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On Tuesday I wrote about how localism has advanced in recent years and how its potential would gain a massive boost if we decide to withdraw from the European Union today. But one very welcome and important change that will take place in any event is that local authorities will retain 100 per cent of the revenue they collect from Business Rates by 2020.

This means £26 billion of revenue will be kept to be spent locally. At present, central government takes the money and then gives some of it back in grants – using a formula that is incomprehensible and thus allows all councils to complain they are unfairly treated. Overall the changes will be “fiscally neutral” as there will also be greater spending responsibilities devolved to councils – mainly from the welfare budget.

But the important change will be that councils will have the power to cut Business Rates. This might well mean they will have increased revenue. There will be an incentive to achieve economic growth. That would boost council coffers – rather than constantly coming up with data to show how deprived they are.

The Communities and Local Government Select Committee sound a bit uneasy about it in their new report:

“We also note the lack of correlation between business rate revenue and local authority need and the fact that, without Revenue Support Grant, it is likely to prove very difficult to shift resources to authorities in direct response to need in all circumstances.”

Furthermore the Committee has discovered that not all councils welcome the challenge:

“Instead of seeing 100 per cent retention as an opportunity, many of the authorities that we heard from feared how they would fare and stressed the need for equalisation and fairness in the reformed system.”

It notes that the New Local Government Network frets that the reforms will “exacerbate the ‘winner takes all’ approach to urban growth”.

In fact there will be arrangements to ensure that redistribution from richer to poorer areas takes place. We will all start from roughly where we are. Indeed this has already started to a limited extent with reforms that have already been introduced.

However the whole point of innovation and freedom will mean that different approaches will be applied and that some areas will succeed more than others.

What is dreary is the Committee’s implied acceptance of the “zero sum game” fallacy. The number of new businesses that will open is not a fixed number. If one town succeeds in promoting enterprise and attracts new business it does not follow that all those businesses would have otherwise opened elsewhere. Some might not have opened at all.

Of course, especially for larger firms, there will be choice and competition over where to locate. The level of Business Rates will not be the only concern but it will certainly be a factor.

For socialists, policies to encourage enterprise by cutting tax and bureaucratic burden represent a “race to the bottom.” They assume that the poor areas will lose out. But this defeatism does not need to become a reality. Poor areas can become rich by showing that they are open for business. They can show to budding entrepreneurs that they provide the best venues for maximising profit.

 

2 comments for: It’s right that devolving Business Rates will make councils compete to attract new firms

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