There are few things in life quite as exciting as the world of local government finance. But before you exit this webpage wait!
Decisions currently being taken in the Local Government Resource Review will have a really important impact on the future of cities and potentially for the national economy.
Our new report released today, Room for Improvement, looks at the current reforms and finds that while Government is moving in the right direction there is a danger that it will fail to be bold enough.
Alongside the New Homes Bonus, the Government is using the resource review to introduce new financial incentives for growth. The review will allow local authorities to retain some of the future growth in their business rates - which raised almost £24 billion in 2010-11 - restoring the link between local government and the local business base.
The big idea is that these incentives are needed to reward a more positive attitude to development, thereby helping tackle the UK’s high house prices and office rents. Six of the thirty most expensive office markets in the world are in the UK. Incentives should also encourage buoyant cities expand to meet demand and facilitate job creation.
We think the Government is on the right track. Our analysis suggests that allowing the retention of business rates could be a strong incentive for growth. Since the nationalisation of business rates in 1990, the growth rate of commercial space has declined and business occupancy costs have increased.
To be effective the new incentives need to be large, simple and transparent, targeted at the appropriate people and long-term. We’ve recommended allowing local authorities to retain between 40 and 60 percent of their future business rates growth, indefinitely.
Inescapably, introducing incentives will create winners and losers - by rewarding places that are able to expand their business base you take away some money from those that cannot. Yet in the long run most cities see their business rates revenues grow, if only by small amounts - 55 out of the 56 English cities saw their business rates tax bases increase between 1999 and 2010.
The findings are potentially challenging for those cities that find it more difficult to attract investment and development. But this doesn’t have to be an either or choice. The report recommends a balance between locally and nationally retained business rates revenues, enabling need to continue to be addressed.
And, if the new incentives do reduce the cost of housing and commercial property, these changes have the potential to generate a national economic benefit. This prize might justify having a little less redistribution.
The main danger is that the Government will decide to overcomplicate the reforms or create an incentive that is just too small. The last Government came up against this problem with LABGI - an incentive that failed to radically change local behaviour.
But with the right design, financial incentives for growth can benefit both the residential and business communities of Britain’s cities and the UK economy as a whole. Now is not the time for timid amendments.