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Business rates uncertainty adding to funding anxiety

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Commentary on the IFS analysis of business rates retention

The warning by the Institute for Fiscal Studies that the move to allow councils to retain a larger percentage of business rates could lead to greater divergences in the funding available for services echoes the concerns repeatedly expressed by local government.

In the spirit of devolution, councils have long called for control over local tax revenues to provide flexibilities and freedoms for councils to meet the needs of their specific communities.

But significant variations in the ability of councils to raise such revenue, whether through business rates or council tax, necessitates the establishment of a fair and robustly evidenced mechanism for the redistribution of resources.

While we know funding for public health and the rural services grant will be subsumed into 75% business rates retention in 2020, there are no details on which responsibilities will be funded by any eventual move to 100%, or which exemptions or tariffs will be used to equalise the system.

Even with a degree of clarity on 75% retention, uncertainty remains as there is no correlation between councils’ ability to increase the rate of growth of business rates and the demand for public health spending in an area.

A recent evidence session for the Commons community and local government committee’s inquiry into business rates retention heard that the move to 75% in 2020-21 would generate revenue that just about covers current national grants for public health and rural services (approximately £5bn).

Therefore, in the absence of a balanced redistribution mechanism, local government will be in no better shape to deal with rising pressures.

While those councils that would in theory receive a net benefit from business rates retention may be disappointed that the previously announced government push to 100% retention has stalled (the loss of parliamentary majority would have imperilled the necessary legislation), others will be anxiously monitoring the fair funding review and hoping it does what it says on the tin.

Moreover, as the committee heard from Chartered Institute of Public Finance & Accountancy chief executive Rob Whiteman, the risks created by uncertainty could in the meantime foster problematic behaviours.

Financially stable councils faced with uncertainty may not make required efficiencies in expectation of future gain from a 100% system, while other more challenged councils may cut further than necessary in preparation for a less than satisfactory outcome to the fair funding review.

The IFS analysis found significant divergences in funding available to councils could arise in just a few years under 100% retention.

It also found no relationship between changes in councils’ business rates tax bases and local economic growth, or employment or earnings growth, in recent years.

IFS associate director David Phillips suggested that if the government is seeking to encourage councils to be more active in promoting growth, other incentives, such as allowing councils to retain part of other taxes such as income tax, may have to play a role.

The IFS analysis calls into further question the government’s focus on economic growth as a solution to local government funding.

And while councils welcome the principle of retention, without a commitment from government over effective transition arrangements, uncertainty is merely adding to the everyday pressures of maintaining sustainability.

Jon Bunn, senior reporter

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