House of Commons - Communities and Local Government Committee

Select Committee on Communities and Local Government Committee Third Report

3 Our response

7. We welcome the fact that the Government has made a commitment to give local authorities an opportunity to develop their role in place-shaping and identity-building, in partnership with local business. In the introduction to our Report, we recalled the series of reviews of local government finance which have taken place over the last 30 years, and regretted that "there has under successive Governments been little change designed to create a funding system that supports and enables local authorities to fulfil their role as 'strategic placeshapers'."[8] In proposing the introduction of a power to introduce a supplementary business rate, the Government has taken a first step towards reforming local government finance in a way which will begin to give local authorities the power needed to fulfil the role envisaged for them.

8. However, the Government's proposals, and its response to our Report, are a significant disappointment. They lack a convincing vision of the future. They are over-cautious and so circumscribed that they will fail to secure any real advance in autonomy for the majority of local authorities. The Government's proposals would result in an SBR with a significantly lesser degree of local discretion than that which we envisaged. Its response to our report is unconvincing in its arguments for the restrictions placed on the powers proposed and wholly lacking in any engagement with our broader conclusions on the need for further financial devolution to local authorities.

Differences between the Government's proposals and our recommendations

9. The most significant differences between the Government's proposals and those which we recommended are as follows:

Ballots. We recommended, in line with Sir Michael Lyons's conclusion, that there should be no requirement for a ballot on SBR proposals within the affected business community: local authorities should be free to hold a ballot "when local or specific circumstances warrant".[9] The Government proposes a requirement for a ballot where the contribution supported by the supplement exceeds a third of the total cost of the project.[10]
Level of authority empowered to levy an SBR. We recommended that upper-tier authorities should be empowered to propose an SBR in co-operation with second-tier authorities in their area, and second-tier authorities should have the power to propose an SBR, either individually or jointly with neighbouring districts;[11] and that the Greater London Authority should have the power to initiate a London-wide supplementary business rate which could be blocked by a two-thirds majority of London local authorities, but individual London boroughs and the Corporation of London should also be able to initiate a supplementary business rate.[12] The Government intends to empower only the highest tier local authority in an area (in London, the GLA) to levy an SBR;[13] shire counties will be required to consult their districts on any new supplement proposals.[14]
Maximum level of SBR. We recommended that there should be no cap on the SBR rate determined by local authorities.[15] The Government proposes a limit of 2p in the pound.[16] The Lyons report had recommended a 4p cap.
Exemptions and discounts. We recommended that any decisions on exemptions or discounts should be determined at a local level.[17] The Government proposes an exemption from SBR for hereditaments with a rateable value of £50,000 or less, with authorities able to provide for further exemptions or discounts.[18]

MAXIMUM LEVEL OF SBR

10. The Government's proposal for a cap of 2p in the level of supplementary business rate which may be levied is the most disappointing aspect of the White Paper. Sir Michael Lyons envisaged a cap of up to twice that, 4p.[19] Combined with the Government's proposal to exempt all businesses with a rateable value of £50,000 or less, the proposed cap slashes the amount of money which could be raised through the levying of a supplementary business rate, by comparison with the Lyons proposals. Lyons suggested that a 4p SBR, levied uniformly across the country, could have raised some £1.6bn.[20] It has been calculated that the yield under the Government's current proposals would be only some £600m.[21] It has also been pointed out that, even if every local authority with the power were to levy the maximum permitted rate, the total raised would still not replace the £850m reduction in Local Authority Business Growth Incentive (LABGI) funding announced at the same time.[22]

11. In its memorandum to us, the Government argues that a national upper limit on the level of supplements which can be levied by local authorities "will provide important security for businesses and will also serve to protect ratepayers from the impact of cost overruns." It continues, "A maximum limit will ensure an appropriate level of protection of national economic and fiscal interests given the increased ability of local authorities to borrow for capital purposes that will result from the supplement."[23] The White Paper adds, "Using a higher limit [than 2p] would increase the risk that spending grows faster than capacity to spend efficiently."[24]

12. It is in the failure to trust local authorities to take effective decisions, in partnership with local business, about the levying and use of local funds that the Government demonstrates its lack of vision. The proposal as it stands will allow significant sums to be raised in some areas, particularly London, and no doubt some worthwhile projects will come to fruition even outside London as a result. But the possibilities could have been much greater. We concluded in our Report that "it would be rare for a local authority to seek, and for the business community to accept, an SBR involving more than a marginal variation to the [national non-domestic rate]", but where those circumstances did come together "we [saw] no reason why it should not be allowed."[25] In our view, provided that adequate measures were put in place to ensure that an SBR was levied by consent, the precaution of a cap was "unnecessarily draconian."[26] The Government has produced no evidence or arguments to change our view and we are dismayed that the Government proposes to hobble local authorities' ability to raise sums which would enable them, in partnership with local business, to make a meaningful contribution to the economic development of their area.

DEGREE TO WHICH LOCAL AUTHORITIES WILL BENEFIT

13. Furthermore, the proposals which the Government has brought forward are likely to be of significant benefit only to a relatively small number of authorities. First, the Government is denying the power to levy an SBR, whether individually or in partnership with neighbouring authorities, to second-tier authorities, including London boroughs. We found the Government's rationale for this decision, as set out in its memorandum to us, unconvincing. The Government says that this is "to avoid businesses in two-tier areas potentially paying two supplements, for the best fit with economic entities and to avoid complexity".[27] Given the requirement to agree the levying of a supplement with local business, we consider this restriction unnecessary, either in London or elsewhere. As we noted in our original Report,

it seems perverse in the extreme to enable upper-tier authorities across the country—including Rutland with its population of 37,000 and capacity to raise a few hundred thousand pounds annually from a 1 pence levy—to initiate an SBR but to deny similar flexibility to London boroughs such as the City of Westminster, with its population approaching quarter of a million and the capacity to raise almost £25 million on the same terms.[28]

14. Secondly, even if all authorities were to have the power to levy SBR, this power alone would not give all local authorities the same opportunities to raise money. As our original report recognised, "the facility to levy a supplementary business rate is most attractive for unitary authorities covering urbanised metropolitan areas … other areas, particularly less urbanised and rural parts of the country, would not be able to benefit or not to the same degree." We have previously "encourage[d] Ministers to consider and bring forward alternative measures alongside a supplementary business rate to allow local authorities and local business communities seeking additional funds for local investment to choose a means which is suitable for their specific local circumstances."[29] The Government's decision to restrict the ability to levy an SBR to upper-tier authorities increases the importance of this recommendation. Thus far, however, there is no sign of any such measures, nor has the Government seen fit to make any formal response to our conclusion.

Further financial devolution to local authorities

15. Finally, we find it necessary to reiterate our conclusions regarding the longer-term consequences following from Sir Michael Lyons's report and more recent Government policy pronouncements regarding the future role for local government. We argued in our original report that "the Government should consider implementation of Sir Michael's recommendations on local government revenue not as the last word but the beginning of a development process of financial devolution", recommending that "its response to the Lyons report should set out how and when the next steps might be taken."[30] Once again the Government has not seen fit to respond to our conclusions; and there is little sign as yet that the Government looking beyond SBR to any "next steps" in financial devolution to local authorities. As we noted in our original Report, more is needed if local authorities are to become the leaders of vibrant communities and the engines of local economic development. Is the supplementary business rate—with its 2p cap and its restriction to upper-tier authorities—the limit of the Government's ambitions post-Lyons? Or will it have the courage and vision to go further? The Government's rhetoric on the devolution of power to local authorities is good. Thus far, however, its actions have failed to live up to that rhetoric. We seek a clear indication from Government that it is prepared to match its words with significant action to empower all local authorities to become the 'place-shapers' of the future.

8 HC 719, para 16. Back

9 HC 719, para 35. Back

10 White Paper, paras 2.56ff. Back

11 HC 719, para 42. Back

12 HC 719, para 52. Back

13 White Paper, paras 2.64ff. Back

14 White Paper, paras 2.71-2. In London, statutory arrangements already exist for the GLA to consult the boroughs as part of the budgeting process (para 2.71). Back

15 HC 719, para 53. Back

16 White Paper, paras 2.41-2. Back

17 HC 719, para 56. Back

18 White Paper, paras 2.51-4. Back

19 Lyons Report, para 8.48-50. Back