New rates system must avoid central raid on council resources, think tank warns
26 October, 2011

Wednesday 26th October 2011
New rates system must avoid central raid on council resources, think tank warns

Localism think tank NLGN today welcomed the principle of allowing councils to keep more of their local business rate growth, but warned that the government’s current proposals could create an overly complex system of tariffs and transfers while allowing the Treasury to siphon off a chunk of business rate money.

In its response to the government’s consultation on plans for business rate retention, NLGN highlights evidence that giving councils an incentive for growth could help boost the UK’s lacklustre economic performance. But this can only be achieved if ministers prioritise the growth incentive over concerns about fairness – too much complex redistribution will make the incentive ineffective. In practice, the think tank argues that councils should be allowed to retain up to 70% of business rate growth.

To address legitimate concerns that some councils will lose out, NLGN recommends that the government should use part of the proposed levy, set-aside and safety net funding to pay for lump sum transfers to areas with less potential for growth, as well creating a capital fund to support public investment in lower growth areas.

The think tank also expressed strong concerns about government plans to top slice billions of pounds of business rate growth to help pay down the deficit over the next two years, and possibly beyond. The business rate is legally a local tax, and ministers must provide clear principles and reassurances about how any top sliced rates money will be returned to local government.

Director Simon Parker said: “These reforms represent a significant step towards giving local government more financial independence, but only if they provide a clear incentive for growth that is uncluttered by complex redistribution mechanisms. Councils will not respond to the growth incentive if they are uncertain of what will happen to any extra money, and the Treasury must be clear from the start about how it will use any top slice. While fairness and need must remain core concerns for any local government finance system, the worst possible outcome of this reform would be a muddled system which produces no real change.”

In its response to the consultation, NLGN proposes an alternative levy design based on the combination of a flat rate marginal tax and a lump sum transfer linked to the baseline. Such a system would connect the collection of funds through the levy with the mechanism through which those funds are redistributed. Both are intentioned to equalise impact of business rate growth on local authorities with different baselines.

1. A PDF copy of NLGN’s response to the proposals is available here