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Business rates alone are not enough to finance devolution

Current devolution of powers to cities proposed by the government will not achieve its aims unless it is supported by full fiscal devolution, a new report warns.

The report, carried out by city strategists Metro Dynamics for Core Cities UK, says that existing proposals to devolve business rates are welcome but do not go far enough.

It calls the English system of local government “one of the most centralised in the developed world”, with local authorities retaining £50.7bn of the £548bn raised in tax every year.

Council funding from central government is administered on a year-by-year basis with extensive control over how it can be spent, which the report says hinders councils’ ability to invest it in local growth and infrastructure.

It says that business rates devolution should be followed by devolution of other fiscal powers, including property tax, the power to introduce new charges, and potentially even income tax and National Insurance.

However, it notes that in a country as small as Britain, this degree of devolution is “not without its risks”.

Sarah Whitney, a director of Metro Dynamics, said: “Fiscal autonomy is not about imposing new taxes. It is about giving local authorities greater control over their finances so they can produce better economic outcomes than are currently possible within the existing highly-centralised system of local government finance.”

“Business rate localisation is a welcome start – but we need to recognise that fiscal devolution poses significant additional risks and burdens as councils wrestling with the complexities of this reform are finding out.  For this reason, cities need further fiscal freedoms to help them manage this risk.”

‘Uncertain’ whether business rates devolution will increase income

The report notes that there is “a great deal of uncertainty” about whether business rates devolution alone will leave councils better off.

It warns that proposals in the 2015 Spending Review to devolve additional responsibilities to councils, including public health, the administration of pensioners’ housing benefits, and Transport for London projects, could cost more than the measures save.

Other areas of concern include the cost of business rates reduction proposed in the latest Budget, the need for top-ups and tariffs to compensate for differences in business rates across local areas, and the cost of appeals by businesses and re-evaluation of rates.

It recommends that the government, the core cities, London and the LGA come together to deliver a workable, co-designed and reformed business rate system that allows councils to use new fiscal responsibilities to support growth.

It also says that the government should hold a series of events with council and private sector leaders to discuss a plan for property tax devolution and potentially devolution of other taxes, and seek cross-party support for a long-term plan of financial devolution.

Sir Richard Leese, chair of Core Cities UK and leader of Manchester City Council, said: “We believe that cities should retain more of the taxes they raise to spend how they like and we want to partner with government to focus on creating a workable, sustainable, system of local government finance.

“Fiscal reform is complex. Business rate reform is just the start of this journey and the process of its implementation needs to be managed carefully to make sure that cities don’t lose out.”

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