by Michael Dugher
It’s fair to say that local government finance is not something that sets hearts racing. The complexity – or incomprehensibility – of the subject turns off even the most ardent policy wonk. In fact, some of you reading this article are already thinking about abandoning doing so, with a view to logging on later when hopefully Dan Hodges has written something more interesting. So when Eric Pickles made a statement in Parliament about local government business rate retention during the height of the phone-hacking frenzy, it was not surprising that the majority of the media gave it little attention. However, despite the lack of interest, these proposed changes that have slipped under the radar are extremely important and could be the government’s most damaging reforms to date.
At the moment, local businesses pay rates to the council, which are then pooled nationally before being redistributed to less affluent local authorities using a complex formula. This system generated over £19bn last year and is used to pay for crucial public services like the police and fire brigade. The government wants to change this. From 2013, it wants to “re-localise” business rates, meaning that councils will get to keep the money they receive from local businesses within their patch.
The government says this is all about “localism”. Eric Pickles claims that enabling councils to retain what they gather from businesses within their area will incentivise them to foster a more competitive business climate. The idea is that councils will try that much harder because they will be the ones that reap the rewards. Pickles has gone as far as saying that it will empower poorer councils to stop having to use their annual “begging bowl” in Whitehall.
But the fact is the country is an unlevel playing field. The amount raised via business rates varies widely from council to council. Councils in poorer areas, with a structurally weaker local economy, cannot just “incentivise” growth and attract new businesses out of thin air. Companies are attracted, for instance, to setting up in London boroughs and the surrounding areas because of all the established advantages that this brings. Attracting businesses to more deprived areas is not as easy. These changes will undoubtedly result in an increased gap in wealth between rich and poor councils, and will add further strain on less affluent councils, particularly in those metropolitan areas outside London and the south east. This in itself will reduce the ability of less well-off councils, who of course have higher needs, to deliver vital services.
SIGOMA (the organisation that represents the large metropolitan councils) has calculated, for example, that Barnsley council would have received over £40 million less last year if the changes had already been in place. This equates to an over 8 per cent cut to its annual revenue. Conversely, a council in a wealthier area like Westminster would be able to fund 482 per cent of its annual budget through business rates alone. This kind of additional income would enable councils in richer areas, often in Conservative-supporting parts of the country, to reduce, or even remove altogether, their council tax as well as at the same time being able to provide better local services. Wealthier councils would indeed swim, whereas poorer councils would be left to sink.
Responding to some of these adverse criticisms, Eric Pickles has promised a system of tariffs and levies for the first year of the system. He claims that these will ensure “a fair starting point” for funding. However, he has said that after this first year, local councils will be “on their own”. Rich authorities will then be free to watch their business rate receipts go through the roof, while other authorities struggle to deliver vital local services and fill the black hole in their finances. A grotesque postcode lottery would ensue. As Steve Houghton, the leader of Barnsley council, has said:
“If we accept a system that only provides resources through economic growth activities, and takes no account of increasing needs of our most vulnerable, how will we be able to explain as a country that for many, those services will only be available in areas of prosperity”.
The impact of the changes to local business rates comes on top of the disproportionate cuts that poorer councils are already facing due to the annual reductions of central government funding. Changes in the business rates represent a “double whammy” for deprived areas. All local authorities are facing cuts of seven per cent a year over the next few years, but councils in poorer areas are disproportionally hit as their revenue from council tax is less and they are inevitably more reliant on central government funding. Again according to SIGOMA, in Kingston-Upon-Hull – the eleventh most deprived area in the UK – only 33 per cent of its budget is funded through council tax, resulting in a seven per cent cut in its overall funding next year. In contrast, in Surrey – the third least deprived area – 82 per cent of their budget is funded through council tax, which means, perversely, that their budget will actually increase next year. And this doesn’t take into account possible business rate retention.
The truth is that these regressive changes have more to do with laissez-faire economics than localism, though there is more than a whiff of party politics about them. When Eric Pickles talks about empowerment, for many parts of the most deprived and struggling parts of country what he really means is impoverishment. It may not be grabbing the headlines, but these reforms should alarm anyone who cares about a fair and more equal Britain. It’s time to get seriously interested in local government finances.
Michael Dugher is Labour MP for Barnsley East, a shadow defence minister and parliamentary private secretary to Ed Miliband