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Rich areas to gain while the poor lose out under business rates plan, study warns

Rich areas to gain while the poor lose out under business rates plan, study warns

🕔20.Jun 2016

Another report has poured cold water over Government plans to devolve 100 per cent of business rates to English councils, warning that poorer areas will lose out under the current proposals.

A study by the thinktank IPPR says the Chancellor’s proposal to scrap direct grants as a system of funding local government and instead allow councils to keep all of the business rate income they collect risks failing by not providing strong incentives to all authorities to grow their local economies.

According to the study, richer councils will have a far greater incentive than poorer areas to attract new businesses, leading over time to a greater concentration of public investment and resources in wealthier areas of the country.

After the first year of the new scheme which begins in 2020 councils will be able to keep all of the money they raise from business rates irrespective of how much cash they need to fund services.

At the moment, councils can keep only half of business rates income and the Government imposes a levy on “disproportionate growth” with funds being channelled back to poorer authorities.

IPPR is warning of a “benefit trap scenario” for poorer councils who find they cannot increase their income significantly despite doing everything the Government asks of them.

The study contrasts Conservative controlled South Bucks council with Labour controlled Barnsley.

If business rates growth in South Bucks was two per cent, its income would grow by more than 50 per cent. A two per cent growth in business rates in Barnsley would yield just 0.8 per cent more in the council’s income.

IPPR is proposing a system that would guarantee all local authorities always see their incomes grow in line with local economic growth. For example, if business rates increase by two per cent, then income will also increase at the same rate.

Alfie Stirling, Research Fellow in economic policy at IPPR, said:

We welcome the further devolution of taxes in England, and across the UK as a whole, and agree with the government that further business rates retention needs to be part of an ambitious plan for the future. Handing over the keys for local resources to local decision-makers will boost their incentive to improve their local economies.

But the Government’s current announcements give serious cause for concern. They risk trapping poorer councils in a cycle of weak incentives and weak economic growth, which would lead to underfunded services and less vibrant high streets.

We urge the government to consider an alternative that ensures devolution works for everyone.

The Government has announced that over the summer it will hold a consultation on its business rates proposal.

Ed Cox, Director of IPPR North, said:

The UK has one of the most centralised and constrained systems of public finance in the developed world and this is a key reason why we also have one of the most geographically imbalanced economies.

While the move to incentivise local economic growth is a good thing, it will be a challenge to balance this with a system that is both fair and effective. Government should consider adopting our scheme, which ensures incentives for growth are spread equally across the country.

We are encouraged by the government’s plans to move to a system of 100 per cent business rates retention for local councils, but we also urge the government to go much further with a more holistic approach to fiscal devolution.

The IPPR report is the latest in a line of critical studies of the rates retention plan.

Last week MPs on the Commons Communities and Local Government Committee said the scheme was fraught with difficulties and might leave some councils worse off.

George Osborne has claimed the new system will give town halls an incentive to concentrate on economic regeneration, attracting new businesses and creating jobs, and improving their finances at the same time.

But a major sticking point according to the MPs is the increasing trend by firms to appeal against their business rates bills. Councils are forced to set aside huge sums of money while the appeal is heard, which can take several months, and then have to cover half of the cost if the appeal is successful.

The MPs were also concerned about how business rate income will be redistributed by the Government from wealthier parts of the country to in an effort to make sure poorer areas do not lose out.

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