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 will encourage them to do what is necessary to increase this income stream, which would also help deliver economic growth.
For cities to be successful in the long term, they must adapt and respond to changing demand. In today’s economy, this means providing the appropriate environment to help develop and attract knowledge-based activities, which are more productive. Some cities are already successful at attracting knowledge businesses and workers because they provide the right environment for them. Others face greater difficulty and need to achieve a more profound reshaping of their economy.
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.
This means the incentive reinforces the status quo. Cities that are already performing well are given the right incentive to support growth (by building more), but cities that have weaker economies do not get a financial reward if they try to improve their business environment ahead of demand.
There are several adjustments that can be made to the system to make sure that it incentivises long-term growth in a greater number of cities and it rewards the contribution of other parts of the country:
- 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.
- Simplify the system to make it more efficient and responsive. There are two ways to do this:
- Implement more frequent revaluations, to make the system more responsive to market change, more predictable for businesses, and easier to understand;
- 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.
- Allow places that contribute to share the reward and the risk. Within city-region economies, different areas play different roles, such as city-centres and industrial zones (home to businesses) and residential 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.
Although these adjustments would help by making business rates devolution benefit a larger number of authorities, more needs to be done to assure financial sustainability locally. The over-reliance on business rates means that not all local authorities will have the ability to increase their revenues. Therefore creating a more comprehensive local finance system, with a set of devolved taxes and redistribution mechanisms, will be necessary to support places in the future.