Political Promise

Should the Proposals to Reform Business Rates Go Further?

In Stefan Houghton on April 6, 2011 at 9:35 am

Local authorities do not set business rates, just collect the receipts. Eric Pickles proposes authorities should have more independence in how councils tax and spend, Stefan Houghton thinks he could go further.

Currently all local authorities collect Business Rates in their respective areas, and pass all the proceeds onto central government, who in turn redistributes the money back to local authorities using a formula which is effectively based on levels of population and deprivation. In place of this system, it is proposed in the Localism Bill 2010-11 that each local authority should have greater discretion over setting Business Rates within their respective areas, and that each authority can keep the rates which they raise and collect. These reforms to business rates have the intention of granting greater fiscal independence to local government, which will allow it to take the action needed to encourage private sector growth which will help address the national issue of rebalancing the economy and reducing unemployment.

Critics worry that this policy is ill advised as it resurrects unsuccessful aspects of General Rates which preceded the current local government financial arrangements. General Rates were replaced because of its numerous flaws, including the fact that Local Authorities were irresponsible when setting their multipliers (used to work out rating) which caused huge discontent amongst the business community as extreme anomalies’ existed in levels of Business Rates demanded for similar business premises in different authorities. However, if the reforms are implemented, surely history won’t be repeated as the lessons from past mistakes have been heeded from both central and local government which will result in appropriate mechanisms being put in place to stop gross anomalies occurring again.

Many local authorities are also concerned about the proposals to reform Business Rates. Such concerns seem paradoxical as it is well known inside and outside local government that the institution desires greater autonomy from central government. Therefore, why would they oppose these reforms? Fortunately sound reasoning is provided beyond the ideological argument that the coalition is seeking to fulfil their traditional goals of greater freedom through decentralisation. Instead the objections are based on the economic reality that many local authorities will face funding reductions for the simple reason that they don’t generate as much money in business rates as they are currently allocated through the current system. It’s predictable that local authorities will say a reduction in their funding with have catastrophic consequences, however in this case, the severity of the funding shortfall is potentially huge. Naturally the consequences will be even more job losses and service reductions to the affected Authorities, which will have negative implications to the private sector. The moral implications are also significant as many affected local authorities represent communities with massive economic difficulties which relay heavily on local government to stop their situations deteriorating further. Finally there is also the societal affect which could see the geographical rich/poor divide widen as the wealthier councils thrive under the new system while the others fall behind.

 

Regardless of these concerns, the fact remains that local government has remained in a moribund state regarding revenues for too long as central government provides much of their finance and sets the parameters for how to run their affairs. Therefore, allowing local authorities to control their own Business Rates is desirable as it will motivate the organisation to innovate for the benefit of their business community, and to be reactive to that community’s requirements, which will have wider societal benefits. However the fears of the economically disadvantaged authorities do need to be heeded. In response Eric Pickles has said government grants will be in place to offset the losses faced by local authorities; however I think this notion goes against what the proposals are trying to achieve, which is to create a new mind frame and culture for local government whereby it becomes a more efficient entity through embracing entrepreneurialism to a far greater extent, and becoming more reactive to everyday market conditions.

I believe the current proposals can be enhanced, whereby greater independence is still awarded, while also creating a system which will create a pro-business attitude in the poorer areas, which will improve their economic situation in the long run. To achieve this, current Business Rates relief should be adapted for each Local Authority depending on which category of economic deprivation they fall under based on the latest official league tables. For example, it could be set in the legislation that only the top 20 economically deprived authorities can award Small Business Rates Relief with the highest thresholds, while the bottom 20 local authorities (most affluent) legally have the lowest thresholds for awarding the relief. The same concept could also be applied to the thresholds used for Rural Rate Relief. In addition, limits could be placed on the standard multiplier, variable depending on each authorities relative economic affluence. Even though these ideas discriminate against richer authorities, arguably the system is still fair as the poorer authorities are being compensated for the advantages they lack which account for much of the prosperity of their wealthier counterparts, such as geographic location, infrastructure, population, and skills in the local workforce.


 

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