FOR too long, local government finance rules have forced councils to go cap in hand to the Treasury like a child asking for pocket money. So at first glance, plans to allow authorities to retain all the funds raised through business rates are most welcome.
However, this might not be the great emancipation many have longed for. The apron strings may have been cut, but local authorities will still be living under George Osborne’s roof and playing by his rules.
We may have to wait until the November 25 spending review for full details but from what we’ve seen so far this looks less like a full scale rates revolution and more like a half-hearted attempt at financial devolution.
As it stands, only a few areas will be trusted to agree a 2p rise to fund major infrastructure projects. The rest will only have the power to issue a blanket rate reduction. This is a blunt instrument which represents a loosening of the restraints rather than full scale liberation.
What is needed is a more sophisticated and nuanced approach which shows faith in the ability of local councils to shape their own future. Osborne should think outside of the Westminster bubble and recognise that the Treasury does not have a monopoly on economic literacy. There is a wealth of expertise at council level and authorities need the flexibility to use their local knowledge to secure inward investment. The power to cut the business rates is a good start. But I would argue that councils need the power to set varying rates within their area and take smaller businesses out of rates altogether.
In Rochdale, the local council has had great success reducing the number of vacant town centre shops by offering rate discounts for independent retailers for the first 2 years. I would like to see this extended full time, with councils given the power to offer lower rates on the high street and place a premium on out of town mega stores and business parks.
The benefits from a thriving business park are all too often not felt in the wider community while a vibrant high street is in everyone’s best interests. Restaurants and cafes get a boost when high street shop spaces are filled and other retailers reap the rewards of increased footfall. The higher concentration of businesses in town centres mean that the cumulative economic benefit from infrastructure investment is greater than in the isolated out of town business estates.
With the freedom to succeed comes the risk of failure and I welcome Osborne’s commitment to review the policy in five years and to provide a safety net to any council whose revenues fall by 7.5% or more. There is a lot of talk about a “race to the bottom” as councils in less well-off areas compete to slash rates to rock bottom prices in a bid to attract business.
This is a valid concern. Without the proper safeguards, there is a risk that already wealthy areas like Westminster and Richmond will become the municipal equivalent of Fortnum and Mason while struggling areas in the North are relegated to the status of Poundland.
The answer to this lies in the greater flexibility to negotiate with businesses over rates to raise the funds needed for specific projects. Firms looking to relocate are not bargain hunters, automatically opting for the authority which offers the lowest rates. Other factors, such as labour market skills and the state of the local infrastructure, play an important role in this decision. Business owners would be willing to pay a little more if they could be confident their local authority is spending that extra cash on, for example, training and transport.
Devolution should never be a top down process and discussion between councils and business is vital if this scheme is going to be successful. Unfortunately for the time being, both are in a state of limbo while they wait for Osborne to flesh out his plans.
The Chancellor is not the only one who favours a “long term economic plan” and councils and private companies will need to know the details sooner rather than later so they can be prepared.
With the introduction of the national living wage and the apprenticeship levy, costs are already rising for businesses. Certainty about the future is a key requisite of major investment and the Government needs to open a dialogue with the private sector as soon as possible to address any concerns.
Government, councils and businesses need to work together to scrutinise the existing system to determine what needs to be tweaked and what needs to be banished to the scrap heap of history.
One question local traders have asked me is whether these proposed changes affect the long delayed revaluation of rates due to come in in April 2017. Reform is needed to ensure small businesses are never again left paying over the odds because of Government failure to react to fluctuations in the property market.
These should include a major overhaul of the antiquated Valuation Office Agency. This slow moving relic needs bringing into the 21st century so that rates valuation can be updated more regularly.
With greater variation in the business rate system across the UK, businesses will have more power to negotiate and argue for a better deal. With this in mind, there will need to be reform to the rates appeal system to protect councils from what has become a very costly procedure.
I also call on the Government to legislate for greater controls over those nefarious and parasitic agencies who prey on small businesses with promises of lowering their rates only to chase clients for extortionate commissions.
Urgency is key here. The sooner these issues are clarified the faster the changes can be implemented. In my work as chair of the all-party parliamentary group for small shops I can tell you that for many small traders, an overall of the rates system cannot come quick enough. To put it bluntly, many shop owners will not be in business in 2020 to enjoy the benefits of reform if action isn’t taken.
Previous Labour administrations should have done more to devolve power to local authorities and so far the Government has had a good record in this area. If done right, the proposed changes to business rates could be the driving force behind major economic growth by setting free the entrepreneurial spirit in the regions. But this won’t happen if reforms are too timid, too prescriptive or too slow.
(This article originally appeared in the Municipal Journal in October 2015)