By Michael Burton, editorial director of Municipal Journal, the UK’s weekly news magazine for local government, based in London, UK.
British politics may be obsessed with Brexit right now but there is another controversy looming – local government finance. Ministers ignore it at their peril; the last major shake-up of local government finance in the UK led to the downfall of Margaret Thatcher.
In brief, the British government wants to let the 353 local authorities in England keep the income they raise from taxes on local business (Wales, Scotland and Northern Ireland have their own systems).
But all that is set to change with ambitious plans to allow local government to retain 100% of its business rates income by 2020. However there is a catch. Whitehall intends ceasing all its direct funding of local government. Local government will have to rely on its local business rates for its future income. This may not be an issue for prosperous Westminster in London or booming Bristol but for many councils in poorer areas there are simply not enough businesses to deliver the revenue. With a 1% growth in the business rates base generating the equivalent of an extra £63.50 per person in Westminster but just £2.60 in Wolverhampton in the English Midlands, any 100% scheme must be carefully calibrated.
This means there will have to be substantial redistribution of business rates from the richer to the poorer areas – so substantial that some critics argue there is hardly any point in changing the system at all.
Apart from the redistribution issue, there is the impact of 100% business rates retention on the 152 English councils with social care responsibilities. They already have huge shortfalls in funding the escalating cost of looking after their local elderly population – now at £14 billion annually. If central funding is removed then they will have to rely on business rates and it is unlikely that local firms will be enthusiastic about having to bankroll local social care which so far has seen an 11% cut in its budget since 2010.
In addition local government has borne the lion’s share of spending cuts under austerity even as demand for services has increased. Excluding education grants, English councils have suffered an average cut of 26% in their funding since 2009/10. Revenue from grants and redistributed business rates has fallen by 38% and council tax revenue by 8%.
The government has already tested the water with the new scheme. However the business rates retention scheme (BRRS) introduced in England in 2013/14 which allowed councils to keep up to 50% of the growth in business rates revenue from new development saw winners and losers.
A study from the respected Institute for Fiscal Studies recently estimated that 264 councils have gained from the BRRS while 119 have seen less funding. Districts with smaller budgets have tended to be winners and larger urban councils with bigger budgets the losers, though none have lost more than 20% of their overall budget. The safety net however has considerably reduced the risk of large falls in income. Should a similar system operate under the planned 100% retention there could be 122 losers with the largest losses equal to around 3.5% of budgets while 16 mainly district councils could see increases of 20%.
The government is currently consulting on its plans and intends launching pilots in Manchester and Liverpool. Local government welcomes 100% business rates retention as long-awaited progress towards devolution. But sometimes you have to be careful what you wish for…
Michael’s new book The Politics of Austerity: A Recent History (Palgrave Macmillan) is just out and looks at spending cuts in the UK, Europe, USA, Canada and Asia Pacific. His previous book, The Politics of Public Sector Reform from Thatcher to the Coalition (Palgrave Macmillan) was published in 2013.