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LGC Briefing: The too difficult box

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A commentary on emerging views on the move to 100% business rates retention

Monday saw the closure of the Department for Communities & Local Government’s consultation on the move to 100% business rates retention and this week LGC has been collecting and analysing responses from across the sector and beyond. While there are some areas of agreement, fault lines are starting to emerge, along with widespread recognition of just how difficult designing the new system is going to be.

On questions regarding new responsibilities, the sector has spoken with one voice: the first call must be existing unfunded pressures. Areas that are linked to growth, such as skills, are appropriate to be funded from business rates; demand led social care pressures, such as attendance allowance, are not. Today LGC revealed the CBI is in agreement on this point.

The sector is also united in calling for the infrastructure levy, which it is currently proposed will be limited to mayoral combined authorities, to be more widely available.

Launching the consultation, then communities secretary Greg Clark made clear the government was not set on a one-size-fits-all approach and would be open to tailored arrangements for areas with devolution deals. Yet on the question of what budgets could be pooled at a combined authority level, the majority view among the sector here is that pooling should be a decision for the individual councils involved, not ministers, and not just available for those in combined authorities. Most respondents are also opposed to funding devolution deals from business rates.

However, in its response London Councils renews its bid to retain all of its business rates in return for taking on additional responsibilities under “a fully devolved system with the mayor and the leaders of the 33 local authorities taking over responsibility for the allocation and distribution of resources within an appropriate governance structure”.

Surprisingly the issue of the split of business rates in two tier areas has so far proved relatively uncontroversial with both the County Councils Network and the District Councils Network stressing it will need to be considered in parallel with other parts of the system. Regarding which tier should have the power to reduce the multiplier, South East Councils, whose members are mainly two tier, suggests a system similar to council tax, with each tier setting a precept on a property.

Things get trickier on the question of how often the system should be reset. This goes to the heart of the existential difficulty of the new system: how to meaningfully reward areas with a high business rates base without seriously disadvantaging areas that do not collect as much?

A consensus has emerged around the idea of a partial reset, where a council retains a certain proportion of its growth. This means the battle then moves onto what that proportion should be and how often those partial resets should take place. The DCLG suggested five years, which the Local Government Association thinks could work. The Special Interest Group of Municipal Authorities thinks five years should be a maximum in order to provide certainty over funding; the CBI thinks it should be a minimum of 10 years to preserve the growth incentive.

These divergent views beg the question of whether it is even possible to find a halfway house between true self-reliance and a relatively equitable settlement for all areas. Interestingly, Sigoma and South East Councils, despite having very different priorities, both tentatively suggest perhaps not.

Sigoma highlights the growth first model of 100% rates retention proposed by the IPPR earlier this year. However, this is similar to the current system where councils pay a levy if their business rates grow above a certain level and the government has been adamant that it will abolish the levy under the move from 50% to 100% retention.

South East Councils notes that a partial reset would mean authorities felt little benefit at all from any growth achieved in the year prior and suggest a simpler approach could be to abandon the reset in favour of allowing councils to retain “50% of growth… from the moment it is achieved”. However, again this is more or less how the current system works.

The response suggests that in light of this “the potential for major upheaval to achieve a similar aim needs to be reviewed,”.

Indeed, with Brexit set to bring plenty of upheaval of its own right across central and local government could a new communities secretary and chancellor decide 100% retention is too difficult?

Both Sajid Javid and Philip Hammond have been quiet on the issue so far. This time last year the announcement of the move to 100% retention formed the centre piece of then chancellor George Osborne’s speech to Conservative party conference. Hopefully we’ll find out next week how it fits with his successor’s priorities.

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