Fiscal reform in local government

Posted on August 25, 2016 · Posted in Accounting & Business

There is nothing new about reform in the world of local government – far from it.  Local government reform is so common that it sometimes seems more like permanent revolution.  Major reorganisation in the 1970s was followed by the poll tax, the council tax, more reorganisation, city mayors and, recently, devo.  Now comes another reform that might sound less sexy, but is equally important: the retention of business rates income.

 

When Chancellor George Osborne announced the policy at the Conservative Party conference last year he grandly called it the “devolution revolution”.  If councils keep their business rates income, he argued, it would provide real incentives to grow their local economies.  At present, business rates – which raise £26bn a year – are collected by councils, but only half is retained within local government.  The balance goes to central government, which then redistributes it to local authorities, in part through revenue support grant.  The local government share is also partly redistributed between councils through a system of tariffs and top-ups to take into account local spending needs.

 

Bar a major u-turn, local government will retain all the tax income it raises by the end of this Parliament.  Government is in the process of issuing a series of consultation papers in advance of legislation being approved by Parliament.  Liverpool and Manchester are piloting 100% business rates retention.

 

This reform will be accompanied by the phasing out of many grants from central government, plus the transfer of additional responsibilities from central to local government.  Importantly, though, it will be accompanied by a new needs assessment exercise which will continue to involve richer councils handing over some of their business rates income to poorer authorities.  The details of how the new ‘fair funding’ exercise will work are being consulted on.

 

According to the government, the new arrangements will lead to an additional £12.5bn of business rates revenue being spent on local services.  This claim, though, has been challenged.  London Councils argue that the arrangements potentially lead to a funding shortfall of £2.4bn, because of the intended transfer of responsibilities to local authorities.  The big ones potentially are public health, at a cost of £3.1bn, and Attendance Allowance (which meets the personal care needs of people with disabilities), which would cost £5bn.

 

There is anxiety across much of English local government about how the arrangements will work.  The House of Commons Communities and Local Government Select Committee is particularly concerned about the “massive problem” of the cost of appeals to business rates and the amount of money councils have had to set aside – £1.75bn, over the last three years – in case an appeal is successful.  The government has responded by committing to improving the appeals process, removing the capacity of businesses to launch unrealistic appeals.

 

But the committee is also worried about the redistribution of rates income, following a period in which rates support grant changes have particularly hit the poorest areas.  Committee chair Clive Betts explains: “The government must address the alarm of councils, which are understandably worried that their spending needs and the funding of their local services will not be supported by their business rates revenue.”  His committee has called on the government to explain how it will protect councils that rely on redistributed business rates and fear they will lose out.

 

Sir Peter Soulsby, the elected City Mayor of Leicester, is one of those concerned. “It is too soon to say what the proposals will mean for the city council’s budgets, as much depends on the detail of how the system is implemented,” he says.

 

“In principle, I welcome the retention of business rates: if done properly, it will be a tool to support the continuing economic regeneration of our city. Nonetheless, the key decisions in relation to business rates will continue to be taken by central government. In the long term, I would like to look forward to a genuine widening of the local tax base, which would give us greater financial resilience and enable us to plan with greater confidence in the interests of the city.

 

“What we must not forget is that the ability of individual authorities to raise rates income is not related to their need to spend – some of the more affluent authorities are able to raise the most rates. The Government recognises this and an assessment of need will be built into the system when it is first created. How this is done, and how changes in need are reflected in the future, will be crucial to the city’s finances. I very much hope that urban authorities will not be disadvantaged through the Government’s desire to provide additional monies to rural areas.”

 

Cllr Nick Forbes, senior vice chair of the Local Government Association, makes a similar point. “It is important for the new system to be implemented in a way which balances rewarding councils for growing their local economies, but avoids areas less able to generate business rates income suffering as a result,” he says.  “Decisions over which grants and responsibilities councils will have to pay for from any extra business rates income are also crucial.”  He adds that councils should be given responsibility for those services – such as skills development and public transport policy – that help to grow their economies.

 

Councils will have greater flexibility to reduce the business rates tax rate in order to attract investment and support local economic growth.  City regions with combined authority metro mayors will be given an additional power to raise an infrastructure levy, providing they have support from local businesses.  The LGA is calling for that power to be extended to all councils.

 

Professor Tony Travers, director of the London School of Economics’ LSE London research project, says the important thing to recognise is that while government is acting as if it is clearly going ahead with the reform, “there is a big question mark hanging over this”.  He explains: “George Osborne is the author of this and the Northern Powerhouse, and if he doesn’t remain Chancellor we will only find out then if everyone else [in government] buys into this”.

 

The major challenge, adds Travers, is how business rates income is redistributed in ways that are fair and meet the diverse needs of different local authorities, while providing effective incentives to councils to grow their local economies and incomes.  “Once you open the Pandora’s Box marked spending needs assessment inevitably everyone will think they can make an argument that will lead to them being better off – but they can’t because it’s a zero sum game.”