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Tony Travers: constitutional change must accompany business rate reform

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George Osborne’s announcement that 100% of non-domestic rates will be retained and partly localised is to be welcomed.  However radical the reform eventually turns out to be, it is further evidence that the chancellor is more committed to decentralised power than any of his predecessors.

Mr Osborne’s motivation is partly economic and partly political. Evidence-based economists have in recent years advocated city-based policies. England/Britain is so centralised that further fiscal centralisation is impossible. Politically, the chancellor knows that the more he offers (particularly northern) cities power, the more problematic it will be for the Labour front bench.

By the end of the decade, councils will raise all their revenue resources (for services other than education) from council tax or business rates. A residual underpinning of equalisation will be preserved by ‘tariff’ and ‘top up’ arrangements in Year 1. 

It is inevitable that wider responsibilities will have to be funded by the total of council tax and NDR. The government will be continuing to reduce overall council resources until at least 2020, so we can expect transfers of additional services (or the removal of specific grants) so as to avoid a windfall gain for local authorities.

But this is a significant step. Councils will be grant-free by the end of the decade and can then hope that their resources will increase at least in line with inflation and/or growth.

Of course, equalisation of the kind which existed for decades until 2013-14 will not return. Indeed, the whole logic of the funding system has been turned on its head. From the 1960s till 2013-14, the precise measurement of needs and tax resources was the starting point for equalising between authorities.

Now, economic growth is the key criterion of changes in funding.  NDR retention and the New Homes Bonus reward extra homes and additional commercial development. There will be winners and losers – not in the initial year, but as economies perform differently.

Incentives work. The government is clearly willing to decentralise some power over property tax so as to kindle additional economic output.

Local government can, overall, welcome devolutionary change. But such movement needs to be part of a longer-term process of constitutional reform. Labour, for its part, needs to come up with a response to George Osborne’s willingness (however modestly) to drive localist policy.

Tony Travers, director, Greater London Group, London School of Economics

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