Proposals in the new bill could lead to perverse planning incentives
Just when the news is aflutter with stories of challenges with the planning system, Government’s proposed business rates retention system could introduce a new planning problem.
Andrew Carter and I have been paying close attention to the Local Government Finance Bill. My latest report, Urban Outliers, dives into the deep abyss of the Bill to explore two small issues which can have big implications for economic growth. I discuss one here.
It starts with the fact that business rates will now be the funding source for local social care, so the amount of business rates local authorities retain needs to be kept in line with local need. To do this, Government will ‘reset’ the amount of funding local Government retains in the proposed business rates retention system every 10 years.
At the same time, though, the retained business rates revenues have another goal of incentivising more development. Thus, the reset creates unhelpful uncertainty, as local government does not know how much of their rates they will retain after each reset to the system. This means that, for any given development, local government will only fully benefit from business rates retention before a reset, as any growth after that has the potential to be stripped out and sent to central Government.
In plain English: local government faces an incentive to delay developments until the beginning of a reset cycle. The benefits of pushing completion of a development back two years from year 8 in a cycle can be quite large, as local government is only guaranteed a portion of the business rates increase for 2 years, rather than 10 (if completed in the first year of a cycle).
The daunting part is that, if the incentive works, we could see waves of developments delayed across the country. This could bring instability to local government finance, treasury intakes, and businesses alike. These are not insignificant incentives authorities face; there is a real benefit to delaying development and business growth.
We do not argue that social need should be ignored at the expense of business growth. Rather, we argue that the mechanisms created by the resets to the system will create negative incentives for local government, business and the community at large, and they should be addressed. Now is the time to put our thinking caps on and work together to come up with clear and innovative solutions to these problems. Who’s with me?
Senior Consultant, City Economics at Arup
Leave a comment
Be the first to add a comment.