Allowing English councils to retain more of their business rates revenue could lead to damaging shortfalls in funding and drive divisions between different areas, the Institute for Fiscal Studies has warned.
Councils that enjoy the biggest increases in such revenues are unlikely to be those with the biggest spending needs, the think tank said. Levelling the playing field by redistributing the money would address regional disparities but would undermine the goal of encouraging councils to use business rates to boost regional growth.
The government turned the business rates system on its head in 2013 as part of its devolution strategy, when local authorities were allowed to keep half of any real-term growth in revenues or bear half of any real-term fall. Until then, business rates were pooled by central government and distributed back to local authorities as grants.
Five years ago, the ambition was for councils to keep 100 per cent of the change from 2019. That has been revised down to 75 per cent from 2020. The idea was to give local authorities an incentive to boost their revenues and local economies by increasing commercial property development or by cutting rates to attract more business.
The IFS said that the plan may backfire and “lead to divergences in English councils’ funding without promoting growth”. Its analysis of councils’ revenues and spending since 2006 showed that the policy may be flawed.
“The report shows that significant divergences could arise in just a few years under 100 per cent rates retention,” the IFS said. “This is because those councils, which would have seen the biggest increases in their retained business rates revenues, were often not the councils that experienced the biggest increases in their relative spending needs, for example, because their population became older, poorer or sicker.
“It is also not clear that the incentives provided by rates retention will translate into faster economic growth. The report finds no relationship between changes in the councils’ business rates tax bases and local economic growth, or indeed employment or earnings growth, in recent years.”
David Phillips, associate director at the IFS, said: “Areas seeing lots of new developments aren’t guaranteed strong economic growth. And growth doesn’t necessarily rely on large-scale property development.”