Last night Parliament debated a Bill that at long last reforms local government finance.The need for reform is one of the worst kept secrets in British politics. The Organisation for Cooperation and Economic Development has called England’s local government finance system one of the most centralised in the world. The Lyons Review in 2007 was just the latest of a long series of papers to recommend fundamental change.
For many years Labour administrations put the whole question into a box marked “too difficult.” The last Government didn’t even make a formal response to the Lyons report. But where Labour failed to deliver, the Coalition is ready to act. Where others have pondered and prevaricated, we are ready to act.
The heart of the Local Government Finance Bill is a much-needed reform to business rates. Under the way the system works at the moment, councils collect rates from local firms. No sooner have they done so than central Government swoops in. The cash is counted up in Whitehall, before being allocated back to councils on the basis of a complex formula.
This creates a strange set of incentives and rewards. The councils who do most to encourage growth, who succeed at attracting new firms and creating jobs, don’t necessarily see any increase in their own finances as a result. In fact, the opposite may be true. Places which succeed can see their grant from central Government drop. This encourages councils to talk down their area’s successes. When the councils who can paint their area’s plight in the most vivid terms get the most out of the system, you can end up with a “begging bowl” mentality.
At any time, but, surely, now more than never, we should councils every possible reason to grow their economy, to support firms and create jobs. We need a system which incentivises success, rather than rewarding failure.
The Local Government Finance Bill will let councils keep a proportion of the business rates they raise locally. It will mean that every council which grows their business rates base will see an increase in their own finances. It will give councils greater financial independence. Above all, it’s about creating new growth. If every council has every possible reason to help their local economy, we’re not just talking about allocating a pot of cash in a different way – it’s actually about making that pot bigger in the first place.
What’s more, thanks to these changes, for the first time, councils will have the ability to borrow – in a safe and sustainable way – against the anticipated increase in business rates. This will give them a new way to fund infrastructure, attract investors and secure jobs for local people.
We’ve already heard a handful of councils expressing their fears about what this means for more deprived areas, about the risk of “polarisation.” I can understand the reluctance to reform: it’s always hard to let go of a safety blanket. But no-one, least of all this Government, wants to see places get left behind.
That’s why we’re hardwiring fairness into the new system. For example, well-off places will be paying a special tariff, while deprived areas will get a top-up. On the day the system comes in, no-one will be worse off than they would have been under the old system. There are special safeguards built in for the future too.
When areas benefit disproportionately from a rise in the business rates, they will pay a special levy, and this levy will be used to fund a safety net for places that see a sudden drop in their business rate income – such as they might face if, for example, a major local employer were to relocate.
But the evidence suggests that the worriers’ pessimism may be ill-founded. The fact is that growth is not a Southern phenomenon. All kinds of places have the people, the skills and the opportunities to create new jobs and businesses. In fact, if our reforms had been in place over the five years of the last revaluation cycle, places like Liverpool, Doncaster, Durham, and North and South Tyneside would all have benefited, because their growth in business rates outstripped the national average.
Above all, the doubters have missed the key point. These reforms have the potential to increase growth, not simply redistribute it. This is not what our economist chums would call a zero-sum game. If these reforms lead to every council working as hard as possible to help businesses thrive, then they have the potential to increase growth overall.
Greater local financial independence: proper rewards for success: even stronger reasons for every council to help local firms prosper and thrive. That is what we want to see, and what the Bill will help us achieve.