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English councils gain hundreds of millions from business rates pilot; but at what cost?

A new report, 100% business rate retention pilots: what can be learnt and at what cost?published today by the IFS and funded by its Local Government Finance and Devolution Consortium, finds that English councils piloting 100% business rates retention could gain around £870 million in extra funding in 2018–19. This would be equivalent to 3.6% of their core spending power. However this is revenue that would otherwise have flowed into central government coffers and could have been used for other purposes.

The pilots may help the government maintain momentum behind its changes to the local government finance system. But it is unclear how much can be learnt from them. The pilots may not last longer than a year, limiting the potential to learn about how councils would respond to a longer term scheme. Furthermore a ‘no detriment’ clause guarantees councils won’t lose out, which means we cannot learn much about how they would respond to the risk of bigger falls in income that could arise if the policy were rolled out nationally.

In terms of the financial implications of the pilots, the report finds that:

  • Revenue forecasts suggest that pilot councils could receive a funding boost in 2018–19 of around £870 million relative to remaining in the 50% retention scheme existing elsewhere. Historically, these forecasts have tended to over-estimate revenues: but even if 2018–19 forecasts were 2.3% too high (the average over-estimate between 2013–14 and 2016–17), the gain to pilot councils would still amount to around £650 million.
  • The gains to different pilot councils in 2018–19 depend on real-terms business rates revenue growth since 2013–14. Forecasts suggest London councils could gain £430 million (£49 per person, or 4.9% of core spending power), and councils in Berkshire could gain £53 million (£59 per person, or 8.4% of core spending power. In contrast, we estimate that Liverpool may see a gain of just £2.5 million (£5 per person, or 0.6% of core spending power).

We do not know how this money would have been spent in the absence of the pilots. One option would have been to increase general grant funding for all councils instead:

  • If this funding had been allocated according to assessed spending needs (measured by the official Relative Needs Formulae), all – not just some – councils would have received a boost to funding, with an average gain equal to £16 per person or 2% of core spending power. Councils in areas with high levels of assessed spending needs – typically in more deprived urban areas – could have seen gains equal to around £20 per person.
  • Most pilot councils would have received less funding from an increase in grants than they will receive from piloting 100% business rates retention.For instance, London councils would have received, on average, £31 per person less from such a boost to grants than from piloting 100% retention.
  • But some pilot councils – those with high assessed spending needs and/or low real-terms growth in business rates revenues since 2013–14 – would have actually seen more funding in 2018–19 from an increase in grants.This includes many of the councils piloting 100% rates retention in urban areas of the North and Midlands of England, including Liverpool, Dudley, Oldham and Bury.

The report also examines how the pilots will operate:

  • In most pilots operating in areas where counties and districts share responsibility for local services, relatively more of the risk and reward from changes from business rates will be borne by counties than under 50% retention.As stated in a recent report published by the IFS this could help reduce the overall risk of funding divergences and channel a little more money to county-level services like adult and children’s social services.
  • Some pilot areas plan to channel most of their extra funding into pooled pots of money that will be allocated according to jointly agreed priorities. Others are allocating more to individual councils based on revenue growth or funding requirements. Unfortunately, the short time the pilots are guaranteed to run for means it may not be possible to compare outcomes from the different approaches.

David Phillips, Associate Director at IFS and an author of the report said: “The English councils piloting 100% business rates retention are set to gain hundreds of millions of pounds in extra funding as a result this year.”

“An alternative use of the same funds would have been to boost grants to all councils by 2%, or £16 per person. While many of those chosen as pilots would have gained less, such a funding boost would have been welcomed by councils that have not been chosen as pilots.”

Neil Amin-Smith, Research Economist at the IFS and another author of the report said: “Given pilots are guaranteed for a year only, and councils are prevented from losing out, the potential for learning about the impact of a long-term 100% business rates retention scheme is limited.”

“Their main purpose may be more strategic. They allow the government to maintain the momentum for reform, given it shelved plans to roll out 100% business rates retention across England after the June 2017 general election. The combination of the voluntary nature of the pilots, and excess demand from councils to become pilots, may mean the government can use them to make changes to the scheme that would be much more controversial if imposed centrally.”

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