Size of Treasury's business rate 'clawback' could rise to £3.5bn

Author: Dan Drillsma-Milgrom, LGC - Oct 17, 2011

Government proposals to allow councils to retain local business rates could mean that as much as £3.5bn of local authority-collected cash is retained by the Treasury.

Finance chiefs at the LGA now understand that the so-called ‘set aside’ element of the government’s proposals - designed to ensure local government stays within its spending limits - could have grown by some 75% on initial assumptions.

A report due to be discussed at the LGA’s executive also shows the extent to which there could be winners and losers under the new system.

Tentative modelling shows that under a system where business rates are retained fully, around 40% of local authorities would experience real-terms grant cuts, while 10% could see funding grow at more than 2% above the rate of inflation.

The report, drafted by the LGA’s director of finance and resources Stephen Jones, left, reveals that due to the inflation figures used in this year’s Budget being higher than those used at the time of the spending review, the size of the ‘set aside’ by 2014-15 has grown from an initial £2bn to some £3.5bn.

The report suggests using the set aside to fund activities related to the economy, such as skills and transport.

In an article to be published in next week’s LGC, Birmingham City Council chief executive Stephen Hughes said the set aside could be used over the next two years to fund the transfer of functions to local government to help pursue growth.

“Personally, I’d like to see better control at a local level of the various funding streams supporting skills and employment: the Department for Work & Pensions’ work programme, the funding from the Skills Funding Agency, European Social Funds and even perhaps higher education,” he writes.

Meanwhile, the LGA’s modelling exercise on the fairness of the scheme will raise concerns that areas with buoyant economies could motor away from more deprived areas.

The analysis found that, if councils fully retained the proceeds of growth, and growth continued over a four-year period at 3.7% while inflation remained at 3%, about half of all authorities would see their resources increase by up to 2% above inflation each year.

While 10% of authorities would see funding grow at above this rate, a little under 40% of authorities would experience real-terms cuts. One authority in nine would receive an increase in resources more than 1% below inflation.

The report stresses that these outcomes are heavily dependent on the precise details of the scheme.

However, Stephen Houghton (Lab), who represents the Special Interest Group of Municipal Authorities at the LGA executive, said the proposals would “lead to two-tier local government”, with the north-south economic divide being recreated in public services.

Any extra protection for poorer areas would almost certainly come at the expense of diluting the incentives for richer areas to pursue growth.

One alternative highlighted in the report would be to allow areas that grow their business rates by a set amount to receive a real terms’ increase by the same amount.

Meanwhile, authorities whose business rates decline in real terms would share in the remaining business rates. This, the association says, could allow strong incentives without “massively destabilising” penalties for failure.

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