IPPR predicts failure for business rates devolution without reforms

Business rates reforms will fail and exacerbate inequality, a new report from the Institute for Public Policy Research (IPPR) says.

The government is planning to devolve full control of business rates to councils by 2020, with the same basic framework as the current system but without a levy on disproportionate growth. This has already led to warnings that it could lead to councils in low-rates areas struggling to fund services.

In its new report, the IPRR said that its modelling of the likely consequences of the scheme show that it will not benefit councils because poorer authorities will profit less from a growth in business rates income than rich ones.

The report: “Such a scheme would likely fail on the government’s own terms. Richer local authorities will receive strong incentives to grow their economies, but for many poorer authorities the rewards are dampened by the likely design of the system. As a result, geographical imbalances in economic growth and public service investment will be exacerbated.”

For example, if Barnsley, with a funding need of around £120m in 2019-20 and business rates income of around £50m, increased its business rates by 2%, it would only see a 0.8% increase in income, said the IPPR. However, South Bucks, with a funding need of £1m and business rates of £30m, would see income increase by more than 50%.

The worst-affected local authorities could lose out by 300-400% cumulatively in real terms in 2019-26, and around a quarter of local authorities will lose out by at least 10%.

Instead of the current system, the IPPR recommended introducing a ‘growth first’ system, where the increase in a council’s funding after the first year would be calculated by multiplying their business rates growth rate by their funding need.

It also proposes alternate systems, including retaining the levy on growth, or a ‘cap and collar’ system, designed to make the system fairer by imposing limits on the potential gains and a minimum rate of return for richer authorities.

The IPPR also said that the government should explore the possibility of risk-pooling business rates across sub-regional geographies such as LEP areas.

The Communities and Local Government Committee’s interim report into the proposals also warned that it would place councils at significant risk of loss through the appeals system.

In response to the report, the District Councils Network said that the new system should focus on places instead of institutions.

The London Councils Network said that a ‘one size fits all’ system would not suit the different kinds of local authority in the country and the County Councils Network said that income should be more fairly distributed within two tier councils.

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