Memorandum by Derby City Council (SBR
24)
1. DERBY CITY
COUNCIL
1.1 Derby City Council is an East Midlands
unitary authority with a budget in 2007-08 of £163 million
(excluding schools). It is an executive member of the special
interest group SIGOMA, and closely follows developments in local
government finance. It has a specialist technical finance team,
and often contributes to debates on funding, especially where
these debates touch on the issues of local authority needs-assessment
and equalisation.
2. EXECUTIVE
SUMMARY
2.1 A supplementary business rate, although
it would generate welcome additional income for local government,
would work against the equalisation principle by which the local
government finance system is judged to be fair. In other words,
it would allow some authorities to generate extremely large revenues,
which could potentially be used to support the mainstream budget
and thereby reduce the local council tax. Other authorities—in
poorer areas with smaller tax bases—would generate smaller
revenues, with the burden of the budget still falling on the local
council tax.
2.2 This paper presents three possible solutions
to this problem, in the hope that the ostensible fairness of the
system can be preserved while additional revenue can be generated.
It also raises a question about whether the funding for large
infrastructure projects should be sourced locally.
3. PRESERVING
FAIRNESS
3.1 The equalisation principle says that
council tax rates throughout the country should vary only according
to local political choice, and not because of geographical circumstance.
In theory, a local authority's Formula Grant (comprising Revenue
Support Grant—RSG—and redistributed National Non-Domestic—NNDR—rates)
is set in such a way that, if all local authorities were to spend
at the level of assessed need, then council tax rates across the
country would be equal. In practice, this is not the case, as
a number of factors militate against equalisation, the main ones
being:
— The adoption by the Government
of the Relative Needs Formula—RNF—in which the level
of assessed need is hidden from view.
— The imposition of grant floors
and scaling factors, which impede the flow of grant to areas with
the greater levels of "need".
— Other "incentive funding"
(such as LABGI), which distributes resources as a reward, as opposed
to distributing resources on the basis of "need".
3.2 Despite these factors, equalisation
as a principle underlying the grant distribution system is valuable
as it provides a means by which changes to that system can be
judged. Without such a principle, the strength of the case for
any change would simply depend on the balance of forces of potential
gainers and losers.
3.3 A supplementary business rate would
have the power to greatly upset the principle of equalisation.
The Lyons Report chart 8.6 (page 298) shows the variance that
would exist from upper-tier authority to upper-tier authority
if a supplementary rate of 1p was levied. Derby City Council would
be able to generate an amount in the region of £2 million
per annum, whereas Westminster Council's amount would be about
£24 million, some 12 times higher. When figures for "need"
were last published by the Government (as part of the 2005-06
finance settlement, and expressed as Formula Spending Shares),
Westminster's need for resources was only 1.3 times higher than
Derby's.
3.4 With such large sums being generated
in some local authorities it is difficult to see how the introduction
of a supplementary business rate would not end up supporting mainstream
expenditure and reducing the council tax in those areas. Westminster
already has one of the lowest band D council tax rates in the
country (£682, compared with the England average of £1,321),
and an additional £24 million could reduce this to below
£500. It is therefore clear that a supplementary business
rate could not be introduced without some additional means by
which this skewing effect on council tax rates could be tempered,
or even avoided.
3.5 Derby City Council here suggests three
possible solutions (although none of them is perfect):
3.6 Ring-fencing
3.6.1 One option would be to treat the supplementary
business rate as a large-scale Business Improvement District (BID).
In other words, it would be down to the business sector to propose
a scheme (or schemes), which would be funded by the supplementary
business rate. That way would ensure that the additional resources
were not being used to support the mainstream budget, and would
result in no effect on tax-payers.
3.6.2 However, there are a number of drawbacks
to this approach:
(a) Many local authorities are already promoting
business growth and investing in infrastructure in their areas.
It is by no means certain that the schemes proposed by the business
community would be wholly different from those contained within
existing local authority plans.
(b) Would the supplementary business rate
replace or work alongside existing BIDs? If it were to replace
BIDs, then it would seem to lack the local focus that BIDs have
(Why should shops in the suburbs contribute to city centre improvements,
for instance?) If the supplementary business rate were to work
alongside BIDs, then potentially the billing authority would have
to administer three separate ratings per property. All this could
result in a tremendous amount of additional work for local authorities.
(c) Ring-fencing income is anathema to the
notion of local autonomy. Throughout local government it is popularly
believed that income allocated to (or generated by) a local authority
should be spent by that authority in any way it sees fit, without
interference from central government.
3.7 Centralisation
3.7.1 Some degree of centralisation of any
additional resources generated by a supplementary business rate
would prevent the scheme from having too severe a skewing affect
on council tax. Given that NNDR increases over the past 15 years
have been kept in line with inflation, while council tax increases
have been above inflation, there is some scope for business rates
to be reasonably increased anyway. Although the Lyons Inquiry
came down against this, it could be possible to increase NNDR
by, say, 0.2p above inflation for the next 10 years, and using
this money to support mainstream local government expenditure.
This would generate an additional £87 million per year for
the next 10 years.
3.7.2 In addition to (or instead of) this,
any income raised through a supplementary rate could be scaled
back by, say, 20%, and this could also be used to support mainstream
expenditure. Currently mainstream revenue grant for local government
is scaled back by about 70% and so any additional support in this
area would be crucial for equalisation to work.
3.7.3 Although centralisation on such a
scale would seem to go against the spirit in which Sir Michael
Lyons proposed a supplementary business rate, it actually can
be used to support local aspirations. An increase in Formula Grant
funded by an increase in rates (and the top-slicing of a supplementary
business rate) would mean that all authorities would receive additional
resources, which could then be used to deliver projects based
on local priorities. Such funding would be distributed in line
with "need", and would not based on fortuitous geographical
factors (that no local authority can control).
3.7.4 Unfortunately, even this approach
would add greatly to the administration of NNDR, in terms of allocating
revenue, reliefs and rebates either to the national pot or retaining
them locally.
3.8 Quid Pro Quo
3.8.1 Rather than attempting to modify a
supplementary business rate in order to make it more compliant
with the equalisation principle, other aspects of the local government
finance system could be modified such that the overall level of
equalisation is improved.
3.8.2 SIGOMA—of which Derby is an
executive member—has made a separate submission to the Select
Committee Inquiry in which it highlights two inequities in the
local government finance system:
— A damping mechanism contained
within the Personal Social Services Relative Needs Formula. This
mechanism reduced SIGOMA's collective RNF funding by some £226
million in 2007-08.
— A failure on the Government's
part to commit to the revaluation of domestic properties so that
the council tax system could be based on up-to-date information.
If either or both of these inequities could
be removed from the system at the time of a supplementary business
rate being introduced, then the distributional effects would tend
to cancel out, making the process more manageable and improving
equalisation in some areas at the same time.
4. FUNDING NEW
INFRASTRUCTURE
4.1 In discussing how local authorities
could spend the revenues raised by a supplementary business rate,
the key word used by the Lyons Inquiry seemed to be "infrastructure".
It is certainly the case that the Mayor of London intends to use
a supplementary rate to part-fund Crossrail. Clearly, the additional
revenue is meant to be used for addressing major transport needs,
and will go beyond the scope of work usually carried out in a
Business Improvement District.
4.2 However, this raises the issue of the
need for infrastructure. If such a need exists, is it not capable
of being assessed against objective criteria that are applied
to all authorities? If so, could this not be funded by central
government in the same way in which other local authority spending
need is funded?
4.3 Local business would no doubt benefit
from improvements to the local infrastructure, but the benefit
of such schemes usually extends well beyond immediate administrative
boundaries, and so there is a further argument in favour of centralising
a proportion of the income generated by a supplementary business
rate, and using this to subsidise need-assessed infrastructure
projects
5. RECOMMENDATIONS
5.1 That the Committee recognises that a
supplementary business rate could not be introduced without at
the same time introducing other mechanisms to prevent a severe
skewing of the local government finance system.
5.2 That this other mechanism would consist
largely of centralisation and redistribution, recognising that
resources should flow to where the need to spend is greatest.
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