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The winners mustn't take it all in the business rates revolution

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George Osborne’s momentous decision to give councils power to set their own business rates has the potential – in theory at least – to end local government’s humiliating subservience to the central state.

Post-Thatcher, local government has been Whitehall’s prisoner, constrained by financial and performance improvement regimes. A succession of grant cuts – which have accelerated dramatically since Mr Osborne entered No 11 – have left it with fewer resources to run core services, at a time of rising demand. So the concept of councils controlling their financial destiny is a good thing. Empowered councils can ensure the resources are there to meet local need.

However, funding will be tied to the chancellor’s core priority. Mr Osborne – a man seen as often in high-vis jacket and hard hat as without – is hell bent on boosting economic growth. He wants to get Britain building to drive prosperity and bring down national debt. He sees councils primarily as the bodies with the greatest potential to bring about the environment and install the infrastructure that attracts firms to an area.

Under Mr Osborne’s plans, core grant will be phased out and councils will be increasingly dependent on business rates. They are therefore incentivised to drive growth to boost their income (or at least ensure it falls more slowly).

In this spirit, prosperous Kingston upon Thames RBC has already bid for financial independence, forgoing revenue support grant but keeping a greater portion of business rates. However, LGC research reveals that in the less prosperous West Midlands, north west and, in particular, north east, self-sufficiency is a distant prospect. Poorer areas will find it especially difficult to decide whether to cut business rates, forgoing short-term yield to encourage businesses to locate there, potentially increasing income in the longer run. A taxation race to the bottom is undesirable.

The Conservatives indicated top ups and tariffs “will be extended” but it remains to be seen that there will be a sufficient level of equalisation to ensure poorer regions, lacking the natural advantages of the south east, are fairly treated. Some council leaders have already expressed fear the north/south divide will be exacerbated. Meanwhile, the Treasury says local government will be asked to take on unspecified new responsibilities (presumably funded by business rates) and the forthcoming spending review will contain details of how councils will “need to contribute to fiscal consolidation”.

Mr Osborne has presented councils with the good news but the fear is that he is saving the bad news for 25 November. He must avoid replacing an over-centralised system with one in which all services are excessively dependent on local growth and loser areas find themselves in dire financial straits.

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