Business rate reforms risk hurting poorest areas hardest

Anna Turley (@AnnaTurley) is the Deputy Director of the New Local Government Network (NLGN)

Caroline Flint is right to highlight the real concern that the business rate reforms could risk hurting some of Britain’s poorest areas hardest, as reported by this morning’s Financial Times (£). The current system has redistribution at its heart, with areas with strong business bases paying in substantial amounts to subsidise areas with limited economic activity.

Westminster, for example, pays nearly 6 per cent of the entire business rate collected, or nearly £1 billion – and yet others remain heavily dependent on the rates not simply to top-up their overall income, but in some cases to double it.

There is no doubt that true local power and freedom for our local democracy comes from greater local financial freedom. The forthcoming local government resource review should have devolution of money-raising powers at its centre.

Allowing local areas more control over their business rates will encourage councils to work even harder to incentivise local economic development and create the right conditions for growth.

Yet our economy is not a level playing field. There are substantial differences between the tax bases of different local authorities in this country. Every place has its own unique industrial and financial heritage, diverse economic patterns, variable skills base, social networks and distinct environmental characteristics.

Moreover, areas that currently benefit from the redistribution may be forced to raise rates to compensate, creating a disincentive for local businesses. Allowing places to keep the entirety of their business rates could therefore mean even greater inequality in our economy across the country.

The government could seek to use the new Local Enterprise Partnership network as a possible vehicle for greater devolution of business rates. It could maintain a degree of redistribution between the partnerships according to need, but then allow them to set their own rates and give them freedom to equalise within their areas as they chose.

The fact that LEPs are meant to be business-led could mean incentives are stronger, as the regime would have greater buy-in from the business sector. A balance between the current system which does much to stifle growth, and a purely localist one which could widen economic disparity in this country must be found.

Most likely this is the conundrum that is delaying the launch of the review that we had expected to see by now.