Two thirds of businesses (66%) are in favour of allowing local councils to retain and distribute the business rates they pay, a new opinion poll published today has revealed.
Ahead of a government consultation into giving greater financial autonomy for councils, the Local Government Group commissioned YouGov to survey more than 500 small and medium sized business decision makers in England and Wales to test their attitudes to reform and the wider economic outlook.
The poll found that of those businesses:
- 66% preferred business rates to be retained by their council and distributed locally, compared to 20% who favoured them being sent to central government and redistributed according to a nationally determined formula
- 44% thought their local economic climate would remain the same over the next year; 32% believed it would worsen and 22% thought it would improve. Businesses in the South of England were the most optimistic (30%), those in the East were most pessimistic that it will improve (13%)
- 69% expected to have the same number of staff in a year’s time as they do now; 16% expected to have more and 13% less. Businesses in London were the most optimistic about recruiting staff (17%), whilst those in the East were the most likely to believe they would have less (16%)
The findings are published after a consultation by the LG Group of almost 90 councils found overwhelming support for reform of the business rates system.
Currently, councils collect business rates and pay them into a central pool, which is then redistributed to all authorities in the form of a grant that is allocated according to different levels of need and different council tax yields. Business rate income accounts for approximately 26 percent of total government grant to local authorities. Even though around 122 councils currently generate sufficient business rate income to cover their local spending needs, the funding they receive is still subject to central government control. By 2014-15, the Government will be taking in £2 billion more from local business rate income than they intend to distribute back to local areas.
10-point plan
The Local Government Group has also today published a 10-point plan for reform of the business rates system.
Baroness Margaret Eaton, Chairman of the Local Government Association, said:
“Now more than ever, we need to put in place a funding system that will support local public services and generate economic growth. This poll shows that there is clear support amongst the business community for giving more control over local public spending to the people that know their areas best.
“Councils dealing with the consequences of steep reductions in central government grant, and so it makes sense to move towards a system that makes them less reliant on what goes on in the corridors of Whitehall.
“The current system of funding local government is incredibly complex and does not meet the needs of the people we serve. Even though many councils raise more money than they spend, all are having to make deep spending cuts at the behest of central government. This undermines local accountability and democracy.
“It is clear that the current system is in need of reform. Local residents and businesses do not understand the relationship between the money they pay and how much the council has to spend on services. However, it is important that the Government recognises the current imbalance in local economies and ensures that there is no localisation without a fair system that allows every community in the country to benefit from the nation’s economic growth. Any new system must ensure that those areas that do not have the capacity to raise huge amounts of funding through business rates do not lose out.
“Most businesses believe their local economic climate will not get any better or could get worse over the next year. Now is the right time to look at a system that has the potential to unlock the potential to boost the economy.”
The Local Government Group has given careful consideration to the re-localisation of business rates, consulting widely with member authorities, and agreed that business rate reform represents an important first step towards the modernisation of funding for local public services. A reformed business rates system must:
1. Be based on stability and a continuing powerful commitment to resource equalisation across the country
There are two strengths of the current system that should be carried through into any new system. Predictability of funding provides the stability that is needed for sensible planning, whilst a robust mechanism for equalisation ensures that there can be a level service offer across the country.
2. End councils’ dependence from year to year on grant distribution decisions by the Secretary of State
The current formula grant system is widely seen as being opaque and far too subject to judgement calls on the part of government.
3. Provide a direct reward for promoting local economic growth
Councils already see the promotion of a vibrant local economy as one of their fundamental responsibilities. The capacity to receive a direct return on their investment in local economic growth would act as a further incentive and provide a stronger platform to engage local businesses in planning for growth.
4. Have a sensible starting point
A smooth transition to a new system is absolutely critical, and requires a starting point that provides councils some continuity. Using formula grant allocations to councils in the pre-changeover year as a basis for the starting point seems to us a workable proposition.
5. Ensure that councils whose business rate income grows faster than their spending needs make a contribution to equalisation
The new system has to do a better job of allowing councils to harness the proceeds of local economic growth for their local residents. But, because business rates growth can be very volatile, places where growth is strong should make a contribution to ensuring that all authorities have adequate resources to meet the needs of their communities. Without that, the reform would not be sustainable.
6. Provide councils whose spending needs are greater than the amount they can collect from business rates with top-up funding
Some councils will simply not be able to generate enough business rate income or other local revenue to cover their spending needs. Moreover, many councils in areas of the country that are most deprived or face significant constraints on their growth potential have the greatest pressures for costly services such as adult social care or children’s safeguarding. These authorities will need extra support to meet the needs of local people.
7. Set up an independent body that is accountable to local government, not Whitehall, to manage equalisation
Using an independent body to manage distribution would increase the scope for transparency and challenge, while providing more credibility to equalisation decisions.
8. Allow councils to manage equalisation within a sub-national pool should they so wish
Pooling on some level seems the best way to manage both equalisation and the risk of fluctuations in how much business rate is collected. However, pools may be more effective if they operate at a sub-national level, likely corresponding with the real economic geography of an area.
9. Review the underlying balance of needs and resources periodically
The sustainability of the whole local government finance system relies on ensuring that every authority’s resources are sufficient to meet the needs of local communities. Both spending pressures and resources can change over time, and need to be reviewed periodically so that balance is maintained.
10. Operate within the context of more diversified local tax base
Business rates are just one component of the funding mix for councils. True localisation would allow councils to diversify their local tax base and develop the package of taxes, charges and incentives that are right for their areas. The purpose would not be simply to increase tax levels on businesses or individuals, but to find a more sophisticated balance of local revenue sources for local services and provide councils with a more buoyant tax base that could in fact reduce the pressures on any individual tax mechanism.
