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The local authority resource review: potential for radical, and contentious, change?

March 22, 2011

As Andy Sawford blogged on here last week, the long awaited local authority resource review has been announced. It seems like there had been a delay in agreeing the scope of the review, with reports (unsubstantiated) that Nick Clegg had wanted a wide ranging review which would consider options for new local taxes and charges and a radical reform of formula grant.

The review now in place is narrower in scope, focusing on the distribution of business rates, but it has potential for radical, and contentious, change. The government is considering how to deliver “the optimum model for incentivising local authorities to promote growth by retaining business rates, whilst ensuring that all authorities have adequate resources to meet the needs of their communities”.

Councils collected £20 billion in business rates in England in 2009-10. Around a third of councils would no longer need government grant if they could retain their business rates. Westminster, for example, collect around £1.1 billion in business rates, but only keep around £150 million. Liverpool, at the other end of the spectrum, received £280 million from redistributed business rate but only collect £178 million.

Those councils that could gain greater financial autonomy will understandably support the reform. Local government has largely welcomed the direction of the reform and for the acknowledgement that financial freedom has to be a central part of localism. The review, however, seems to suggest that the government is not going to give councils the ability to set the business rate locally – or, if there are changes here, they will be constrained.

The major contentious issue in the review then is equalisation.

It is clear that there will still be an element of redistribution between wealthier and poorer councils, but not how any mechanism would work. The huge variation between councils in their ability to raise income from business rates and council tax cannot be ignored, nor their different capacity to increase economic growth.

Councils currently encourage growth, even without the incentive of retaining most of their business rate, and, no doubt, their performance, as well as their capacity, varies, but success cannot be attributed just to council’s performance, or even primarily to it.

Allowing some councils to retain more or all of the business rate they collect will reduce the funding for others, so how will the government fill the gap? Would the government be prepared to accept a bigger divide between councils in the interests of localism?

Perhaps Eric Pickles will have to reconsider his caution about bringing in a range of new local taxes and liberalising fees and charges. It is likely that the business rate reform will be linked in some way to incentives the government will bring in to encourage growth, particularly in poorer areas – so that business rates income could increase (even if the rate was lowered). Lifting planning restrictions in the budget tomorrow is part of this agenda. Again, this is bound to be controversial.

It is clear that the local government finance system we have now is the opposite of localist. It could be said to hinder economic growth – at least, it does not encourage it. Reforming local government finance has proved a poisoned chalice before – and successive governments have retreated from major reform as a result.

Reconciling the contradiction between greater financial autonomy and equity is never going to be easy. Local authorities will want to have their voices heard, individually and collectively, over the next few weeks.

This post is based on a LGiU members briefing written by Janet Sillett. Briefings are available through individual subscriptions and accessible to all officers and elected members of our member authorities. For more information on joining the Local Government Information Unit please follow this link.

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