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IFS: Business rates pilots a strategic central move to push for controversial reforms

The ‘no detriment’ clauses in the 100% business rates retention pilots mean that it is not possible to establish how councils would respond to falls in income if the policy is rolled out, the Institute for Fiscal Studies (IFS) has warned.

Its new report, ‘100% business rate retention pilots: what can be learnt and at what cost?’, found that English councils piloting 100% business rates retention could gain around £870m in extra funding in 2018-19 – the equivalent of 3.6% of their core spending power.

However, it argues that although the pilots may help the government to maintain momentum behind its changes to the local government finance system, it is unclear how much can be learned from them – with the ‘no detriment’ clause, which guarantees that councils will not lose out, masking how councils would respond to the risk of bigger falls in income that could arise if the policy is rolled out nationally.

The report also stated that the additional council revenue is cash that would have otherwise flowed into central government and could be used for other purposes, although it acknowledges that it is not known how the money would have been spent in the absence of the pilots. Last month, a Department of Health and Social Care minister argued that the scheme may pose a risk to core public health funding.

The IFS proposed that funding allocated according to assessed spending needs would see all councils receive a money boost, equal to around £20 per person, although most pilot local authorities would have received less funding from an increase in grants than through the 100% business rates pilots.

However, some pilot councils with high assessed spending needs and/or low real-terms growth in business rates revenues would have seen an increase in funding through grants.

David Phillips, associate director at IFS and co-author of the report, explained that the English councils piloting the 100% business rates retention scheme are set to gain hundreds of millions of pounds in extra funding this year.

“An alternative use of the same funds would have been to boost grants to all councils by 2%, or £16 per person,” he continued. “While many of those chosen as pilots would have gained less, such a funding boost would have been welcomed by councils that have not been chosen as pilots.”

Neil Amin-Smith, research economist at the IFS and also co-author of the report, said that the main purpose of the pilots may be strategic.

“They allow the government to maintain the momentum for reform, given it shelved plans to roll out 100% business rates retention across England after the June 2017 general election,” he added.

“The combination of the voluntary nature of the pilots, and excess demand from councils to become pilots, may mean the government can use them to make changes to the scheme that would be much more controversial if imposed centrally.”

Responding to the report, an LGA spokesperson described that fact that almost half of all authorities are covered by the business rates pilot as positive.

They said that “it is important that the existence of pilots do not affect other authorities now, or when further business rates retention is implemented. The government also needs to add clarity about what happens to the pilots when 75% retention is introduced.”

“Councils must be rewarded for growing their local economies but areas less able to generate business rates income need to remain protected,” the spokesperson added. “Councils will see their core funding from central government further cut in half over the next two years and almost phased out completely by the end of the decade. This means councils are facing a financial cliff-edge that the government has to address.”

Top image: Images of Money

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