Councils Need Control of Business Rates

The Government's commitment to give power to local authorities needs to be backed up with appropriate action

Author: Tom Shakespeare, Localis - Jan 27, 2011

Posted in: Local Government Finance / The financial flexibilities needed for economic development / Localis In The News

Localis has welcomed with open arms many of the coalition government’s policies to decentralise power to local government and communities. But without genuinely rebalancing the control of finances between central and local government, the government’s commitment to decentralise power will only go so far.

The shortage of local revenue streams damages local accountability, reduces incentives for councils to improve local areas, and creates inefficiency and distortions in the system.

So what are the options to give councils more control of their finances?

The government’s existing policy to implement a ‘Business Increase Bonus’ is the most radical policy currently on the table, allowing councils to keep a proportion of any growth in business rates for a period of six years.

This will undoubtedly give councils a much greater incentive than they currently receive. The problem is the lack of permanence of the reform, and the small degree of financial autonomy that it will give local councils.

Creating new local taxes is one further option that could be considered in the future. However, in the short term, it would create significant implementational problems, not least because the Treasury would look for any redesign of the tax system to be revenue neutral. Therefore, the only practical option in the short term is to localise existing taxes.

Localisation of NNDR

We believe that the re-localisation of national non-domestic rates (NNDR), or business rates as they are more commonly known, is the most practical and radical option available in the short term.

Business rates make up approximately £19bn of local government’s income, and are the largest property tax after council tax, making them very suitable as a local tax.

Currently business rates are collected locally by councils, but then sent to central government before being reallocated to councils in the guise of ‘formula grant’, according a fiendishly complicated distribution model called the four block model.

But is this really necessary? Why can councils not be allowed to buy their way out of this bureaucratic merry-go-round?

Should local government not finally be given a clear, direct incentive to grow local economies, and hence grow the national economy?

Returning greater control of business rates to councils would be a crucial first step in creating a more autonomous and accountable system of local government finance, allowing them to take a longer-term strategic approach.

Consulting local councils

Localis has teamed up with Ernst and Young to produce a full report to explore all the practicalities and options of such an approach.

Of course, we want as many councils to sign up to the idea as possible. It is for that reason that we have consulted councils from across the country and across all three major parties to ensure that the system we propose will work for all councils, as well as the government and the business community. The support of these organisations is absolutely vital for the success of this project.

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