Overall, it is a first step in the right direction towards more self-sufficient cities that foster economic growth. However, the design of business rates retention introduces perverse incentives and leaves out some places — the urban outliers — which do not stand to benefit much from the local retention of business rates revenues.
One perverse incentive, called the “delay effect”, is created through the 10-year resets of the system. This will penalise local authorities for bringing development forward late in a reset cycle because the retained revenue after reset is uncertain. This incentivises authorities to delay a development’s completion until the beginning of the next reset period.
The second issue lies in the exclusion of rateable value increases from rates retention during revaluation and resets to the system. This strips out growth in rateable value that occurs from public realm and transport improvements. This will effect cities which would benefit more from investing to support their existing business stock rather than seeking to expand it.
Reducing the effects of these elements would create a fairer and more inclusive system which rewards cities that support economic growth in a variety of ways.
Senior Consultant, City Economics at Arup