The business rates balancing act: London autonomy and national subsidy

by Dave Hill

Yawn all you like, but there was a good reason why Sadiq Khan and others gave a couple of big cheers about the arcane issue of business rates last month.

In March, the national government produced an agreement for more devolution to London government. This included allowing London to “retain a higher share of locally raised business rates” – a sort council tax on non-domestic premises – and a readiness to “explore options” for giving the capital more “powers and flexibilities” over the share it retains.

A pre-requisite was that the Mayor and the boroughs worked out how such new arrangements would function in practice. Khan’s October announcement was that this had been achieved. Doing so wasn’t completely straightforward: although there is a cross-party consensus on the issue I’m told a few Tory boroughs took a bit of persuading before climbing on board.

But what’s to get excited about? What might more business rates autonomy in general mean for London? And what might it mean for the rest of the country?

At the moment, London’s boroughs hold on to only just under half the total amount of business rates raised in London while the rest is spent around the rest of the country. This is an example of how the capital’s economic power supports – or subsidises, if you prefer – the wider UK.

We’re looking at some very tidy sums. There are different sets of figures to draw on, but Hugo Bessis at Centre for Cities, using the most recent official forecast data available, says that £6.8bn a year is generated in business rates in London, of which about £3.3bn is retained in the capital and £3.5bn re-distributed to Barnsley, Bodmin and so on.

The idea is that under the devolution deal London will be able to retain all of the growth in the amount of business rates collected each year. Given that London’s economy just keeps on getting bigger, that looks like more money for London government to spend: the Mayor calculates that it would amount to £240m next year.

Note, though, that London would continue to hand over a fixed portion of its business rates receipts to be used elsewhere. Note too that this change will be in return for the Mayor’s taking on responsibility for giving Transport for London money for investment, which previously came in the form of a grant from central government. So let’s not get carried away.

Another provision of the devolution deal is to allow the “voluntary pooling” of business rates revenue by different authorities. This could mean, for example, boroughs clubbing together to spend on things they collectively need.

All of this should be seen as one more step along a long road towards the far greater control London government desires over how taxes raised in the city are made use of here. And it is also a stage in national government’s policy for all local authorities in England, including in London, keeping all the business rates money they raise in their own areas by the end of the current parliament.

Khan and the boroughs are hoping that the capital will be able to pilot this “100% retention” system. They want full control over London business rates, not only keeping all the money and having the freedom to work out together how best to use it on meeting London’s needs – that’s what the “pooling” provision would allow – but also to set the rates themselves, decide on their revaluations be in charge of the appeals system.

This would take London a significant way towards enjoying the sort of financial autonomy enjoyed by other big cities in other countries. But what might it mean for other big cities in this country, and indeed for the country as a whole?

Hugo Bessis strikes a note of caution. He recognises that were London to start keeping the roughly £3.5bn it currently exports elsewhere it would lose the same amount in government grants, leaving it with more power to spend its money to best local effect – a good thing – but not making it richer right away.

However, over time, London probably would become richer as a result, and particularly by comparison with other cities. That is partly because its economic performance is so much higher than theirs, and partly because if London starts providing less financial support to those other cities, their own efforts to become more economically productive and financially independent would be hampered – a bad thing. He concludes that it’s too soon for London to be allowed 100% retention:

For the national business rate system to be sustainable without London, the amount of business rates collected outside the capital would need to grow significantly. This means the economic performance of other parts of the country, and the subsequent tax take in them, will need to improve substantially. Business rates devolution aims to encourage this, but more will need to be done to tackle long-lasting regional and urban issues.

There are, then, many balances to be struck. As Lord Adonis said on Tuesday, a bigger, stronger London does not have to mean other cities being weakened. And Centre for Cities is in full agreement with him that beneficial urban growth is not a zero sum game. But as Adonis also said, while London needs public investment in new transport infrastructure, just as Birmingham, Leeds, Liverpool, Manchester and others do, London is in a better position to find more of the money needed for this itself. And as Hugo Bessis argues in relation to business rates:

Full retention of business rates, with no form of redistribution, raises questions about the financial feasibility and long-term sustainability of this for other places. The key to the puzzle is to make sure growth occurs in the rest of the country, so that the system can support itself without relying on London transfers.

All of these balances are tricky to get right and doing so is not helped by the political fostering of anti-London feeling and populism around the “north-south divide” that the UK has seen too much of recently. In light of that, the cross-party meeting of mayors from across England at City Hall yesterday, which followed a smaller gathering in Birmingham last month, can only have been helpful. When will a national political party find the nerve and imagination to come up with a national strategy to help all the UK’s cities really thrive?

Read the whole of Hugo Bessis’s Centre for Cities article here.

 

 

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