Andrew Stunell MP writes: Re-localisation of business rates will give councils real financial freedom

Yesterday’s announcement of our plan to re-localise business rates is one of the most significant reforms announced by the Coalition so far. Ok, not as newsworthy as the phone hacking scandal, but it’s big news for local democracy nonetheless. It marks another fundamental shift from central control to local responsibility.

Under the current local government funding system, Whitehall dishes out grant allocations to councils each year based on an incomprehensible formula that is far too complex and lacking in transparency. Most of this money is funded by the business rates, collected locally, but funnelled centrally, and then reallocated. Councils are left at the whim of the formula-setter in Whitehall, and there is no incentive to promote business growth either. All you get are the extra HGVs, but none of the rates income! All this is about to change.

So what are the main things that Liberal Democrats need to know? It’s simpler, fairer, and puts real power back in the hands of local government. Under the new system business rates will stay in the area in which they were generated up to the level of existing formula grant (so in 2013 every council will start with the same money they would have got with formula grant). After that future growth in their Business Rate will be retained by the Local Authority in which it was paid, providing councils with a real incentive to go for growth. Local Authorities may even choose to work together and “pool” to share the benefits of growth. The London Boroughs are intending to go down this path and the Greater Manchester Authorities, among others, are also discussing the possibility.

So far so good, I hear you say. But what about the safeguards? How will we stop authorities with low business rate bases, and high levels of deprivation from being unfairly hit? That was my top priority in the Department as the scheme has been worked up. As well as a scheme that provides realistic incentives, we have to have one with effective equalisation. I believe we’ve succeeded. Firstly, no local authority will lose out in the first year of the scheme. Nick Clegg made this commitment publicly at the recent LGA conference, and it’s one we’ve been determined to achieve. In order to make this a reality, central government will calculate a baseline in 2013/14 (the first year of the new system) for each local authority, which will be based on the Formula Grant funding levels in 2012/13.

Whilst most councils raise roughly the amount in business rates that they get in formula grant, there are outliers that bring in much, much more (think Westminster, and the City of London) and some who bring in much, much less (think Knowsley or Burnley). To balance this out, there will be a system of tariffs and top-ups to ensure that the poorer authorities are protected, and the richest ones don’t see disproportionate growth. The tariff and top up grants would be self-funding and remain fixed in future years.

We’ll also be introducing a system of insurance against excessive gains or losses, so that an authority doesn’t lose out disproportionately if a large business fails in their area (such as a factory or steelworks). This will be paid for out the tariffs on the most well-off authorities, and depending on the levels of money raised, these tariffs could also redistribute resources to, or fund other schemes directly in authorities with lower growth. There will also be a regular revaluation (every five years) of the rateable values of businesses, and the system will be adjusted accordingly to make sure it remains up to date. The system would allow the option of a reset if it was felt that resources no longer met need sufficiently within individual local authority areas. This is fair, and ensures that the most deprived authorities aren’t left behind.

It should also be noted that over the last few years, many Local Authorities in areas of high deprivation have also been in areas of above average business growth, and so would benefit from the new system. Liverpool saw an average increase in growth of its business rate base of 5.6% between 2005/6 and 2009/10. Sheffield saw 3.4% growth, Newcastle and Stockport both 3.6%, Manchester 5.7% and Ed Miliband’s own area of Doncaster saw 5.9%. In addition to the tariffs and top-ups providing the most deprived areas with a strong safety net, there is much scope for these authorities to benefit from growth in their own areas.

Further to the reforms of Business Rates, we are also introducing Tax Increment Financing as an option for local authorities. Announced by Nick Clegg at out last Autumn Conference, the reforms will give councils the ability to borrow against future business rate revenue to help fund major infrastructure projects.

The re-localisation of business rates is a big step towards the empowerment of local communities. We think we’ve got a pretty solid and workable framework that balances equalisation with growth. But we’re open to views on how we can make it better. The formal consultation on our proposals is an important part of this process. You can find the link here. There is also a Plain English Guide to the Reforms, which is available here.

If you think we’ve got aspects of this wrong, tell us. I want to hear people’s responses loud and clear in the coming weeks. This is an important reform. It’s crucial we get it right.

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13 Comments

  • LondonLiberal 19th Jul '11 - 3:26pm

    Thanks Andrew. This is a good idea, but not without pitfalls. I’m glad to see you’e working hard to ensure that Westminster City Council doesn’t benefit from a windfall of £1bn while others lose out.

    Now if only you’d stop taking credit for Labour’s 65,000 social homes (at genuinely ‘affordable’ rents, i might add)…

  • Joseph Donnelly 19th Jul '11 - 10:26pm

    Completely agree with this Andrew Stunell.

    I would go further with localisation of tax raising powers and autonomy to councils but this is a good first step.

  • One of the big issues of “principle” here, of course, is again, redistribution (and by implication, what we mean by fairness). In the Lib Dems, many of us activists have always accepted that “fairness” often means redistribution. Politicians of the right (and this is sometimes true of “Orange Bookers”) cannot accept this, and wish to regard existing wealth or what is already owned as not fair game for redistribution, who may, according to taste, be “scroungers”, “workshy”, “corrupt” etc etc.

    This is an issue at all organisational levels – at individual level, where welfare changes are currently going against redistribution, at Council level, where Andrew has told us, he is aiming for a settlement which retains an equalisation (redistributional) element, at EU level, where right wingers attack ideas that we might actually redistribute resources from richer to poorer European countries (and use nationalism as a way of stirring people against such redistribution). On a wider scale, the debate about overseas aid feeds into the same principle, and the opposition of many (who are richer, and from whom resources may be redistributed) – it is a matter of pride that the Government is standing firm on this particular attempt at a little more equal situation.

    The current media furore is interesting, in that Murdoch and other rich media proprietors from various national backgrounds have used their media constantly to preach against anything which might realistically redistribute some of their and other similar people’s wealth. I would like to think we could get a more balanced debate as a result of the developments we are seeing, but am not hugely optimistic.

  • Paul Buchanan 20th Jul '11 - 9:46am

    Couldn’t disagree more.

    Shame on you Stunnell, with your experience, you should know that this is no more than a publicity stunt – once again shuffling the deck chairs on the Titanic whilst the ship goes down, and as for allowing authorities to extend their already maxed out borrowing against “future business rates”, well, that is just criminal and makes what the bankers did to the economy seem positively beneficial by comparison.

  • Mike Shellens 20th Jul '11 - 10:55am

    Now let me see if I have got theis right. We are to sweep away the existing, hated system because of its incomprehensible formula and lack of transparency.
    We are to replace it with a much better system that has tariffs andthen top-up and insurances to be paid for out of the tariffs, all unspecified. So no complexity or lack of transparency there then. But what is clear is that once we have made reasonable gains locally there is no incentive to make any more ’cause they will be nicked to help out other less successful authorities. Furthermore, there is a revaluation every 5 years which risks sweeping away all my gains.
    To cap it all we have the threat of a reset. So the rational business will chose to locate in “successful” authorities to avoid being clobbered by a reset where” resources no longer met need sufficiently”.
    Dancing in the street? I fear not.

  • Andrew – Can I ask you to clarify:

    1. You are not re localising all business rates (which would mean Westminster Council being able to abolish Council Tax entirely and indeed pay money to its voters if it wanted!) but re localising future growth in business rates? Which makes sense.

    2. No one loses out in the first year. How do they lose out after that? Presumably that is if their total income from business rates falls?

    3. If Councils can now (quite rightly), borrow for investment against business rate income why will you not let them borrow for investment in Council Housing against future Council Rental income (now that you have thankfully ended the disgraceful system in which former Labour and Conservative Governments stole Council Rent money away to pay for everything from Housing Benefits (under Thatcher) to Olympic infrastructure (under New labour)?

  • Andrew Stunell MP 20th Jul '11 - 5:22pm

    Paul is right – the scheme gives each council the same starting figure of business rates as they would have had under a continuation of the formula grant system, and then allows them to keep the locally-generated increase in future business rates. For later years there is what in effect is a progressive tax system proposed so that high gainers will pay into a fund to protect others from ‘shocks’. Interested persons can view the Consultation on line at the link in the article above, and there will be eight supporting technical reports published next month which give a huge amount of background information and an interactive gizmo that will allow you to assess the impact of different parameters on your authority before you send you views in.

    Optimism alert: whilst understandable suspicions that we are up to something are in fact completely wrong, it is important to remember that the Government remains committed above all else to closing the £400 million a day gap between revenue and spending. That means that the full expansionary impact of this long overdue reform will not come into play until after the current CSR ends in 2015. It is also the reason that unrestrained borrowing by local government is not going to be allowed.

    On Paul’s other point, it is worth remembering that the key reason we’ve got Housing Associations at all is that they are non-state institutions and so can raise money on the private market without affecting the UK’s public sector deficit. The people who make that kind of rule (in this case 35 years ago) are well above my pay grade.

  • Tony Greaves 20th Jul '11 - 10:18pm

    Not surprisingly I am concerned that the new system should not penalise resource poor councils. So far (on the basis of info provided) I am satisfied that this new system does not do that. This is what I have understood – someone will tell me if I’ve got it wrong:

    Andrew has a graph (also drawn for me by E Pickles last week!) that shows that a majority of Councils will not gain or lose much by keeping their business rates. There is a minority at each end of the graph and the intention is that the “big gainers” will have money transferred to the “big losers”.

    I was told that the first year’s evening out will actually mean that every council gets the same resources as it would under the present system (there will be an apparent cut for everyone because grants are being cut – the “no losses” is on what the formula funding would have been, not what it was the previous year – but it’s in year 3 when the losses to councils are the least).

    The evened out levels of resource will then form the foundation for changes in future years based on growth in business rate income in each area. (This could be pooled across say a county or an LEP).

    There will then be a second redistribution mechanism based on that growth in each area. I.e councils will keep most of the growth in business rates in their area but it will be top-sliced to provide redistribution to councils with no or little growth.

    I hope I have got that right. I suppose like everyone else I’ll have to read the whole thing in the next few weeks. But the coalition (and certainly the LDs) cannot afford any more redistribution from the poor to the rich.

    Tony Greaves

  • Tony Greaves 20th Jul '11 - 10:21pm

    One more point – it occurs to me that I do not understand how this new system will dovetail with the government’s CPR proposals to cut local government grants in year 4, by which time the new system will (on current plans) be in place.

    Tony Greaves

  • Local tax rates on businesses? TERRIBLE IDEA.

    It will be a race to the bottom with who can cut the fastest. The Neo-Liberal economic dream doesn’t work. I’m never going to vote Lib Dem again.

  • Andrew says that we have HA’s because they can borrow ‘off balance sheet’ -that is ‘off PSBR’.

    Surely many HA’s began as niche groups filling gaps in local social housing provision such as for disablity where the state sector was large and institutionalised in approach and others through ‘socially minded’ motives via community organisations such as the Joseph Rowntree Trust and organisations such as a Churches HA (for homeless people) I visited in Cardiff ? I have visited a number of good examples in all those categories.

    But Government policy over the last 30 years has deliberately changed the profile of the sector and the HA scene is now dominated by large Housing ‘companies’ in all but name. Many have lost their small, flexible local roots and become in effect national organisations managing many thousands of properties in widely scattered areas -much of it acquired at knock down prices in transfers from Local Authorities. Transfers which became all but compulsory under New Labour 1997-2010. Towards the end of that period even Government reports acknowledged that these ‘housing companies’ were not utilising their balances and borrowing power to anything like the degree expected, preferring instead to concentrate on managing existing assets and basing new build largely on taxpayers funding. Hence, as the Governments Barker Report spelt out, an average of only 23,000 new social houses a year were built during 1997-2010. This was only half the figure needed to even keep waiting lists static and completely failed to make up for the end of virtually all Council House building.

    If HA’s are to remain the Government’s preferred route for building social housing ‘because their borrowing is off balance sheet’ then why not direct all taxpayer support for local economic development to private sector bodies too? Their borrowing too would then be ‘off PSBR’ just like HA’s?

    But if genuine Localism means returning to LA’s the power to serve their communities needs by borrowing for economic development against future Business Rate income then why not the same common sense policy as regards borrowing against Council House rental income for building Council Housing?

    Council’s are locally elected and accountable -HA’s are neither. Public bodies such as Council’s also of course can borrow much more cheaply than the private sector (which is what Treasury rules count HA’s as) .

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