Last week's announcement of our plan to re-localise business rates is one of the most significant reforms announced by the Coalition so far. Ok, not as newsworthy as the phone hacking scandal, but it's big news for local democracy nonetheless. It marks another fundamental shift from central control to local responsibility.
Under the current local government funding system, Whitehall dishes out grant allocations to councils each year based on an incomprehensible formula that is far too complex and lacking in transparency. Most of this money is funded by the business rates, collected locally, but funnelled centrally, and then reallocated. Councils are left at the whim of the formula-setter in Whitehall, and there is no incentive to promote business growth either. All you get are the extra HGVs, but none of the rates income! All this is about to change.
So what are the main things that people need to know? It's simpler, fairer, and puts real power back in the hands of local government. Under the new system business rates will stay in the area in which they were generated up to the level of existing formula grant (so in 2013 every council will start with the same money they would have got with formula grant). After that future growth in their Business Rate will be retained by the Local Authority in which it was paid, providing councils with a real incentive to go for growth. Local Authorities may even choose to work together and "pool" to share the benefits of growth. The London Boroughs are intending to go down this path and the Greater Manchester Authorities, among others, are also discussing the possibility.
So far so good, I hear you say. But what about the safeguards? How will we stop authorities with low business rate bases, and high levels of deprivation from being unfairly hit? That was my top priority in the Department as the scheme has been worked up. As well as a scheme that provides realistic incentives, we have to have one with effective equalisation. I believe we've succeeded. Firstly, no local authority will lose out in the first year of the scheme. Nick Clegg made this commitment publicly at the recent LGA conference, and it's one we've been determined to achieve. In order to make this a reality, central government will calculate a baseline in 2013/14 (the first year of the new system) for each local authority, which will be based on the Formula Grant funding levels in 2012/13.
Whilst most councils raise roughly the amount in business rates that they get in formula grant, there are outliers that bring in much, much more (think Westminster, and the City of London) and some who bring in much, much less (think Knowsley or Burnley). To balance this out, there will be a system of tariffs and top-ups to ensure that the poorer authorities are protected, and the richest ones don't see disproportionate growth. The tariff and top up grants would be self-funding and remain fixed in future years.
We'll also be introducing a system of insurance against excessive gains or losses, so that an authority doesn't lose out disproportionately if a large business fails in their area (such as a factory or steelworks). This will be paid for out the tariffs on the most well-off authorities, and depending on the levels of money raised, these tariffs could also redistribute resources to, or fund other schemes directly in authorities with lower growth. There will also be a regular revaluation (every five years) of the rateable values of businesses, and the system will be adjusted accordingly to make sure it remains up to date. The system would allow the option of a reset if it was felt that resources no longer met need sufficiently within individual local authority areas. This is fair, and ensures that the most deprived authorities aren't left behind.
It should also be noted that over the last few years, many Local Authorities in areas of high deprivation have also been in areas of above average business growth, and so would benefit from the new system. Liverpool saw an average increase in growth of its business rate base of 5.6% between 2005/6 and 2009/10. Sheffield saw 3.4% growth, Newcastle and Stockport both 3.6%, Manchester 5.7% and Ed Miliband's own area of Doncaster saw 5.9%. In addition to the tariffs and top-ups providing the most deprived areas with a strong safety net, there is much scope for these authorities to benefit from growth in their own areas.
Further to the reforms of Business Rates, we are also introducing Tax Increment Financing as an option for local authorities. Announced by Nick Clegg at out last Autumn Conference, the reforms will give councils the ability to borrow against future business rate revenue to help fund major infrastructure projects.
The re-localisation of business rates is a big step towards the empowerment of local communities. We think we've got a pretty solid and workable framework that balances equalisation with growth. But we're open to views on how we can make it better. The formal consultation on our proposals is an important part of this process. You can find the link here. A plain English Guide to the reforms is also available here.
If you think we've got aspects of this wrong, tell us. I want to hear people's responses loud and clear in the coming weeks. This is an important reform. It's crucial we get it right.