Dropping business rates devolution now would be a backwards step by the Government
Last week’s Queen’s Speech made no mention of the Local Government Finance Bill, suggesting that the business rates reform has been put on ice, at least for the time being – and that the UK will continue to be one of the most centralised countries in the developed world.
This is a concern for a number of reasons. Firstly, business rates devolution could play a crucial role in supporting the development of local economies, by enabling local authorities to capture the fiscal benefits of economic growth within their area, therefore giving them a greater incentive to take the right decisions to improve their economy. There is no such incentive under a full-grant system of funding, because local authorities generally receive an amount of money that corresponds to their needs, regardless of how well they perform. In other words, fiscal devolution rewards good policy practices by increasing local revenues. So far the move towards a 50 per cent retention structure, in place since 2011, has not been substantial enough to generate this incentive.
Secondly, business rates devolution would give local authorities more control over some of their revenues and how they spend them. This greater control is important from a policy point of view, as it means local authorities can develop more tailored policies, moving away from the one-size-fits-all model. From a political perspective, it also results in stronger accountability for local government. Currently in the UK local taxation only represents 5 per cent of total tax revenues, compared to the OECD average of more than 10 per cent.
But this also comes with challenges, which may explain why the Government has been relatively wary about moving towards more devolution.
One difficulty is making sure the system is well-designed to incentivise and reward good policy decisions to the largest number of places across the country. The system as it is currently constructed mainly rewards the building of more floor space, but this isn’t an appropriate solution everywhere because of the varying economic performance of places across the country. Another challenge is to make sure that the weakest economies will still be supported by this funding mechanism, without hindering too much the growth incentive in more successful places.
Of course, cities already possess a number of tools to increase their revenues – with or without business rates devolution – as our latest report on public assets illustrates. By adopting a more entrepreneurial approach to using the assets at their disposal, cities can support economic growth, increase their tax base, and attract more businesses and jobs.
Nonetheless, business rates devolution would be a hugely important step towards reversing decades of centralisation in the British political system and giving cities more of the control they need to boost their economies. Scrapping these plans now would be a backwards step by the Government. It is unclear if the plan to devolve business rates is has been dropped or simply postponed to later. But given how far discussions went – pilot areas to experiment the new system had been launched and are to be maintained – seeing the legislation reintroduced is a conceivable option.
Our upcoming work will reflect on those issues set above, and will focus on how business rates devolution can be designed so that every city and local authority across the country can get the most out of devolution – watch this space for more details in the coming months.
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You are right to stress the importance of rethinking property taxation, and we need to look at Council Tax and business rates together. A useful study testing out the application of Land Value Taxation in Oxfordshire found that it would lead to owners of larger houses paying more, and small businesses much less.
We need to learn from the cities that have outperformed the UK, and show how changes to property taxation would benefit the great majority. My TCPA pamphlet Smart Growth and Intelligent Local Finance sets out some proposals that have worked elsewhere.