IFS warns local government finance pilots will cost Whitehall £873m
Think-tank says business rates retention schemes will reduce central government’s financial flexibility and may not provide valuable insight
Housing and communities secretary Sajid Javid Credit: PA
The Institute for Fiscal Studies has questioned the value of government efforts to shake up local authority finances and boost economic development with pilots that allow councils to retain up to 100% of the business rates from new firms that start up in – or move to – their areas.
It said that the Business Rate Retention Scheme was projected to take £873m out of central government coffers during the current financial year, but that there would be little measurable lessons from the pilots, other than that most councils volunteering to take part would be better off than would otherwise have been the case.
The study came just one day after the Ministry of Housing, Communities and Local Government named former HM Treasury director general for public services Andrew Hudson as the lead for an independent review into the processes and procedures underpinning the business rates system.
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Under the BRRS, councils have retained 50% of business rates growth in their areas from 2013-14. Under government plans to increase this to 100% from 2020, ten pilot areas were announced to test the new system, with a “no detriment” clause in the programme to protect councils from losing out where they have moved from 50% retention to 100%.
The IFS said that the current pilot areas covered 53% of the English population, including Greater Manchester, the West Midlands and Greater London. It said the areas covered raised 63% of the England's total business rate income, which would normally be collected by councils but passed on to central government for redistribution.
In return for taking part in the scheme, councils agree to forego Revenue Support Grant funding from MHCLG. Some areas have also agreed to accept cuts in central government funding in areas including transport and health-and-care integration.
The IFS said council revenue forecasts for 2018-19 led it to estimate that pilot areas would see a financial benefit of £873m in total – almost half of it (£431m) in London.
“This is equivalent to 3.6% of pilot councils’ core spending power, or almost 2% of the spending power of all councils,” it said. “This financial benefit represents a cost to central government, to which this revenue would otherwise have flowed.
“This revenue could have been used to reduce the budget deficit, or fund tax cuts or higher central government spending. There is therefore an ‘opportunity cost’ to the 100% business rates retention pilots.”
It added that if the £873m were allocated according to official assessments of council areas’ spending needs, 1-in-10 areas would have seen an increase in spending power of 2.1% higher than is currently planned for 2018–19. Conversely, most pilots would have received less funding if the retained business rates were redistributed via needs-based grants.
The IFS report authors said the fact that BRRS pilot council areas had chosen to take part in the scheme, and had been protected with “no detriment” safeguards meant the pilots would have “limited” learning value, and that "quick wins" may have been employed to boost income rather than longer-term growth-boosting strategies.
“There is an inherent limitation to how much one can learn in a year or two, given that the impact of 100% rates retention on funding levels and risk would tend to grow over time,” the report said. “A mechanism able to cope for a couple of years may not be suitable in the longer term.”
However, the report authors conceded the pilots could help maintain momentum behind local government financial reform after ministers chose not to proceed with plans to move towards a scheme of 100% business rate retention for all English councils by 2019-20 in the wake of the 2017 snap election.
The government is now planning to move to a 75% retention model by 2020-21.
Housing and Communities secretary Sajid Javid said Andrew Hudson’s review would “ensure robust processes across the board” as English councils moved towards the new retention regime.
In relation to the IFS report, an MHCLG spokesman said the business rates pilots were helping to test aspects of future finance reform.
“We are giving councils more control over the money they raise locally,” he said. “Nationally, through the pilots, authorities will retain £1.8 billion – money which will stay in communities to be spent on local priorities.
“With councils working together and sharing their business rates income, we are empowering them to make more effective decisions that can have a positive impact on the wider area, as well as investing to encourage further growth.”
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