Memorandum by the Centre for Cities (SBR
17)
SUMMARY
The Centre for Cities strongly supports Sir
Michael Lyons' endorsement of Supplementary Business Rates (SBRs)—which
we first proposed in our City Leadership report in February 2006.
SBRs will help England's cities and city-regions to deliver much-needed
investment in local transport infrastructure. City leaders, business
and ministers must now reach agreement on how SBRs can be taken
forward to unlock transport investment and enable growth.
CENTRE FOR
CITIES
1. The Centre for Cities is an independent
urban policy unit, based at the Institute for Public Policy Research
(ippr). It is taking a fresh look at how cities function, focusing
on the economic drivers behind urban growth and change. After
a successful incubation phase, the Centre will `spin off' from
ippr at the end of 2007.
2. Dermot Finch is Director of the Centre—he
was previously a senior policy adviser at HM Treasury (1994-2005).
Tom Bloxham MBE (Chairman, Urban Splash Ltd) is Chair of the Centre's
Steering Group. Lord Sainsbury of Turville is the principal funder
of the Centre. The Centre's website is www.ippr.org/centreforcities.
3. The Centre has a strong track record
on city governance and finance issues. Our City Leadership report—which
will be discussed in more detail below—called for the introduction
of Supplementary Business Rates (SBRs) in February 2006. Our current
City Transport work, which examines the role played by transport
in urban economic growth, looks at the role of transport in local
economic growth, has further demonstrated the case for SBRs in
England's cities.
4. Together with the British Property Federation,
the Centre provides the Secretariat for the All-Party Urban Development
Group (APUDG). The APUDG is chaired by Clive Betts MP; other officers
include the Rt Hon Nick Raynsford MP, Lord Richard Best, Andrew
Pelling MP and Baroness Scott of Needham Market.
ABOUT THIS
SUBMISSION
5. Our response to the CLG Committee's inquiry
is based on:
— Research findings from our City
Leadership report (published February 2006);
— On-going City Transport work,
particularly with regard to the governance and finance of local
transport; and
— The first inquiry of the All-Party
Urban Development Group, where MPs and Peers called for greater
local financial autonomy to address transport needs.
6. Findings from these projects are directly
relevant to the Committee's inquiry questions, particularly the
rationale for the introduction of an SBR; the appropriate scale
of a supplement; and accountability mechanisms.
7. As strong supporters of SBR, we will
conclude by setting out what we believe to be the key challenges
that still need to be addressed—by city leaders, business,
Ministers, and MPs—before SBRs can be used as a tool to
support local economic growth.
RESEARCH FINDINGS
City Leadership
8. The Centre's City Leadership report recommended
the introduction of Supplementary Business Rate (SBR) powers for
major city-regions—starting with Greater Manchester and
Greater Birmingham. These proposals subsequently influenced Sir
Michael Lyons' analysis and recommendations (see paragraph 13
for more).
9. Our research found that a 2p SBR (approximately
a 4.7% rate "top up") would have raised approximately
£35 million per year in both Greater Manchester (11 authorities)
and Greater Birmingham (13 authorities) between 2000-01 and 2004-05.
In calculating these sums, we applied the same small business
reliefs currently operating in the National Non-Domestic Rates
system.
10. Thanks to the stability of NNDR as a
revenue source, this 2p "top-up" could realistically
be used to underpin borrowing for one major infrastructure project
in a city-region. However, since the total revenue raised would
be relatively small (as compared to the scale of infrastructure
needs), a city-region would need to prioritise SBR receipts extremely
carefully. A 2p SBR could part-finance one high-profile project
in each city-region, such as the redevelopment of Birmingham New
Street Station or the expansion of Manchester's Metrolink system.
In City Leadership, we recommended that revenues from the SBR
be ring-fenced to improvements in transport—a top priority
for local business leaders across the country, and particularly
in England's regional cities.
11. Our report also recommended that a
directly-elected city-region mayor be ultimately accountable for
the decision to use SBRs to fund local transport improvements.
While we still believe that elected mayors would provide the best
accountability mechanism for SBRs, we recognise that there is
no groundswell of support for city-regional mayors outside London
at the present time.
12. It is possible that city-region "Executive
Boards"—the model that most city-regions are presently
taking forward—could also be empowered to use SBRs, although
specific guarantees would be required to ensure that the resulting
revenues are focused on a small number of transport priorities—rather
than jam-spread across constituent authorities for political reasons.
Executive Boards may also provide a route for greater business
involvement in the SBR process, as a number of city-regions are
considering how to co-opt one or more business representatives
on to their Boards.
Centre for Cities reaction to the Lyons Inquiry
13. Sir Michael Lyons' final report endorsed
SBRs, recommending that local authorities across England gain
the freedom to impose SBRs of up to 4p in the pound (approximately
10% on business rates). The Centre for Cities welcomed Sir Michael's
proposals on SBR—and were pleased by the positive reaction
from a range of government departments, including the Treasury.
14. Using the Lyons Inquiry's proprietary
data, the Centre for Cities completed some speedy calculations
to understand what a 2p SBR—rather than the 1p and 4p modelled
by the Lyons Report—could deliver in England' biggest regional
cities. We found that:
— Birmingham: A 2p business rate
`top up' in Birmingham City would yield £15.4 million per
year—which would support a 10-year loan of £118 million.
This would eliminate the funding gap for the New Street Station
redevelopment—which currently stands at £114 million.
— Manchester: A 2p business rate
"top up" across Greater Manchester (10 authorities)
would yield £40.6 million per year—and support a 10-year
loan of £310 million. This comes close to covering the local
share of Metrolink Phase III (£380 million—on top of
£520 from DfT).
— Leeds: A 2p business rate "top
up" in the Leeds City Council area would fund nearly 40%
of the cost of the proposed Bus Rapid Transit network—the
successor to the cancelled Leeds Supertram.
15. These examples show that SBR could have
a significant, positive impact on urban infrastructure. At the
same time, however, they make it clear that SBR is not a panacea,
nor a simple answer to cities' investment needs.
City Transport
16. Our Connecting Cities report, based
on seminars held in Newcastle, Birmingham, Liverpool, Bristol
and Reading, found unanimous agreement in regional cities on the
need for new financial tools to invest in local transport infrastructure.
17. While local authorities almost unanimously
supported SBRs, we found a mixture of opinion among business stakeholders.
At national level, the Confederation of British Industry and the
British Chambers of Commerce expressed strong reservations about
SBR. However, local Chambers in cities with clear infrastructure
needs—eg Manchester, London—were more positive.
BOX 1: BUSINESS
VIEWS ON
SBR
| Business concerns
| Business support |
| Business reservations on SBR include: | Support from business stronger with:
|
— Lack of a business vote/potential for imposition by local authorities;
— Additional business tax burden;
— Cumulative impact of SBR and road-user charging schemes on firms;
— Scale and scope of SBR—including length of time, geographic coverage;
— Lack of trust in local authorities without revenue hypothecation.
| — Early consultation and involvement;
— Clear objectives: infrastructure required for economic growth;
— Hypothecation to transport;
— Good business-local government relationships, eg Manchester;
— Areas with a major local transport scheme requiring investment, eg Crossrail, New Street Station.
|
18. While interest in SBRs was highest in large cities
like Manchester, Birmingham and Leeds, some concerns were expressed
in less-dynamic urban areas. Stakeholders in Newcastle and Liverpool
worried that SBRs could serve as a disincentive for foot-loose
businesses, which might instead opt to locate in areas which are
not subject to an SBR. However, there was a strong sense that
any decision on SBRs, whether in favour or against, should be
taken locally.
All-Party Urban Development Group
19. The APUDG's first report—Loosening the Leash
(February 2007)—backed Supplementary Business Rates as part
of a wider tool-kit for local authorities to invest in transport
infrastructure. It noted that "no single instrument, developed
in isolation, will be enough to overcome the infrastructure funding
gap in Britain's cities. A `tool-box' of new infrastructure funding
mechanisms is required at city level" (p 20).
20. In the report, MPs and Peers recommended the introduction
of SBRs as part of that wider "tool-box"—noting
that they are simple, clear, easily ring-fenced, stable enough
to underpin borrowing, and a pragmatic way to unlock greater private-sector
investment in Britain's cities and towns.
SPECIFIC ISSUES
RAISED BY
THE COMMITTEE
Rationale for the SBR
21. In recent months, Government has acknowledged that
big urban areas are the "building blocks" of the English
economy. Major departments—including DCLG, DfT and the Treasury—have
been working on sub-regional or city-regional arrangements to
ensure that economic development and transport functions are delivered
at the scale closest to that of "real local economies".
22. Our research has repeatedly found that England's
cities need greater financial devolution and flexibility to fund
more transport projects themselves, rather than depend entirely
on central government funding streams with conditions attached.
[15]Regional cities have
also told us that without greater financial devolution, many key
transport projects designed to underpin local economic growth
will not be able to proceed.
23. The House of Commons Transport Committee, in its
recent inquiry on Local Transport Planning and Funding (2006),
concluded that "far too much time and money are wasted preparing
schemes which are never approved for funding." We agree.
SBRs—along with other devolved financial tools—would
enable local transport authorities to fund key transport projects,
support economic growth objectives, and deliver service improvements
without constant recourse to Whitehall departments.
Accountability and approval mechanisms
24. Business accountability: Our previous research has
recommended that SBR powers rest with elected local government.
However, we have recommended that funding be hypothecated to transport
projects following robust consultation with the local business
community. We have argued that this formula ensures a degree of
accountability, while concentrating the final decision-making
power with democratically elected local leaders.
25. Many business leaders, while supportive of the overall
concept, argue that SBRs should only proceed on the basis of a
business vote. Others, including Sir Michael Lyons, have argued
strongly against a business vote. Lyons recently called the idea
"iniquitous" and questioned why businesses should be
able to throw out carefully-crafted SBR proposals (LGC, 31 May
2007). His report favoured extensive business consultation and
participation in the SBR design process, rather than a business
vote on the issue.
BOX 2: FOR
AND AGAINST
A BUSINESS
VOTE ON
SBR
| Arguments for: | Arguments against:
|
— Pragmatism: business support is needed for SBR legislation to pass, and a vote could secure this.
— Fiscal discipline: a "check" on local taxation and expenditure plans.
— Accountability: since SBR is an extra tax on business, business requires democratic vote.
— Certainty: guarantee SBR purpose, time limits, geographical scope.
| — Principle: a vote would undermine the integrity of the tax system, and open all new tax decisions to referenda.
— Democracy: only elected officials should have the power to impose or remove a tax, central or local.
— Consultation: business involvement in SBR priority-setting, design sufficient.
— Hypothecation: ring-fencing SBR to transport infrastructure projects is adequate guarantee.
|
26. As Box 2 above shows, this issue is not clear-cut.
The need to ensure business accountability and buy-in must not
be minimised. The Centre strongly believes that key stakeholders
must convene and reach agreement on how, not whether, SBRs should
be administered and approved. To that end, we are currently working
to build consensus between business and cities on this issue—by
convening a high-level event in July 2007, which will include
top business and local leaders.
27. Given this on-going work, it is not appropriate for
the Centre to express a firm view on accountability mechanisms
at this point in time. However, we would point out that there
are many accountability options available for SBR. These range
from ministerial reserve powers to `strike down' a local SBR proposal
that does not have business buy-in, through to the formal vote
supported by national business organisations such as the CBI and
the British Chambers.
28. Business vote options range from an unweighted, universal
franchise ("one business one vote"), through to the
voting model put in place for Business Improvement Districts by
the 2003 Local Government Act.
BOX 3: BUSINESS
IMPROVEMENT DISTRICT
VOTING RULES
In order for a BID to be approved, two tests need to be met:
(a) a majority of those businesses voting (not all the businesses in the area) must vote yes, and
(b) those voting in favour must represent a majority of the rateable value of all businesses voting.
BIDs were brought in with the 2003 Local Government Act. The precise wording—which is in section 50—is as follows:
Approval in ballot
1. BID proposals are not to be regarded as approved by a ballot held for the purposes of section 49(1) unless two conditions are satisfied.
2. The first condition is that a majority of the persons voting in the ballot have voted in favour of the BID proposals.
3. The second condition is that A exceeds B.
4. A is the aggregate of the rateable values of each hereditament in respect of which a person voting in the ballot has voted in favour of the BID proposals.
5. B is the aggregate of the rateable values of each hereditament in respect of which a person voting in the ballot has voted against the BID proposals.
6. For the purposes of subsections (4) and (5), the rateable value of a hereditament is that shown on the day of the ballot.
|
Source: Business Improvement Districts (England) Regulations
2004.
29. Whether the BID model is the correct model for an
SBR vote is open for debate. For example, BID voting rules potentially
allow a minority of businesses to impose a supplementary levy
on all businesses within a defined area. The potential impacts
of such a system must be considered in more detail.
Scale of SBRs
30. Geography: the Centre has repeatedly argued that
the city-regional scale—the functional economic area—is
the best level at which to plan and execute strategic investment,
including transport. Accordingly, we believe that SBRs should
be introduced at city-regional/sub-regional level, and pooled
by the constituent authorities to ensure maximum borrowing leverage.
31. Additionally, tying SBRs to the city-regional or
sub-regional level would ensure that revenues collected are of
a sufficient magnitude to underpin a substantial, visible infrastructure
investment. With a few high-profile exceptions (eg Birmingham,
Leeds), individual local authorities do not have a large enough
tax base to generate significant SBR revenues on their own.
32. However, we recognise that a city-regional SBR could
be politically difficult in some areas. It may be necessary to
"build out" from the centre, with Core City local authorities
taking the lead, and other authorities coming on board later.
While pragmatic, this approach could lead to free-rider problems,
with outlying authorities enjoying the benefits of SBR investment
without contributing to the costs. For this reason, coalitions
of local authorities, rather than individual councils, are best
placed to take SBR forward.
33. Cities and city-regions must also have substantial
flexibility regarding the time-frame of an SBR. For some infrastructure
projects, a short, time-limited SBR will suffice; for others,
a medium-to-long term revenue stream (eg 10-30 years) will be
required. The Government must not be overly prescriptive on this
issue, and allow cities/city-regions to develop innovative SBR
proposals, so long as they are consistent with existing fiscal
rules.
BOX 4: REVENUE
RAISED FROM
A 2P
SBR
| SBR coverage area | SBR revenue per annum (2p supplement)
| 10-year loan from PWLB |
| City of Newcastle | £6 million
| £45.9 million |
| City of Manchester | £12 million
| £91.8 million |
| Tyne and Wear (5 authorities) | £17 million
| £130 million |
| Greater Manchester (10 authorities) | £40.6 million
| £310 million |
Source: Centre for Cities calculations based on Lyons
Inquiry data.
34. Size of SBR: In order to ensure business buy-in,
the Centre believes that enabling legislation for SBRs should
include a clear upper limit for the supplement. Our previous research
suggested an SBR of 2p (about 4.7%). Meanwhile, the Lyons Report
more recently recommended an upper limit of 4p (nearly 10% on
the business rates). A 4p rate may be unrealistic, given business
concerns and potential impacts on the health of the local economy.
We believe that cities should have the freedom to set SBRs that
respond to local investment needs and circumstances. Over the
coming months, we will work with city and business leaders to
identify a sensible upper limit.
Impact on equalisation
35. The Centre has consistently argued that SBRs should
be raised and retained locally—outside the equalisation
system. Any form of equalisation measure would dampen the utility
of SBRs as a revenue-raising tool, and would remove the in-built
incentive for cities and city-regions to promote the growth of
their respective business bases.
36. We recognise that an SBR might not be an appropriate
revenue-raising mechanism in some areas—eg rural areas with
low business property tax bases. In other areas, it might be politically
contentious and hard to introduce. However, these issues must
not be used as an argument against empowering local authorities
to use SBRs. Given the fact that SBRs would not substantially
affect the existing NNDR equalisation system, SBRs would not leave
any area worse off in real terms—and would help to deliver
transport improvements in big cities, where they are most critically
needed.
37. The Government could choose to use specific grants
(ie, outside of the RSG system) to support areas that are unable
to levy an SBR. However, these grants must not be taken from the
overall local government finance settlement—or they risk
undermining SBR as an incentive to promote economic growth. For
SBR to work, the Government must ensure that SBRs are truly additional,
and that no authority experiences grant reduction because of the
extra revenue raised.
38. In addition to receiving the benefits of an SBR,
big cities / city-regions must be prepared to deal with the potential
risks. In the long term, it is possible that SBR revenues will
decline—either due to decreases in rateable value, or to
economic downturn. Cities must ensure that they have sufficient
contingency funds on hand to service any borrowing underpinned
by SBR revenues.
Implementation issues
39. Two-tier areas: In our City Leadership work, we recommended
that an SBR be levied across a Birmingham city-region composed
of 13 authorities—7 MDCs and 6 neighbouring District Councils.
While we recognise that there are difficulties associated with
this, we do not believe that two-tier architecture should be seen
as an obstacle to the use of SBR across functional economic areas
(eg city-regions or sub-regions). We believe that district councils
in such areas should be given the ability to "opt-in"
to SBR arrangements—collecting the supplement and pooling
it with other partners as part of a Multiple Area Agreement (MAA)
or an agreed city-regional plan.
40. Thresholds: As noted in point 11 above, our City
Leadership report argued that SBRs should be subject to the same
rate reliefs and exemptions as the existing NNDR. Small businesses,
especially in deprived areas, would receive substantial reliefs—ensuring
that an SBR would not become a major new tax burden.
15
See, for example, All-Party Urban Development Group (2007),
Loosening the Leash: how local government can deliver infrastructure
with private sector money London: APUDG; Marshall A (2007),
Getting the Connections right: Eddington and the future of
urban transport investment London: Centre for Cities at ippr;
Marshall A and Finch D (2006), City Leadership: giving city-regions
the power to grow London: Centre for Cities at ippr. Back
| 
