London shouldn’t be allowed to keep all its business rates – yet

Full business rates retention for the capital is unfeasible without an economic transformation in other UK cities

Earlier this month the Mayor of London Sadiq Khan and the city’s borough leaders announced new proposals to pool business rates revenues starting next April. This follows the Government’s call to encourage local authorities to pursue pilots of the 100 per cent retention system, which should be implemented in 2020. Under the proposal London would keep 100 per cent of the growth in business rates revenues generated over years, but not 100 per cent of all business rates generated locally: it would still pay a fixed tariff to redistribute some of business rates receipts to the rest of the country.

However, leaders in the capital are hoping for more control over business rates in the future. Claire Kober, who is chair of London Councils (the umbrella body for the capital’s local authorities), framed the new proposals as “a key moment” in London’s “journey towards 100 per cent business rates retention”. But what impact would full retention of business rates have for London and the rest of the country? And would it be feasible or desirable economically and politically?

Currently, £6.8 billion a year is generated in business rates in London, of which about £3.3 billion is retained by London boroughs and the GLA, and £3.5 billion is redistributed to the rest of the country.

The London Finance Commission has suggested that any deal for full business rate retention in the capital would initially be revenue neutral. This means that in exchange for the right to keep those extra £3.5 billion, London would face an equivalent reduction in grants from central government, which is currently worth £11.9 billion. So the operation is essentially a swap of £3.5 billion from grants to business rates and vice-versa.

London would see two benefits to this. First, it would gain more responsibilities. Some of the powers that are currently funded through a specific grant – that is, a grant that usually comes with restriction on how it is spent – would now be funded through a local tax, meaning that the capital would have the power to decide how to spend it. Second, London would see its revenues vary over years in line with business rates receipts. Given that these have been steadily increasing in the past years, the capital would have the potential to grow its budget through control of business rates.

However, the benefits are less clear for the rest of the country. While initially there would be no change in funding (because London’s business rates contribution would be replaced by the amount of grant it forewent), over time other places would not benefit from the year-on-year growth of London’s tax take as they do currently.

As such, for the national business rate system to be sustainable without London, the amount of business rates collected outside the capital would need to grow significantly. This means the economic performance of other parts of the country, and the subsequent tax take in them, will need to improve substantially. Business rates devolution aims to encourage this, but more will need to be done to tackle long-lasting regional and urban issues.

It is essential to make sure London has enough autonomy to deliver adequate services and play the strong role it is expected to play in the national and global economies. But full retention of business rates, with no form of redistribution, raises questions about the financial feasibility and long-term sustainability of this for other places. The key to the puzzle is to make sure growth occurs in the rest of the country, so that the system can support itself without relying on London transfers. This will take a long time to happen. But unless this is achieved, London’s aspirations for further autonomy are likely to be vain.

 

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