Over a year in the making, the Local Government Finance Bill is finally taking some shape. Before everyone starts partying like it is Jubilee weekend, there are some really important details to consider.
First, I have some kudos to give for the Bill. There are some positive changes from earlier versions:
- Overall, there is more recognition that this Bill can be used to incentivise growth (among Government’s other goals).
- The Government has come forward with a rather large incentive of 50 percent retention of additional business rates, well in line with what the Centre for Citieshas been suggesting.
- Local authorities will be able to pool their business rates, reducing volatility and giving more opportunities to fund cross-border infrastructure and skills programmes. There is also a greater emphasis on pooling across a functional economic area.
However, there are some issues we think still need some work.
- Clarity: The design of the system is complicated and unclear.It will be difficult for authorities (and voters) to understand just how much additional development will benefit them, which reduces the effect of the incentive.
- Certainty: The system is designed with an initial 7 year reset period, which can be changed at a later date. This means the most certainty of income an authority will receive for a new development is seven years, and this may lead to a delay incentive. I have previously argued that at least 10 years between resets—preferably 20—would provide the certainty needed for authorities to act on the incentive.
- Rewards: The system only rewards authorities for building new commercial property; it doesn’t incentivise converting old properties to suitable uses or investing in the public realm. To ensure the policy encourages business growth everywhere, a more compreshensive system would reward different development improvements that increase property values.
Now, the onus is on cities. Given the complexity of the Bill, local government will need to understand how the system works and how their city can benefit from bringing forward new development (not an easy task).
Also, cities may have to work harder in the current economic climate to realise the benefits of rates retention, as building rates are lower outside London and the South East. But, those authorities which really take this on will see benefits to their cities, and that’s the point – rewarding places for taking difficult decisions and going for growth.
Note: Evidence demonstrating the potential effects of the business rates retention incentive have been published using supporting evidence from previous Centre for Cities research.