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26.10.16

IFS: Business rates reform will mean ‘significant winners and losers’

County and borough councils are more likely to suffer a loss of income since the government introduced business rates retention compared to districts, according to a new report from the Institute for Fiscal Studies (IFS) into local government finance.

The report said that, since 50% business rates retention was introduced in 2013-14, 119 councils, including most county and borough councils, had seen a decrease in funding, although no council lost more than 2% of its budget.

In contrast, 52 councils, most of whom were district councils, gained a 5% or more budget increase. The IFS noted that collectively councils put aside £3.2bn to meet the costs of successful business rates appeals, higher than the DCLG’s predicted amount of £1.8bn.

Overall, the report found that councils in England have suffered 26% real-terms cuts to their funding since 2009-10. Revenue from grants and redistributed business rates has fallen by 38%, while revenue from council tax has fallen by 8%.

Councils that are the most grant-reliant, such as those in inner London and those serving poorer communities, cut their spending by 33%, but the least grant-reliant introduced cuts of just 9%, according to the study.

The areas which suffered the greatest spending cuts included planning and development, housing, and culture, which suffered cuts of more than 40%, while social services received 10% cuts.

“The changes to local government finance in England during the 2010s will be truly revolutionary. We will have moved from a system where equalisation and insurance was paramount, to one with much more emphasis on incentives for growth, but also more financial risk for councils,” said David Phillips, a senior research economist, and an author of the report.

“Along the way there will be lots of tricky policy decisions. And there are big picture questions, such as whether these changes will actually empower councils to deliver more growth, or just burden them with additional revenue and spending risks.”

The IFS said this was due to a “lack of clarity and consistency” in the way grants are distributed, with the DCLG failing to account for the fact that cuts in grants led to a bigger overall decrease in spending power for grant-dependent councils.

It said that efforts to provide protection for these councils were only made in 2011-12 and 2013-14, were “not very effective” and led to an increase in cuts for some councils.

From 2016-17, the formula has changed so that cuts will be more equally distributed across councils. However, the IFS said other cuts risked increasing inequality between councils. For example, the New Homes Bonus is funded by top-slicing general grant funding, meaning that it will transfer money from grant-reliant councils to wealthier local authorities that are more likely to build more homes. It also provides better incentives for areas where more new homes fall into high council tax bands.

The IFS noted that councils in England were planning to draw on their reserves in 2016-17, but were still anticipating cuts of 22%, compared to 15% in Scotland and 11% in Wales. Recently, Wolverhampton, Newcastle, Kent, Manchester, Sheffield and Croydon councils all revealed plans to cut services and jobs as they struggle to cope with budget cuts.

The IFS warned that there will be “significant winners and losers” after 100% business rates devolution is introduced in 2020.

It said “more or less radical changes” would be needed to offset the consequences, such as changes to the system of tariffs and top-ups and frequent resets of the funding system as councils take on new spending responsibilities.

The County Councils Network has called a redesign of the business rates system ‘crucial’ to avoid a loss of income.

Cllr Sharon Taylor, vice-chair of the District Councils’ Network (DCN), said:  “In its recent consultation on moving to a system of 100% business rates retention, the Government has been very clear that there must be a ‘powerful incentive’ for the delivery of growth. The DCN could not agree more. To do this, the system must be strong enough both to influence behaviour and reward the delivery of growth – both in terms of business and household growth.

“The DCN is also clear that something akin to the current system for tariff’s, top-ups and safety nets will still be required for the sustainability of the new system across the entire local government family."

 A DCLG spokesperson said: “Councils have spent decades campaigning for 100% retention of business rates, so they can keep the money they raise locally.

“The government’s reforms will ensure councils have a real incentive to support local jobs and business, helping grow the overall pot of funding for local government due to economic growth.

“They will have nearly £200bn to spend over this Parliament on services that people want.”

(Image c. Images of Money)

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