LABGI
16 August, 2007

Anthony Brand, Researcher, NLGN
Regeneration and Renewal

Another victory was won for local financial freedom last week as the High Court ruled against CLG and for two local authorities. Corby and Slough councils have been claiming entitlement to additional payments from CLG through the Local Authority Business Growth Incentive (LABGI). The disagreements concerned whether the incentive applied only to new businesses or included additional rates from expanded businesses.

CLG initially claimed it would be “administratively burdensome” to review local cases but last week the High Court asked the department to reconsider their ‘irrational’ refusal and award extra payments to the authorities.

Though Justice Newman said his ruling “would not open floodgates” to other claims, Phil Woolas had previously claimed £84 million in LABGI funds were being held back in lieu of this case. CLG have indicated that they will make additional payments to other local authorities that reflect this decision and that the methodology behind it will be carried forward for the final year of the current scheme. What happens after that is less certain and this decision will also feed into a wider LABGI debate.

Designed to encourage local authorities to focus on and benefit from economic growth, the LABGI fund was expected to be worth £1 billion between 2005 and 2008. It was even hailed by some as the first steps to a re-localised NNDR. In reality, the complex, centrally controlled formulas mean local authorities are wary of relying on its income or from investing specifically in order to benefit from its rewards. Less than £500 million was awarded in the first two years (though the cap on grant has now been removed). Baseline calculations and the growth formula have resulted in perverse targets in many areas. The system also inherently favours local authorities with large existing base rateable values and has been said to encourage large, warehouse style developments at the expense of smaller local businesses. Certainly the courts decision will benefit many local authorities whose local economies rely more on the success and expansion of SMEs.

Local authorities, supported by Lyons Review findings, demand a successor scheme that is more simple, transparent and predictable. An improved scheme, due next April, must deliver reliable, longer-term incentives which match the longer term investment cycles required to deliver economic growth. Following from the High Court’s decision, a reformed LABGI must better reflect the varied nature of local economies. It must be designed to reward councils for delivering growth that is sustainable and appropriate for their areas. Formulas must be clear and transparent enough to be incorporated into local investment strategies to the extent that local authorities can even borrow against the income stream. Central reforms must be supported by local engagement with business and the community as to what investments would be most effective in driving growth.

Any decision on LABGI may have wider implications as local authorities push for greater local financial freedoms, but councils will not be getting ahead of themselves. The fact that this disagreement went to the High Court is indicative of the work still to be done on improving central local relationships in general, as well as in strengthening the links between councils and local economies. The sub-national review has taken some tentative steps towards redressing the central/regional/local balance but more is needed before councils will be able to see economic development as an investment rather than a cost.