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Full business rates retention risks increasing inequality, councils warn

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Handing councils full control of business rates while abolishing the revenue support grant risks increasing inequality, the Special Interest Group of Municipal Authorities (Sigoma) has warned.

Chancellor George Osborne announced the radical shake-up of the way local government is financed at the Conservative party conference in Manchester this morning.

By 2020, the grant councils receive from central government will be phased out in return for letting local authorities keep all of the £26bn collected in business rates.

Reacting to the news, Sigoma’s principal research officer Geoff Winterbottom told LGC: “We are concerned this has got that potential to further widen the gap [between richer and poorer areas].”

He said that without some form of redistribution the system was “just not a go-er”.

“There is a mechanism in the current system, albeit its flawed, [for redistribution] and we would be looking for that to continue,” he said.

“There’s so little detail at the moment it’s hard to come out and say it’s bad or good but we’ve got a lot of issues we want to understand and equalisation is at the top of that agenda.”

In a statement from the Conservatives released after Mr Osborne’s speech, it said the top ups and tariffs system would be “extended” and added the “safety net policy which protects local area against big drops in business rates will also be maintained”.

Retaining 100% of business rates and business rate growth was one of the key recommendations in the Independent Commission on Local Government Finance’s report, released in February.

Its chair Darra Singh welcomed today’s announcement.

“Local government has been asking for greater scope over business rates for a long time,” he told LGC. “There’s a real opportunity here to provide the flexibilities and controls at a local level for areas to think about how they can drive economic improvement and development.

“I’m not saying there aren’t challenges, clearly there are and those need to be worked through.”

Ahead of the spending review on 25 November, Mr Osborne warned local government it would still need to make “further savings”.

However, Mr Winterbottom said it was unclear how that would work if councils get to keep 100% business rates as that “effectively freezes our income in cash terms” but thought it might mean the government claws money back by other means, especially as Mr Osborne said councils would be given “extra powers and responsibilities”.

Mr Winterbottom said: “My understanding of that is we will have to take on further burdens of providing services which won’t be funded, or that there will be some other mechanism whereby we will have to pay something into a central pot.”

One finance chief at a northern council told LGC the reforms were “quite scary” with the spectre of new responsibilities but no new funding.

He said: “It doesn’t matter how much the government spins this whether it’s about devolution, new powers, or being able to retain 100% of business rates; there’s not £1 of guaranteed additional funding in this for councils. The link between a needs assessment and local government funding will be lost forever.

“The changes are all a smokescreen – it’s like a Trojan horse – to keep everyone’s eye off the main government objective which is the upcoming funding cuts.”

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