together represent over 47% of the population of
England and provide services across over 84% of its land area.
The Society carries out research, develops and disseminates best
practice, and publishes reports on key issues for economic development
policy and practice. Through its collective expertise, it seeks
to play its full part in helping to inform and shape national
and regional policies and initiatives.
2. The availability of finance to promote
and improve local economies is a key issue for local authorities
and CEDOS welcomes the opportunity to put forward its views to
assist the Select Committee in its inquiry into local government
finance: supplementary business rate.
CEDOS—OUR OVERALL
POSITION
3. Sir Michael Lyons in his inquiry into
local government has emphasised the importance of the local authority
place-shaping role, a key part of which is working to make local
economies more successful. He has drawn attention to recent work
comparing the UK with the USA and Europe, which concluded that
the lack of devolution and local discretion in the UK is a constraint
on economic performance. Sir Michael believes local government's
ability to fully perform its place-shaping role is limited by:
— the weight of central controls,
both formal and informal, which can lead to local choices being
crowded out and can stifle innovation and experiment;
— a lack of flexibility over existing
resources, with a large proportion of local government funds coming
from specific grants; and
— a high degree of dependence
on central funding with limited flexibility to raise additional
resources.
4. CEDOS shares these views and believes
that pressure on resources is a significant barrier, which constrains
the efforts of local authorities to make their economies more
successful. The pressure on local government spending particularly
affects non-statutory services like economic development. In this
context, CEDOS has welcomed the Government's introduction of the
Local Authority Business Growth Incentives Scheme [LABGI] but
believes that it needs further developing to provide greater certainty
of funding and a stronger prescription for its use for economic
development and regeneration purposes.
5. CEDOS believes there is a need to do
more than this. A step change is needed to provide a sound basis
for effective local authority economic place-shaping. The financial
link between business growth and investment needs to be fully
restored to enable local authorities to retain income derived
from business rates linked to:
— the introduction of a new statutory
duty of local authorities to promote or improve the economic well
being of their areas [in place of the power to do so given by
the Local Government Act 2000]; and
— strengthening Comprehensive
Performance Assessment to give more emphasis to the economic promotion
activities of Councils and their approach to joined up working
on behalf of their local economies.
6. We recognise that there are issues around
the relocalisation of business rates that will need addressing,
primarily concerning the equalisation issue. As Sir Michael Lyons
has pointed out, following the decision to move schools funding
into a separate ring-fenced grant, business rates now provide
the bulk of the revenues needed to equalise between authorities
for differences in needs and council tax resources. If business
rates were to be localised without an equalisation component then
unless equalization were to be achieved in a different way, some
local authorities would be worse off. On the other hand, if business
rate localization is pursued with an equalisation component, it
would result in businesses in many areas paying taxes to their
local authority that would seem to be local revenues, but would
in fact be reallocated elsewhere in the country. [13]
7. Despite this, it ought to be possible
for business rates to be fully localized with a focus on their
use to support economic place-shaping, with the overall equalization
process achieved by other means within the local government funding
system.
8. In the report of his inquiry into local
government, Sir Michael Lyons, whilst having sympathy with the
relocalisation of business rates, has decided not to support this
at the present time. Instead, he proposes the introduction of
a power for local authorities to levy a local supplementary business
rate to increase local flexibility and support continued investment
in infrastructure.
9. Whilst a new supplementary business rate
power could potentially provide a boost to localism, CEDOS is
sceptical about its scope for being really effective in assisting
local economic place-shaping because:
— there is likely to be a good
deal of opposition from local businesses to an additional business
rate being introduced, which could be counter-productive for developing
and maintaining good working relationships between local authorities
and their business communities;
— in most areas it would not generate
enough resources to provide a sufficient stimulus for effective
investment in infrastructure or other economic development activities;
— there is a fundamental contradiction
between its effectiveness on the one hand and its fairness on
the other; and
— there would be likely to be
considerable complexities in its administration.
10. Because of these concerns, which are
referred to in more detail below in relation to the particular
issues being considered by the Select Committee, CEDOS believes
that there would be very little prospect of a new supplementary
business rate power making any real difference nor of many authorities
having the political will make use of it.
11. In this context, and acknowledging that
re-localising business rates linked to a new statutory duty to
promote economic well-being is unlikely to be achievable in the
short-term, the best way forward in the immediate future is to
develop and strengthen LABGI to:
— do more to encourage the use
of LABGI rewards to provide an additional impetus for local authority
economic development activity and probably to ring-fence its use
for economic development purposes;
— make the funding easier to estimate;
— provide for greater certainty
of funding over the longer term and ensure announcements on amounts
for any one year come early enough in the local authority budgetary
cycle to make a difference to spending decisions; and
— increase its effectiveness in
2-tier areas by reducing the present skewing of rewards in favour
of District Councils.
12. Even if a supplementary business rate
is introduced and/or there are moves towards re-localisation of
business rates generally, CEDOS believes that an improved and
strengthened LABGI should be retained as an important incentive
to local authorities to support the promotion and improvement
of their local economies.
THE RATIONALE
FOR INTRODUCTION
OF A
SUPPLEMENTARY BUSINESS
RATE
13. The rationale given by Sir Michael Lyons
for introducing a new power for local authorities to levy a local
supplement is "to increase local flexibility and support
the continued investment in infrastructure that both businesses
and local authorities have called for". In our view, this
rationale is undermined by:
— likely opposition from the business
community, which could jeopardise relationships and partnership
arrangements that have been built up between local authorities
and their business communities and the joint working that is essential
to achieving economic prosperity;
— a limited prospect of many local
authorities having the political will to take up the new power,
not least because of the adverse reaction of local businesses;
and
— the limited ability of many
areas with an insufficiently large initial tax base, to raise
enough resources to support the sort of significant infrastructure
investments that Sir Michael Lyons envisages a supplementary business
rate being used for. [14]
ACCOUNTABILITY AND
APPROVAL MECHANISMS
FOR THE
INTRODUCTION OF
A SUPPLEMENTARY
BUSINESS RATE
AT A
LOCAL LEVEL—THE
ROLE OF
BUSINESS AND
THE WIDER
COMMUNITY
14. If a local supplementary business rate
is introduced, it will be essential for it to be operated in a
way that is transparent, simple and as easy as possible to administer.
It will be important to build in a process not only for effective
and meaningful consultation with businesses but also to give the
local business community a strong voice in the decision making
process in the context of wider community involvement. For this,
a link to Local Strategic Partnership arrangements, which usually
include local business representation, could help to minimise
bureaucracy and provide the necessary long-term strategic context.
15. A potential governance framework for
a local supplementary business rate ought to be Local Area Agreements
but with a three year timescale and too much of their focus being
on priorities determined by central Government, they are unsuitable
in their current form.
16. Whatever governance arrangements are
decided upon, the interaction between an overall supplementary
business rate and local Business Improvement District schemes
[BIDS] will need to be assessed carefully. Businesses will resist
the potential imposition of two supplementary local taxes for
different purposes and there would need to be safeguards regarding
the cumulative impact of both supplementary business rates and
BIDS on non-domestic ratepayers.
17. There are circumstances where infrastructure
requirements will need to be addressed at a scale wider than that
covered by either existing Local Strategic Partnerships or Local
Area Agreements. In this context, the concept of Multi-Area Agreements
[MAAs] could prove useful, although we will need to wait to see
how this develops and what local/sub-regional freedoms and flexibilities
are involved when Government's detailed thinking on MAAs emerges
from its review of sub-national economic development and regeneration.
CONSIDERATION OF
IMPLEMENTATION ISSUES,
INCLUDING THE
IMPACT ON
LOCAL AUTHORITY
TAX BILLS
AND DECISION-MAKING
IN TWO-TIER
LOCAL AUTHORITY
AREAS
18. The proposal is for upper tier authorities
to set the supplementary business rate. Although the Lyons report
claims that this will provide for a less complex system for businesses
by reducing the number of possible different rates to 150, this
still illustrates its complexity. Moreover, in two-tier areas,
the complexity is added to by the need for proposals to be the
subject of discussion and agreement between county and district
councils, with a joint plan for the use of the revenues raised.
If a supplementary business rate is introduced, this will be an
important area for action in those parts of England pursuing enhanced
two-tier arrangements.
THE IMPACT
OF A
SUPPLEMENTARY BUSINESS
RATE ON
EQUALISATION
19. The introduction of a supplementary
business rate will have an effect on equalisation. As the Lyons
report has shown, the power to levy a supplement would not be
equally valuable in all areas and the revenues that individual
areas could raise would vary substantially. However, Sir Michael
concludes that all the revenues should remain local on the basis
that to do otherwise would constrain the ability of local authorities
and businesses to decide how to use the additional resources they
had chosen to raise, and reduce the accountability of local authorities
for the use of locally raised money.
20. There is no doubt that putting in place
special equalisation arrangements would limit the incentives for
promoting economic development and not help the relationships
between businesses and local authorities in the significant number
of areas where the additional taxes raised locally would as a
result be reallocated elsewhere in the country. On the other hand,
the fact is that the revenues individual areas could raise would
vary substantially depending on the size of the area and the number
and value of properties in the area, reflecting variations in
economic geography and relative prosperity. This would lead to
inequality in its impact if all the money raised were to be retained
locally. It is this fundamental contradiction between effectiveness
and fairness that that is a key factor, which limits the appeal
of the power to levy a supplement proposed by the Lyons report.
THE APPROPRIATE
SCALE OF
THE SUPPLEMENT
21. The Lyons report gives figures of the
revenue that would be raised in unitary and upper tier authorities
by a 1p supplement on business rates. As the amounts vary from
authority to authority, there is no right answer to the issue
of appropriate scale. It will depend on the local circumstances—on
the economic development needs of the area in comparison to the
yield produced by a given rate level. However, although a supplement
as high as 4p has been levied in some BIDS areas, given the likely
opposition of the business community to a general power to levy
a supplementary business rate, a supplement of more than 1p seems
unlikely to be practical.
THE THRESHOLD
FOR PAYMENTS
AND WHETHER
SMALL BUSINESSES
SHOULD BE
REQUIRED TO
PAY
22. Small businesses pay a higher proportion
of their turnover in rates than larger businesses and to reflect
this, the Government has recently introduced Small Business Rate
Relief to reduce bills for small businesses. It would be essential
to extend this protection to small businesses if a supplementary
business rate is introduced not only in the interests of the small
businesses themselves but also in the interests of areas that
have large numbers of very small businesses. A supplementary rate
without small business relief could be destabilising because of
the high impact that an increase in marginal costs can have on
such businesses.
23. On the other hand, the extent of the
relief in terms of discount or exemption would have to be judged
carefully in terms of:
— the impact on revenue in areas
with a relatively small number of large businesses;
— the degree of unfairness likely
to be felt by larger businesses for effectively having to subsidise
smaller businesses, simply on account of their size;
— the nature of proposed projects
which a supplementary rate is intended to fund; and
— the ability to engage the small
business community in the consultation and decision making processes.
24. This further illustrates the complexity
that would be involved in local decision-making and administration,
if a supplementary business rate were to be introduced.
13 Sir Michael Lyons has calculated that to maintain
current levels of equity under a localised business rates system,
65 authorities would need to pay some of their local tax revenues
to central government to support other authorities with smaller
tax bases and higher needs. Back
14
For example, in Devon, where the rateable value exceeds £430
million, it would take the proceeds of a 1p supplementary tax
for the whole county for ten years to meet the gross cost of just
one major bypass scheme, even when supplemented with funding from
other sources. Back
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