Centre for Cities has been a long-term advocate of business rates reform. So, this morning we waited excitedly like the boy from John Lewis’s Christmas advert for DCLG’s response to the Local Government Resource Review consultation. Having read the document, my feeling is now more akin to receiving an ill-fitting jumper.
Clearly much of the detail is still to be set out, but government’s interpretation of the policy at the moment seems to have taken a “growth-light” approach to rates retention. Whilst the proposed system will reward authorities for growing their business base, it is also very complicated, reduces the incentive authorities’ experience, and creates uncertainty in local government revenues.
Focusing on the 10 year re-set period, this will have several effects on local authorities:
First, because the system will be re-set every 10 years (Government will also be able to re-set more often in "exceptional circumstances"), local authorities will have relatively little certainty of their revenues beyond that period. This will limit their ability to borrow against business rates revenues in a TIF system (which is based on loans over a longer period of time) or plan for long-term projects.
As we expected, both forms of TIF were confirmed in the Response. Option 1 TIF—which is really an extension of an authority’s prudential borrowing powers—will be available to any local authority. Though, the business rates retention system, as proposed, will not easily facilitate borrowing at that level due to the level of uncertainty the system creates. Option 2 TIF—which protects business rates from the uncertainty created by the system—will also be allowed, but on a rationed basis yet to be set out.
Second, authorities will benefit less from new businesses built towards the end of the 10-year period. The reset will strip out some of the business rates the authority retains (benefitting from 4 years of rates growth if the property is built in year 6 of the resetting period). This is likely to influence authorities as to when they encourage and approve new developments.
Third, by excluding the growth in business rates from revaluations, authorities which have raised property values by investing in transportation or public realm improvements will not retain the growth benefits from those investments.
There is still an opportunity for the government to create a business rates system that really encourages economic growth at the local level. But, the balance at the moment is more on the side of central control and equity at the expense of a system that seriously incentivises growth. If Eric Pickles really wants to give “every possible reason to create the conditions for local growth,” the Government must create stronger and clear incentives for growth.
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