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Time to make local voices heard on fiscal devolution

Source: PSE Aug/Sep 16

PSE investigates the latest developments around full business rates retention locally and the prospect for further fiscal devolution.

Over the next four years, local authorities will invest most of their energy and attention towards the government’s business rates devolution proposal. Consultations have been launched one after the other to refine the finer details of the plan, and further technical consultation on the reformed system is expected in the autumn.

At the beginning of July, the DCLG hit councils with two major pieces of information: the decision to press ahead with appeals system reforms under the ‘check, challenge, appeal’ process, and another consultation, open until 26 September, on the approach central government should take towards 100% business rates devolution. 

The first was largely welcomed. Just one day before the government confirmed its intention to reform the appeals process, the LGA put out a statement calling these improvements “essential” to keep councils from diverting large sums of money to cover the risk of backdated appeals – around £1.75bn over the past three years. Under localised business rates, local government would be liable for 100% of the cost of successful appeals, posing an even bigger threat. 

According to the DCLG, an “overwhelming majority” of respondents to a consultation on appeals reforms “recognised the need for change”. The former communities secretary, Greg Clark MP, added that the current appeals system means backlogged cases, “often caused by unscrupulous agents eyeing up a fast buck”, generated unnecessary costs for all bodies involved. 

The second major announcement, yet another consultation, confirmed that local government will retain 100% of taxes raised locally by the end of this Parliament, giving councils control of around £12.5bn of revenue from business rates. This 100% rates retention will soon be piloted in Greater Manchester and Liverpool City Region in order to test its different elements before it is rolled out more widely. 

But there was a catch to the consultation: to ensure the move towards 100% rates retention will be fiscally neutral, the main local government grants will be phased out and “additional responsibilities will be devolved to local authorities in order to match the additional funding from business rates”. It promised, however, that if the value of these new responsibilities exceeds the increased retained rates receipts, central government will continue to fund the difference. 

A historic opportunity 

What does this mean in practice? The consultation document set out a number of different options for further fiscal devolution, all contingent on a set of criteria, including whether the devolved element builds on the strengths of local government and supports economic growth, improves outcomes for service users, and takes into consideration the medium-term financial impact on councils. It also suggested that, in order to ensure certain outcomes are delivered with the funding devolved, central government may eventually create new statutory duties. 

The obvious and first example in the list of potential responsibilities to be devolved and cut centrally is the revenue support grant, but other fiscal duties include the rural services delivery grant, the GLA transport grant, the public health grant, Better Care Fund, Early Years and Youth Justice, amongst others. 

Speaking at the LGA annual conference at the time, Clark said the ability to select fiscal duties for devolution gave local authorities a “historic opportunity” to shape their own financial future. 

“For years, councils have been calling for central government to give them the power to retain local taxes, including business rates,” he added. “Today, we set out the first steps towards making that ambition a reality, transforming the relationship between Whitehall and town halls and putting local government at the heart of delivering strong economic growth for their communities.” 

Fair Funding Review 

The same consultation also kicked off the first steps of the Fair Funding Review, which will analyse councils’ relative needs and resources – an assessment that hasn’t been thoroughly made in over a decade. As well as updating the demographic pressures that face each particular area, the review will establish what the needs assessment formula should be “in a world where all local government spending is financed from locally-raised resources”. 

The DCLG is now aiming to consult on the principles for the needs assessment in the autumn, with a final consultation on the formulae expected in summer 2018 – in time for the introduction of 100% rates retention. 

Geographical imbalances 

Responding to the consultation launch, the LGA’s senior vice chair, Cllr Nick Forbes, recognised that the document was an important step on the road towards business rates retention, largely by posing many open questions to councils. 

But he rejected some of the proposals for further fiscal devolution, namely around administering the demand-led Attendance Allowance benefit for older people, which he said would exacerbate already-strained council budgets. 

He also stressed the importance of implementing the new system in a way which “balances rewarding councils for growing their local economies but avoids areas less able to generate business rates income suffering as a result”. 

Such remarks aren’t anything new. Many have raised concerns that as well as incentivising large out-of-town retail units rather than SME growth, business rates devolution could hit struggling areas the hardest. In a report published at the end of June, the influential think tank IPPR said the scheme would “fail on the government’s own terms”, with richer councils receiving strong incentives for growth whilst many poorer councils would see their rewards dampened – further aggravating geographical imbalances. 

Moving away from the centre 

But many could argue that plans to expand fiscal devolution, mooted by local government minister Marcus Jones MP last year, are to be welcomed. The Communities and Local Government Committee had already labelled the government’s approach to fiscal devolution “pretty limited” when it launched an investigation into denationalising business rates late last year. More recently, in mid-July, Solace president Mark Rogers called on new prime minister Theresa May to work with councils to accelerate the fiscal devolution agenda – which some believed could come to a standstill following the UK’s vote to leave the EU. 

It is also a generally accepted view that the English local government system is one of the most centralised in the developed world, to quote a Core Cities UK report published earlier this year. As it stands, councils retain just over £50bn of the £546bn raised in tax every year. 

We are yet to see how full business rates devolution will unfold, particularly as Greater Manchester and Liverpool test the new approach from April next year. But whether your area is piloting the approach or not, one thing is for certain: unprecedented fiscal devolution is imminent, and it will be up to councils to shape how it is carried out – so make your voices heard.

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