Philip Hammond was at pains to offer an optimistic outlook for the UK’s finances in the recent spring statement, claiming to be “positively tigger-like” about the nation’s economic prospects.
The chancellor’s view wasn’t shared by the Office for Budget Responsibility or the Institute for Fiscal Studies. Both forecast that national economic growth will only fractionally increase next year – meaning the economic gloom of the past decade is unlikely to lift any time soon.
Of course, the national outlook plays out very differently across the country. Centre for Cities analysis shows that while cities in the Greater South East are among the most productive in Europe, many elsewhere in the country are lagging behind.
To address this problem, cities need to have the right tools and resources to drive growth in their economies – and this is where the government’s plans for business rate devolution come in. The idea is that, by allowing cities to retain more of the rates revenue they generate, they will be incentivised to support more growth in their economies.
Devolution is a welcome step, but is not enough in itself. More extensive reforms of the system are needed to ensure that business rates devolution helps all cities across the country – not just those that are already successful.
The central problem with the current system is that cities can only increase their intake from rates revenue by expanding the quantity – not the quality – of commercial floor space.
That’s a useful incentive in cities like Cambridge and Brighton, where there is a high demand for more high-quality commercial space. But in cities such as Blackpool and Burnley, such demand is currently limited.
And so the current setup encourages the prioritisation of more low skilled, out-of-town commercial developments such as call centres or warehouses, rather than the addressing of the barriers in attracting more high value, highly productive firms and jobs.
What needs to change? First, the government should allow local authorities to retain the value uplift resulting from improving the quality of local commercial property. This would give places a direct financial reward for improving commercial space, which in turn will help them attract more high value businesses and jobs.
Second, changes are needed to make the system more efficient and responsive. The government has recognised this by announcing triennial revaluations of business rates from 2021, a welcome move to make the system more reflective of local economic conditions (though yearly revaluations would be better still).
Another useful change would be to remove the cap on the total yield of business rates revenue, to allow places to generate and keep more income from rates overall.
There is no let-up expected in the funding constraints local authorities face, and the uncertainty ahead for the national economy. So making these changes will be key in helping cities secure a more sustainable financial footing, and enabling them to make a bigger contribution to the country’s productivity and prosperity.
Andrew Carter, chief executive, Centre for Cities