Areas involved in 100% business rates retention pilots could collectively gain an extra £873m funding in 2018–19 although some councils could have been better off had that money been redistributed nationally instead, research by the Institute for Fiscal Studies has found.
The biggest beneficiaries are set to be London boroughs, including the Greater London Authority, which will collectively benefit by an extra £431m, followed by those involved in the Berkshire pool (£53m).
The single area that stands to gain the least, according to IFS analysis, is Bury MBC (£1.5m) but that forms part of the Greater Manchester pilot which is set to collectively gain an extra £51.6m.
In its report 100% Business Rate Retention Pilots: what can be learnt and at what cost?, the IFS said the extra £873m areas will get is equivalent to 3.6% of pilot councils’ core spending power, or almost 2% of the spending power of all councils.
“This financial benefit represents a cost to central government, to which this revenue would otherwise have flowed,” the report said.
The IFS also raised questions about how much can be learned from the pilots as they are only taking place over a limited period of time.
David Phillips, associate director at IFS and an author of the report, said: “The English councils piloting 100% business rates retention are set to gain hundreds of millions of pounds in extra funding as a result this year.
“An alternative use of the same funds would have been to boost grants to all councils by 2%, or £16 per person. While many of those chosen as pilots would have gained less, such a funding boost would have been welcomed by councils that have not been chosen as pilots.”
If the £873m had been allocated according to official assessments of spending needs then “one-in-10 areas” would have received more than £9m in additional funding with the IFS predicting councils in Essex “would have been due an additional £20m in total”.
The IFS’ report said: “But most – although not all – pilot areas would have received less funding, as they gain more from pilot status than they would have gained from needs-based grants.”
If the extra funding had been distributed based on need, the IFS said councils such as Dudley MBC, Liverpool City Council, and Oldham MBC would have been better off than they are in their respective pilots.
The IFS noted that “councils have historically tended to be overly optimistic about their future business rates revenues” income – forecasts between 2013-14 and 2016-17 have, on average, been 2.3% higher than their outturn figures. But even when all forecasts were revised down by this amount, the IFS predicted pilot areas would gain about £650m, of which London would receive £311 and Berkshire £43m. “This would still represent an increase in core spending power of around 2.7% across all pilots,” the IFS said.
While tier splits among those involved in pilots have been made public, the specific pooling arrangements that determine how extra income will be spent have not. The IFS said that was surprising. It gave an example of the set-up in Berkshire where each partner will “nominally retain 99% of locally raised revenues (the remaining 1% is allocated to the area’s fire authority)” but added it had obtained a document which showed “in practice ‘the authorities themselves propose to retain only 30% of any additional resources retained within Berkshire’ and the pilot as a whole will invest £25m of locally retained revenues in strategic infrastructure”.
The IFS’s report said the “scope for learning from the pilots is likely to be limited”, as the largely self-selected pilots are “unlikely to be representative of all councils”. The ‘no detriment’ clause, which means councils will be no worse off than they would have been under the 50% rates retention scheme, means they “are not facing the risks” they otherwise would and might therefore take different decisions to mitigate those risks.
Neil Amin-Smith, research economist at the IFS and another author of the report, said: “Given pilots are guaranteed for a year only, and councils are prevented from losing out, the potential for learning about the impact of a long-term 100% business rates retention scheme is limited.
“Their main purpose may be more strategic. They allow the government to maintain the momentum for reform, given it shelved plans to roll out 100% business rates retention across England after the June 2017 general election.
“The combination of the voluntary nature of the pilots, and excess demand from councils to become pilots, may mean the government can use them to make changes to the scheme that would be much more controversial if imposed centrally.”