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Councils concerned about impact of cuts – and uncertain about effects of the business rates retention policy

A new report by researchers at the Institute for Fiscal Studies (IFS) uses recent surveys  from the Local Government Information Unit (LGiU) and PwC to examine council decision-makers’ views on whether cuts to funding have affected service quality and on the impact of business rates retention scheme (BRRS) on revenues and incentives. It also looks at how these views vary around England.

Survey responses suggest confidence about councils’ abilities to maintain service quality in the short term but significant concerns about the impact of cuts in the longer term. It also finds uncertainty about the revenue impact of the business rates retention scheme so far, and about the design and impact of a proposed expansion of the scheme.

The report was funded by the IFS’s Local Government Finance and Devolution Consortium. Key findings include:

Cuts and service quality

  • Despite years of cuts, 89% of respondents to the LGiU’s survey say that service quality was maintained in their area last year. However, just one-in-three respondents to PwC’s survey are confident that they can avoid significant reductions in quality over the next three years, falling to one-in-six over the next five years.
  • Respondents’ confidence about service quality in 2016–17 and 2017–18 is not related to the scale of cuts their council has faced over the last seven years. However, respondents from councils where revenues have fallen more, and those set to see bigger cuts between 2016–17 and 2019–20 are more concerned about service quality going forwards. It may be that while mitigation measures (such as use of reserves and continuing efficiencies) can offset the impact of larger cuts in the short-term, they cannot do so indefinitely.
  • Respondents from ‘upper-tier’ councils with responsibility for social care (and many schools) are less optimistic about service quality than those from ‘lower tier’ shire district councils without such responsibilities. Almost 75% of respondents from such councils thought cuts would be evident to the public in 2017–18, compared to just 15% of respondents from shire district councils.

Business Rates Retention

The BRRS currently lets councils keep up to 50% of the growth in local business rates revenues and was introduced in 2013.

  • Two-thirds of respondents to PwC feel unable to ascertain whether their council has gained or lost financially from the BRRS. This may be because they are unsure what the funding system would otherwise have looked like, or be caused by the complexities of the scheme.
  • A lack of understanding and information about business rates performance could make it difficult for local stakeholders to hold their councils to account, thereby blunting the intended incentives for growth the scheme was designed to create.

Plans were announced in Autumn 2015 to move from 50% to 100% business rates retention by 2020.

  • 40% of respondents to the LGiU survey expect that 100% retention would incentivise local economic growth, but only 23% expect that their council would gain financially from such a policy.
  • Respondents from councils which have done relatively well under the current 50% scheme, and where recent economic growth has been higher, are also more optimistic about 100% business rates retention.
  • In thinking about the design of the business rates retention system, respondents from Labour-controlled councils are much more likely to prioritise redistribution (87%) over incentives for revenue growth (13%), whereas respondents from Conservative-controlled councils are roughly evenly split. This appears to be driven by the fact that Labour-controlled councils tend to have higher spending needs and may expect to win from fuller and more frequent periodic redistribution of revenue growth.
  • These systematic differences in preferences suggest it could be difficult to design a 100% BRRS that can command support across the political and socio-economic spectrum.

David Phillips, Associate Director at the IFS, and an author of the report said:

“Officials and politicians from councils that we estimate have done well out of the business rates retention system so far, and where recent economic growth has been faster, are significantly more confident that the proposed 100% rates retention scheme would benefit their council,“

“This is perhaps unsurprising. But such confidence may be misplaced. Other research shows that over the period 2008 to 2015, at least, there was remarkably little link between local economic growth and increases in the business rates tax base. In other words rapid economic growth does not guarantee good business rates performance, and vice versa.”

Jonathan Carr-West Chief Executive, LGiU, said:

“Councils currently have little certainty as to how they will be funded beyond 2020. The impact of 100% Business Rate Retention looks increasingly uncertain. For councils, who have been told in recent years that they should be investing in their local economy so that they will be able to fund themselves through business rates post-2020, the current lack of policy direction adds yet another layer of uncertainty and complexity to their financial planning.

There is now an opportunity to have a rethink about how we broaden the local tax base to create a sustainable way of funding services in the long-term. More creative approaches to fiscal devolution were ruled out of the initial round of devolution talks: it’s time to revisit them.”

Jonathan House, PwC partner, commented:

“With council finances under continued pressure and social care dominating spending, they will need to think radically about their future strategy and service models and assess different scenarios given the prospective shift to 100% business rate retention.

“Leaders in local government will need to be particularly alert to how a shift to 100% business rates retention will impact on local economic growth and on their plans to reform public services.

“Councils have proved their resilience and ability to deal with the challenges they are faced with. As they look to the future, they will need to find new ways to innovate and invest in drivers of growth, all in the face of continued uncertainty.”

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