The weasel the government sneaked through during the phone-hacking frenzy

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

Tags: , ,

5 Responses to “The weasel the government sneaked through during the phone-hacking frenzy”

  1. Don Gately says:

    I doubt pickles will have his way – there will be a range of losers here – some rural/suburban areas, full of dormitory housing, around conurbations could lose out. They’ve seen their population increase but not the local economy as commuters socialise and shop nearer to an urban workplace than the more peripheral home. That approach was fine under the council tax regime – which incentivised residential population growth – but a problem when business rates are made local.

    This will threaten some conservative seats and with the political balance the way it is that’ll be a significant problem for pickles.

    At the same time cities like Manchester – which have effectively been subsidising peripheral conservative councils as their business rates have been absorbed into the national pool – are projected to see a massive boost to their income.

    The impact isn’t all negative for labour councils and positive for tories. This will create a kind of financial chaos with many unintended outcomes – that seems a better tack for opposition than just the “punish my lot/reward your lot” approach. It’s not that this is skewed (although across councils as a whole it’ll favour the south east above much of the rest of the nation) as much as it’s completely irresponsible with no real understanding of the risks involved in such an approach. I think the govt can be hit harder on measures of incompetence than on their political agenda as they’re a complete shower.

    I would predict that Pickles temporary measures end up effectively permanent though – wasn’t the Barnett formula supposed to be a temporary fix?

  2. doreen ogden says:

    Utterly frightening – I did read a bit about this but did not realise the full implications so thankyou. I think a lot of devilish deeds are slipping under the radar. They really do not have any conscience as well as no mandate for all these changes. Disgusted.

  3. Haro Yousofian says:

    Poorer areas, rich areas is all nonsense. It is the central government that ultimately contributes to the councils budgets. The system that the rich give to the poor is a stupid one and should have never been put into place. Complicated formulas and god knows how many systems won’t change the fact that different councils have different potential for raising money and sooner or later it is the central government that will need to step in. In short poorer councils will either have to be able to compete with the rich councils which seems to be the way it is going or the central government should pick up the tab for the required statuary obligations of the councils whatever the cost. How many times in the past areas have become deprived and been ignored by everyone and have become the dumping ground for the list able people in the society.

  4. Sue Marsh says:

    It alarmed me!!! This is terrible!! As a “welfare warrior” i know all too well, that people don’t believe that what I’m telling them can really be as awful as I say. If anything, I hold back. It is in fact a little more awful than I say.

    Please tell me that this is spin? Because if not it will surely lead to the greatest inequalities our country has ever seen? It’s a HUGE change??

    Please, really, tell me it might not be as bad as you say?

  5. Richard says:

    Don Gately, I think you may be right about the suburban/rural areas, such as my own, many of which are marginal seats which effectively decide the winners in any election. Add to that that these areas are seeing their high streets fall into disuse at an alarming rate.

    As for the possibility of some councils removing council tax altogether, I’m not sure that this will go down well with the business community which will see itself as bearing all the burden for public service provision. And one unintended consequence of this could be that it affords them far too much power and say over local communities and service provision.

Leave a Reply