05Conclusions and policy recommendations

To remain successful, cities must adapt their economy to changing demand – they must create the appropriate environment to help develop and attract knowledge-based services.

But cities are in different positions when it comes to achieving this outcome, meaning that what they need to do to support growth varies. Successful cities are already attractive to high-value activities and need to build more to sustain growth. Weaker cities are less able to attract those sectors and need to work on providing the relevant conditions to attract them in the future.

The current business rates incentive, by only rewarding local authorities which allow the development of additional property, is most relevant to only a handful of successful cities and does nothing to help weaker performers to turn around their economy.

By making a number of adjustments, the business rates incentive could help more places pursue a long-term growth strategy. To make the most of the growth incentive and maximise its impact across a wider number of places, the following changes should be implemented:

  1. Allow local authorities to capture the value uplift of commercial property. This will encourage cities to improve their business environment to attract more high-value services and 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, to 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 that contribute to share the rewards and the risks. 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.

While these adjustments can help business rates devolution to benefit a larger number of local 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.