The decision to revive proposals to localise business rates, outlined in last week’s local growth white paper, shows ministers are serious about radically shaking up local government finance.
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Repatriating business rates is a move the sector has long called for. But, following the shelving of similar proposals in reports in 2004 and 2007 by then local government minister Nick Raynsford and Sir Michael Lyons respectively, some in the sector had grown sceptical.
There are a number of hurdles to be overcome before such a policy becomes reality
Last week’s paper confirmed that options to enable councils to retain locally raised business rates would be “considered” as part in the Local Government Resource Review, expected to begin at the start of 2011.
But there are a number of hurdles to be overcome before such a policy becomes reality. The influential business lobby has already voiced its opposition, while the practical problems of how to equalise between areas of varying resources remain as real as ever.
Business secretary Vince Cable’s comments, following his speech to the House of Commons to introduce the white paper, appeared to offer hope that councils would not only retain money raised through business rates but also gain the discretion to set the level at which they are levied.
Asked by Clive Betts (Lab) if the government was considering the “complete localisation of business rates so that once again local authorities are able to control the majority of their resources”, Mr Cable said: “That is indeed exactly what we are considering, albeit with appropriate protections for business.”
Such protections could involve arrangements similar to those in place for the business rate supplement, where businesses are given the chance to vote on such an increase. The measure has yet to be used.
But CBI deputy director-general John Cridland said he was opposed to local authorities having any discretion over business rates at all. “Such a change would mean that businesses would face unknown varying levels of tax across the country,” he added.
Council discretionary funds
The issue of how to bring about equalisation between areas when the revenue stream that makes up the bulk of councils’ discretionary funding is likely to be more pertinent.
Before 1990, when rates were collected locally, a mechanism called the London Rate Equalisation Scheme was used.
Tony Travers, director of the London School of Economics’ Greater London Group, who wrote a paper submitted to the Lyons inquiry in 2006, explained: “At its simplest, the London Rate Equalisation Scheme was a way of taking some of the very high business rates from central London, redistributing them to the rest of London, then taking a bit of money away from London as a whole, so the whole country [balances].”
The paper also explained that councils could be split into two categories: those authorities such as Westminster City Council or the City of London Corporation that raise more through business rates than they spend; or those authorities that spend more than they raise in local taxation.
For example, an exercise carried out based on councils’ 2006-07 budgets, showed Westminster was the biggest contributor to the pool. It had a revenue budget of £207m but raised a huge £879.4m in business rates and a further £4.4m in council tax.
At the other end of the spectrum, Chesterfield BC was only able to cover 39% of its £13.3m revenue budget through locally raised taxation.
Mr Travers’s proposal was to provide - within a system of localised business rates - some form of pooling mechanism whereby resources were taken from the 107 authorities raising more than they needed and passed to the 341 authorities raising less than they needed.
He stressed that no matter how difficult the equations, the Department for Communities & Local Government team was capable of producing a workable system.
The real battle for councils will be political, rather than practical. Victory here could hand councils a substantial slice of the autonomy they have craved for so long.