Budget 2016: Councils expect to be “fully compensated” by Treasury for business rate funding losses

Proposals to make local government financially self-sufficient by 2020 must not be impacted by George Osborne's business-boosting measures, a lobby group has warned

By Jim Dunton

17 Mar 2016

Chancellor George Osborne’s Budget commitment to exempt hundreds of thousands of small firms from paying business rates should not affect the funding government has committed to devolve to councils by 2020, the Local Government Association has insisted.

The lobby group, which represents the majority of English local authorities, said it expected councils to be “fully compensated” for the £6.7bn in revenue that Osborne’s reforms are projected to remove from the system.

Under radical proposals to make English local government largely self-sufficient from central government funding and more focused on promoting local growth, councils are due to move to a system where they retain 100% of their business rates by 2020.

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Currently, the rates are collected locally but only a portion is retained with the remainder redistributed by central government.

November’s Autumn Statement put the annual value of the business rate at £26bn.

In yesterday’s Budget, Osborne said Small Business Rate Relief (SBRR) would be permanently doubled from 50 percent to 100 percent, effectively exempting properties with a rateable value of £12,000 or less, while the threshold for standard business rates would be raised to £51,000.

Osborne also said annual business rate rises would switch from being pegged to the Retail Price Index to the traditionally lower Consumer Price Index in 2020.

The Treasury’s “Red Book”, which gives further detail on measures announced in Budget speeches, said the combination of business rate changes would reduce projected business-rates revenue by £6.7bn over the next five years. But it added that local government would be “compensated for the loss of income as a result of the business rates measures”.

A Budget response from the LGA said it believed SBBR measures would not result in reduced funding to councils under the new devolved arrangements, but said the switch from RPI to CPI inflation risked costing authorities money.

"We welcome the government’s assurance that local government will be fully compensated for the reduced income as a result of this relief, but notes that this will mean that the resources to be retained under 100 percent rate retention will be less than previously projected," it said in a briefing.

"The change from RPI to CPI for the annual indexation of the business rates multiplier will lead to a reduction in income to councils at a time when they will be more dependent than ever on this income. "It is imperative that full account is taken of this in the new business rates system."

GA chairman Lord Gary Porter applauded Osborne’s announcement that the switch to devolved funding for councils would be trialled by Liverpool City Region, the Greater Manchester Combined Authority, and the Greater London Authority.

However he cautioned that it would be “important to avoid a knock-on financial impact on other councils” as a result of the pilots, which are due to start in 2017.

“Local government will rightly need to play a lead role in making sure any new national system works effectively and fairly,” he said.

Reacting to the Budget, chief executive of the Chartered Institute for Public Finance and Accountancy Rob Whiteman said he believed councils were “likely to feel as though they’ve been stitched up” over the business rate changes.

The Treasury said the impact on councils of the business rate changes would be considered as part of a consultation on funding devolution this summer.

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