Government plans for Business Rates too complicated and unclear to work

Cllr Stephen Greenhalgh, leader of Hammersmith and Fulham Council, says Government plans don't give councils enough incentive to promote growth

I am delighted to see today's publication by the independent think tank, Centre for Cities of a comprehensive analysis of the proposals for business rate reform included in the Local Government Finance Bill. The Bill represents the single most significant change to the way council services are funded that we have seen for a generation.

At first I was delighted that local government finance reform was on the coalition government's agenda at all. Like Eric Pickles, I hoped for a move away from a local government finance system solely based on need to one based on whether your council is a great place to do business. I yearned for a simple, easy to understand and transparent system with a real incentive for councils to promote business growth.

Therefore I am disappointed with what the Local Government Finance Bill proposes which is currently at the House of Lords Committee stage. Like many, I support the Government’s objectives but the transparency, clarity and incentives that existed in previous iterations of these proposals seems to have been lost as an army of civil servants have sought to reconstruct the status quo. The Bill recommends the replacement of an incredibly complex system with an incredibly complex system which will be littered with tariffs and top ups, set asides, levies on high growth areas, revaluations and resets.

There is deep concern that the Bill fails to provide a real growth incentive as councils can only retain the physical tax base growth and it removes any reward for an increase in rateable values. This means that there is no incentive to improve the local business infrastructure and environment.

The system of levies and top ups also complicate matters unnecessarily. The levies provide a disincentive for councils to grow their business base and the top ups may well reward councils that do not grow their business rates at the expense of those that do. Finally the balance of risk seems wrong. Treasury is passing over the very real risk of recession driven business rate reductions with a limited growth upside for councils.

This Centre for Cities’ report, Urban Outliers illustrates many of the key issues that a number of council leaders, finance leads and officers have been raising with ministers and DCLG officials in recent months but also brings to the forefront a number of perverse incentives that could undermine the proposed new system.

This new system should not only reward physical growth. Local authorities support businesses in ways other than by allowing more building to occur. In many areas around the country, particularly in urban environments, space is at a premium and if increases in floorspace are viable they are marginal. We know from talking to business leaders that they really value the other things that councils can do – nurturing start-ups, improving transport links and establishing the infrastructure needed to support the local economy.

None of these resource intensive projects would be rewarded through the new system. Conversely, while the Government has highlighted the role of the high street, investment in existing streets will not yield the same financial benefit as, for instance, granting permission for a new retail superstore on the outskirts of a town.

The resetting of the system at arbitrary periods could also have a disruptive effect on the planning system. Towards the end of a reset period the clear incentive will be to postpone planning consents so that they occur at the beginning of the next period. Centre for Cities’ research suggests that the potential effect could be an extra 75% in rewards for councils that delay consents.

Something not picked up on by the report but which is potentially of great concern to local authorities and could have a tangible impact on our budget-setting is the lack of any provision in the Government’s proposals for appeals. Successful appeals throughout a valuation period gradually erode the starting taxbase for local authorities. Unless changed, councils will see themselves become liable for all mistakes made by central government’s Valuation Office Agency officials.

The report makes interesting reading for all of us with concerns about the future funding of local government. I hope it also gives ministers food for thought. The Communities Secretary and his colleagues’ willingness to press ahead with reforms which the previous government shirked should be commended but it is vital that we get this right.