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Councils ‘ill-equipped’ to cope with volatility of business rates retention, report warns

Councils ‘ill-equipped’ to cope with volatility of business rates retention, report warns

🕔24.May 2016

The Government must make sure poorer cities and regions do not lose out when local councils are permitted to retain a hundred per cent of business rates, two leading think tanks have warned.

Core Cities UK and Metro Dynamics say the localisation of business rates is a welcome step towards fiscal devolution for town halls, but warn that some local authorities are ill-prepared to cope with “a volatile source of income”.

Councils will be able to keep all of the business rates they collect from 2020, when the Government will scrap the direct grant it has paid to local authorities for decades.

The measure has been presented by Chancellor George Osborne as a means of handing councils greater financial freedom. He believes authorities will be given an incentive to create jobs and encourage economic development in order to maximise business rates growth.

But the Metro Dynamics report, which can be found here, says plans to devolve business rates, while an important stage towards fuller fiscal devolution, needs to be managed carefully as the rates are a volatile source of income that can vary according to how a local economy is performing with local authorities ill-equipped to absorb short-term economic shocks.

Metro Dynamics argues that business rate localisation should be part of a basket of fiscal measures devolved to cities.

The report follows the disclosure that Birmingham city council, the country’s largest authority, is running a £42 million business rates deficit caused chiefly by firms appealing against the size of their bills.

The £42 million deficit consists of £24.5 million for 2015-16 plus a historic deficit of £17.6 million after allowing for backdated appeals.

Core Cities UK is calling for a “workable and fair solution” to be found to Business Rate localisation.

Any additional responsibilities handed down within the new system must focus on helping cities to tackle productivity and reform the public sector to achieve better outcomes, in ways that match the distinctive local needs of different places, the think tank added.

Manchester-based Metro Dynamics’ report, A Call for Greater Fiscal Autonomy for Our Cities, argues that cities should be able to retain more of the money raised within them to spend locally and in the longer term should move towards fuller fiscal devolution – in line with cities across Europe and the rest of the world.

The report states that the Government’s immediate priority should be to achieve ‘sensible reform’ of business rate retention at a local level – making sure city finances are not disadvantaged in the short term.

Sarah Whitney, a director of Metro Dynamics, said:

Fiscal autonomy is not about imposing new taxes. It is about giving local authorities greater control over their finances so they can produce better economic outcomes than are currently possible within the existing highly-centralised system of local government finance.

The only two taxes over which English councils have any degree of control are council tax and business rates. Most cities within the OECD countries have control over many more taxation streams and many receive direct allocation of national or federal taxes.”

Business rate localisation is a welcome start – but we need to recognise that fiscal devolution poses significant additional risks and burdens as councils wrestling with the complexities of this reform are finding out. For this reason, cities need further fiscal freedoms to help them manage this risk.

The report points out that the UK is way behind when it comes to fiscal freedoms for major cities. Tokyo retains 80 per cent of the taxes it raises compared to an estimated nine per cent for English cities from 2020 even after business rate devolution. The OECD average is around 25 per cent.

The report goes on to recommend that:

  • Central government, London and Core Cities UK, with representation from the Local Government Association, should come together to deliver a reformed business rate system.
  • Government should commit to a longer term – but timetabled – programme of wider fiscal reform focusing on local authorities retaining more of their tax base.
  • Government should initiate a series of events with city authority and private sector representatives, setting out the principles and operation of fiscal devolution.
  • Government and cities should seek cross-party support for principles and progress of longer term fiscal devolution, ensuring space within any future legislative schedule.

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