Summary

The devolution of business rates aims to incentivise economic growth by aligning fiscal interests with growth requirements. The assumption is that allowing cities to have more control over business rates would encourage them to do what is necessary to increase this income stream, which would also help deliver economic growth.

But while the steps to achieving growth are different across cities, the business rates incentive is the same everywhere. The business rates system rewards the expansion of commercial floorspace. This is the appropriate thing to do in already successful cities, where demand is high and more needs to be built.

But in weaker cities the incentive will translate into local authorities allowing the development of large, out-of-town premises, matching the demand for lower value activities, instead of adapting their economy and attracting higher value and more productive businesses.

Adjusting the system

There are several adjustments that can be made to the system to make sure that (i) it incentivises long-term growth in a greater number of cities and (ii) it rewards the contribution of other areas in the country:

1. Allow local authorities to capture commercial property’s value uplift. This will encourage cities to improve their business environment and attract more knowledge-intensive industries, rather than just expanding floorspace.
2. Simplify the system to make it more efficient and responsive. There are two ways to do this: (i) implement more frequent revaluations, which will make the system more responsive to market change, more predictable for businesses, and easier to understand; (ii) remove the cap on the total yield generated to allow local authorities to capture real rateable value growth and for more money to be generated and redistributed.
3. Allow places who contribute to share the reward and the risk. Within city-region economies, different areas play different roles, such as city-centres and industrial zones (i.e. areas home to businesses) and residential areas (i.e. areas home to workers). By pooling business rates revenues together, local authorities that are mostly residential would have an opportunity to benefit from the economic success to which they contribute