The Government has introduced two new policies to rebalance local decision making in favour of development. The New Homes Bonus (NHB) offers local authorities a payment for each additional house built and the Local Government Resource Review (LGRR) will allow for the retention of business rates. These new financial incentives for growth are certainly a step in the right direction. Together, the reforms mark a fundamental shift in the way that local government in England is financed, incentivising local authorities to be far more pro-growth and pro-development.
In a complex world, no policy will be a catch-all for the challenge of increasing the supply of residential and commercial property. Yet, with the right design, the NHB and LGRR can create financial incentives for growth that benefit both the residential and business communities of Britain’s cities, and the UK economy as a whole.
Key policy conclusions and recommendations
• Our analysis suggests that local retention of business rates could create a strong incentive for growth. This can be illustrated by the decline in the growth rate of commercial space, and increase in business occupancy costs, following the nationalisation of business rates in 1990.
• The Government must be bold with its proposals. In the longer term, the shift to an incentive-based system will create both relative winners and losers. Yet the majority of cities should still see growth in their local business tax base – 55 out of the 56 English cities saw their business rate tax bases grow between 1999 and 2010. We think the potential economic benefits for the country justify this trade-off between redistribution and national economic growth.
• To be effective the incentive for growth needs to be well designed. It needs to be large; strong at the margin; contain no thresholds; incentivise the right behaviour; target the decision maker; be simple and transparent; and long term.
• All local authorities should be allowed to retain a fixed proportion of the growth (40-60 percent) in their business rates, indefinitely. This would create a strong, simple, long-term incentive to support development and economic growth.
• To ensure growth enabling infrastructure can be financed, a mechanism needs to be created to enable long-term pooling of some of the business rate revenues at the Local Enterprise Partnership (LEP) or city regional level. Government should create an additional bonus for business rate growth committed to the LEP level for infrastructure investment.
• The Government’s approach to incentivising additional housing delivery with the NHB is welcomed. However, as it is currently configured, the NHB looks to be too small to sufficiently increase the housing supply. The Government’s own calculations estimate that the NHB will increase supply by just 8 to 13 percent. Our analysis suggest that it will be too weak an incentive to increase house building in the areas and cities of the country where there is the highest demand.
• To improve its effectiveness, the NHB needs to be increased in size – preferably tripled. It should also be targeted at those residents most affected by new housing development.
• The New Homes Bonus needs to be placed on a permanent legal footing. To make the New Homes Bonus work properly, the amendment to the Localism Bill that allows financial considerations to be material in planning decisions should be preserved.
This report is part of our research strand on financial incentives, supported by CB Richard Ellis and SNR Denton.
Senior Consultant, City Economics at Arup