The Government has announced that, by the end of this Parliament, local government will collectively retain 100 per cent of business rate revenue, described by the Chancellor as a ‘devolution revolution’. As a consequence, Revenue Support Grant, the main central government grant for local authorities, is to be phased out and, to soak up the resulting additional local tax revenues, local government will have to take on new responsibilities.
We support 100 per cent retention of business rate revenue but continue to believe that it is one among a number of fiscal powers which should be devolved to local authorities, and which we hope will follow in due course. We do not, however, underestimate the significance of these reforms, which, while incentivising councils to promote local growth and economic development, could lead to significant divergences in authorities’ spending power. We also note the lack of correlation between business rate revenue and local authority need and the fact that, without Revenue Support Grant, it is likely to prove very difficult to shift resources to authorities in direct response to need in all circumstances.
The setting up and structure of the system, and the way in which revenue is redistributed, are therefore critical. We had originally set out to examine the policy itself; however, at a late stage, we were required to change our approach after the Department preferred to wait to provide evidence until their consultation on the reforms had concluded. Our evidence has revealed a host of issues, brought together in this report, relating to the setting up and running of the system and to achieving and sustaining growth, which need further consideration. We intend our ‘issues for consideration’ to feed into the Department’s consultation and aid the work of the Government and sector.
There is much to learn from the current 50 per cent retention system. The issue of businesses appealing against their rates bills has caused significant concerns, with refunds to ratepayers often far exceeding authorities’ growth in business rate revenue. Unless resolved, the appeals issue will pose a major challenge to 100 per cent retention, undermining the system before it has even had a chance to get going.
The amount of additional local tax revenue resulting from 100 per cent retention is uncertain; different figures have been quoted and we assume that the extension of Small Business Rates Relief and the uprating of the multiplier by the Consumer Price Index will affect the amount available. New responsibilities for local authorities must therefore be carefully chosen to ensure that they remain proportionate to the additional revenue generated and are suited to local authorities’ devolution ambitions.
A number of common themes about the responsibilities that local government would be willing to take on emerged from the evidence: they should be linked to the drivers of local economic growth, they should not be demand-led and, in deciding what they should be, a set of principles should be followed. The Government should base its approach on these principles, set out in full in this report, in order to ensure that new responsibilities are within local government’s control, fit with its role and wider responsibilities, and promote local growth and the wellbeing of residents. The Government has also announced two reforms intended to boost economic activity: the infrastructure premium and the power for authorities to reduce rates. The proposal that Local Enterprise Partnerships (LEPs) should be involved in the decision-making process was criticised by both local authorities and the business sector. The Government should review whether it is practical, possible and fair for LEPs to take on this role, and seriously reflect on whether limiting the infrastructure premium to mayoral combined authorities runs counter to the aims of 100 per cent retention. Local authorities, uncertain whether they would in practice be able to reduce rates, wanted to be able to raise them as well. This flexibility would provide an effective lever to stimulate and foster economic growth and we recommend that the Government and the sector give careful consideration to this.
9 June 2016