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Business rates are a bad deal for councils and the high street

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A guest briefing, from IPPR North research fellow Jack Hunter, on why councils that can rely upon multiple income streams will be more resilient.

Earlier this month the Commons Treasury committee announced an inquiry into the impact of business rates on businesses.

The likes of the Federation of Small Businesses, who previously called business rates “an unfair, regressive tax”, have welcomed the news. Time will tell if the government, which has been dragging its feet on almost every policy issue outside of Brexit, will take heed of any recommendations that emerge.

At least ministers seem to know that change is needed. In his 2018 Budget, chancellor Philip Hammond announced a short-term fix to reduce the costs of business rates on the high street: a two-year reduction in business rates for small retailers.

Just last month, Northern Powerhouse minister Jake Berry also suggested that the government was considering reforms to the current system, including levying business rates on retail warehouses at the same level as high street shops.

Amid the uncertainties of Brexit, the decline of the high street and concerns about the impact of automation and technological change, businesses deserve a fairer system. Some of the noises coming from ministers are welcome, if overdue.

But any rethink is also a chance to fix the system for local authorities as well.

Given the continued cuts from central government, rising service demand and the regressive nature of council tax rises, councils are likely to see increasing business rates revenue as their best way of raising funds to cover their costs.

The devolution of business rates through increased rates retention was introduced to link councils’ financial interests to the state of their local economy – and to reward those who were able to grow their rates base with a share of the proceeds. But this is problematic, for two reasons.

First, the prospects for growth vary considerably between different parts of the country. Historical differences in infrastructure spending, for example, mean that some areas are better placed to grow faster. More fundamentally, there is little relationship between future economic growth and projected demands for services like social care.

Second, the current system incentivises councils to encourage and allow increases in commercial floorspace, while offering nothing to those that develop the productivity of firms or the incomes of employees. Contrary to the government’s intentions regarding rates retention, multiple studies have shown no relationship between increases in councils’ business rates tax bases and growth in either gross valued added, employment or earnings.

This means that we have a system that rewards local authorities that are successful in attracting out-of-town warehouses that keep their staff on zero-hour contracts, or national high street chains that don’t pay a living wage, while offering nothing to councils that work collaboratively with businesses, universities and civil society to boost productivity and living standards.

Of course, fiscal incentives are not the only determining factor in local decision-making. As democratically-accountable bodies, local authorities are strongly motivated to act in ways that are aligned with the interests of their citizens, and therefore the health of the wider economy.

But the precarious state of local government finances means that short-term financial considerations are more likely than ever to take prominence in decision-making than in previous years. This is clearly wrong, and undermines the government’s desire in the industrial strategy for local solutions to productivity and inclusive growth.

So what is needed? Although tweaks to the business rates system like more regular revaluations would help, we need a proper discussion about what a sustainable source of locally-raised tax revenue looks like.

Learning from less centralised countries, local government in England needs much greater diversity of funding, including measures such as a local income tax or a share of corporation tax or VAT. Local authorities that can rely upon multiple income streams will be less susceptible to the incentives that a single local tax entails, and as a bonus will be more resilient to changes in their tax base.

The latest inquiry on business rates is an opportunity to fix a broken system. Those who care about local government should use it to argue for a better deal for councils as well as the high street.

Jack Hunter, research fellow, IPPR North

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