The business rate retention scam

“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.”

Source: The Times (pay wall)

One thought on “The business rate retention scam

  1. It has been obvious to me for some time that Conservative policies to push funding to a local level were likely to make British society more divisive.

    In Kensington & Chelsea, you can own a multi-£m mansion and pay c. £700 per year in council tax. K&C has a very low social care need, so cutting their social care grant costs them very little, and they will have to put up council tax by only a tiny amount to compensate (if they need to raise it at all – remember they gave their council tax payers a £100 rebate after saving money on the Grenfell Tower refurbishment).

    Devon has a high social care need, so our Council Tax will be going up yet again by significantly above inflation – fortunately a lot of Devon residents can afford such increases. (But remember when you gripe about this, that this rise in council tax is not really a local tax rise, but just a reflection of a central government policy to give tax cuts to the ultra-rich funded by cuts in council grants.)

    e.g. Liverpool has a very high social care need, but council tax payers will just not be able to afford big increases – presumably Liverpool residents will just have to go without social care.

    So the net outcome of Conservative Government policies to fund social care from local taxes will be to create a postcode-lottery on social care, making deprived areas even more deprived whilst boosting the finances of the well off areas like K&C (which coincidentally is where many of the big Tory Donors live). This is social engineering – they are taking us back to pre-Victorian times when 5% of the population owned almost everything and the poor were destitute and lived in squalor (or on the streets).


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