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James Maker: Rates reform must be fair to counties

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The absence of the Local Government Finance Bill from the parliamentary calendar has generated many column inches in LGC, and last month the debate took on another dimension with the announcement of the second round of business rate pilots.

Despite the uncertainty, the pause presents a period for local and central government to reflect on the objectives and design of business rate retention and the wider sustainability of local government funding.

Many aspects of increased local rate retention are still possible without primary legislation, and local government remains committed to pushing for greater retention.

However, there is a growing sense, particularly in the county world, that there is a need to explore a broader range of options, some of which may not result in 100% retention.

The County Councils Network’s recent members’ survey found that 55% of county leaders still supported 100% retention, while 27% were neutral and 18% disagreed.

This lack of universal support is reflective of findings from modelling on business rate retention undertaken by Pixel Financial Management for CCN.

This research followed in-depth analysis of the profile of business rates in county areas and considered different scenarios in designing the new system, and how these might affect different types of authority and parts of the country.

Overall, Pixel’s research shows 100% retention will present a number of challenges to ensuring long-term financial sustainability for all councils and the right incentives to drive growth.

The headline message from the modelling is a severe growing divergence between service needs and business rate income over time for counties, while London and districts could benefit disproportionately. Counties could see an additional funding gap, on top of existing pressures, of £700m by 2029.

With less than half of county leaders believing 100% retention would be effective in mitigating continuing reductions, these findings reinforce CCN members’ views on the need to prioritise the fair funding review ahead of the implementation of business rates reform, and ensuring the first call on the additional quantum is focused on meeting unfunded service pressures.

While the longer-term modelling is informative in the context of the ongoing discussions on 100% retention, it is important all councils considering pilots use this evidence to inform discussions about pooling, appropriate geographies and tier shares.

Pixel found almost all individual county areas are predicted to achieve growth in business rates, however this masks a divergence of business rates income within county areas; with many districts well above baseline and some below.

Pixel argues this additional risk factor means county geographies are the logical footprint for managing business rates across an area, with opportunities to pool risk and rewards and balance growth investment.

The recent pilot prospectus acknowledges these issues, strongly encouraging counties and all their districts to come together in pilot propositions, with an emphasis on pooling and demonstrating how growth in rates can be reinvested across an area.

The overall potential funding gap and the divergence of business rates income, however, raise questions as to whether it is equitable that pilots for 2018-19 should be treated differently to the first round, where a ‘no detriment’ clause applied.

Although the government wants to test risk, including how councils would mitigate losses, the threat that councils could be worse off during the pilots could mean only areas with healthy growth apply for pilot status, ultimately limiting the extent to which these factors can be tested.

This issue, alongside the time-limited nature of pilots, are concerns CCN is actively exploring with member councils and the Department for Communities & Local Government.

System design in two-tier areas will also be key, such as tier shares.

Pixel estimates under a fully retained system the additional funding gap facing counties would be £150m smaller if the county share was increased to 80%.

While this is only a 21% reduction in the overall figure, the findings more broadly show a higher retention share for county councils will be important in balancing a full locally retained system across local authority types and regions, and ensure a fair and sustainable share of resources between district and counties.

Those considering taking part in pilots must carefully consider these findings. But given the limited scope of these pilots and that no new responsibilities will be devolved in them, it may be that agreed pilots only represent a step towards a larger share for county councils, and therefore shouldn’t lock in a specific tier share for all counties.

Pilots and this research represent the next phase in the discussion on rate retention.

CCN remains committed to the DCLG and Local Government Association programme and our working group with the District Councils’ Network to explore system design, including tier shares, utilising the research to support the development of sector-wide proposals that are sustainable, fair and practical.

 James Maker, head of policy & communications, County Councils Network

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