County councils could end up with a funding gap of £550m - £700m within 10 years of the intorduction of a system of fully retained business rates, according to research shared exclusively with LGC.
Detailed modelling shows the income counties would generate through 100% rates retention fails to match the growing costs of services, particularly in relation to adults and children’s social care, over a 10-year period between 2019-20 and 2028-29.
The study, undertaken by Pixel Financial Management for the County Councils Network, also opens up the debate about how shares of growth should be split in two-tier areas in the future.
Under the 50% rates retention system, districts retain 80% of the growth and county councils 20%. If this split continued counties would be £700m worse off according to the modelling while if it was reversed they would be short of £550m funding required to meet the estimated demand for services. The research also suggested that allowing county councils to keep a higher share of rates would also result in less funding being redistributed through top-ups and tariffs.
Pixel’s modelling, seen by LGC, makes a number of assumptions about service funding pressures and how the 100% rates retention system would work in the long-term. These include that the system would be partially reset every five years and the bulk of the responsibilities handed down to local government to make the system cost neutral would go to top-tier councils.
The research has been shared with LGC after the government announced plans to pilot full rates retention in more places in 2018-19, particularly in rural areas.
LGC revealed earlier this month how three county areas – Leicestershire, Suffolk, and Surrey - have emerged as front-runners to pilot 100% business rates retention, despite concerns about how the new system for pilots might work in two-tier areas.
Given the fact Pixel’s research indicates counties are likely to lose out financially in the long-term, the CCN has questioned whether it is fair the new pilots do not have a ‘no detriment’ clause, as is the case in existing pilots in Cornwall, Greater Manchester, Liverpool, West Midlands, and West of England. This specifices the councils involved cannot be worse off than under the current funding system.
A recent CCN survey of county leaders showed only just over half (55%) continued to support the implementation of full business rate retention.
Nick Rushton (Con), CCN finance spokesman and leader of Leicestershire CC, said Pixel’s modelling highlighted “the unique challenges facing county authorities in implementing” full business rates retention.
“CCN is supportive of moves towards greater local retention, alongside wider fiscal devolution, but we must ensure the system provides sustainable long-term funding and a platform to truly incentivise growth and self-sufficiency,” he said.
CCN said it wanted to work with the District Councils’ Network to discuss Pixel’s findings.
DCN’s chair John Fuller (Con) said he “fully supports the principle” of full rates retention and added his members were looking forward “to playing a leading role in shaping pilot schemes”. He said it was “critical that we devise an integrated approach that incentivises growth at a scale” but added: “Any system which moves away from incentivising growth risks reducing the overall pot of money available to local government.”