Business Rates – the future state of local government

Promodo

June 14, 2016

Local government’s reaction to the prospect of business rates devolution has been almost as varied as the likely options for its distribution. All shade of opinion is represented in this debate from “we know its rubbish and we will prove it is” – through to  – “bring it on ….” . The more reserved amongst us hope that the details on the size and nature of the distribution will provide enlightenment, whilst others remain attracted to the opportunity for greater self-determination.

Far less complicated is the Chancellor’s reasoning for business rates devolution. It is guided by the same political principles as those used in the other instruments of devolution. Greater local control over public policy priorities within a much smaller local state (which stays small) and no real terms increase in taxation. Achieving these goals helps create the conditions for private sector growth and the opportunity for the market to rebalance the economy, it is argued.

There is nothing in this reasoning which should give comfort to local government that business rate retention at its inception fills the gap left from the demise of rate support grant, or that it provides for real local fiscal control. There is little prospect of it doing either. This position is being underscored by the Chancellor’s great ‘giveaway’ policies since the announcement of the transfer to local government: small businesses, shops and now newspapers are to benefit from extended business rate relief. After years of procrastination on business rate revaluation, it will be taken forward as part of the devolution process; such is the nature of the immediate devolution prize. However, like a handful of sand passed from one to another, much will have slipped though the fingers in the process of transfer.

The dilemma of course is the one faced on other aspects of the devolution agenda – the prospects for the future. Could this mean real opportunity to create greater prosperity and improve public service provision in the medium/longer term and do we want to own the opportunity of success and the risk of failure whilst we can expect so little in the short term? Is this prospect compelling enough to accept the meager position in the shorter term? These questions wont be answered by the distribution formula eventually applied to address business rates equalisation. It remains a deeply political one – do we aspire to have greater control over the destiny of our places, what is the price worth paying for this and what are the prospects for the future?

So how should we understand this opportunity and the risks, how do we evaluate the opportunity for private sector growth within our local geographies and over what timescale to achieve real terms growth in local state income and expenditure?

There is little to comfort us in modern history at least as it relates to the country outside London and the south east. Performance only points in one overall direction, that of economic decline and private sector loss against almost any measure you wish to choose. But is historical economic failure any measure of future success? If we change the conditions and the environment for growth then perhaps the past is no longer an indicator of the future? The devolution deals are at their core very similar as they all relate to the same conditions which have to change. The scale of the change being sought is wide and deep – education and skills, infrastructure, transport and connectivity, business support and regulation to name but a few.  The scale of the task is huge at the very moment when the resources to enable changed conditions are scarce and becoming scarcer. The historical underinvestment in the conditions for growth is not going to be addressed any time soon and business rates retention will not provide for this.

Whilst geographic rebalancing of the economy is not a realistic outcome of current devolution policy, there is a more finely balanced question as to whether faster growth is achievable at least in the medium term. At the heart of the business rate devolution policy is a desire to incentivise this opportunity. Replacing for many a dependency on RSG with a dependency on business rates makes local government expenditure dependent on the growth of the private sector. The need for private sector growth becomes not only a place shaping need but also a public service imperative. This is the real strategic opportunity and risk of business rate retention. Formulas for redistribution may offset some of the risk at least in the shorter term, but the new dependency will remain.

Dave Smith

Managing Director

Promodo Ltd

May 2016