A local government finance expert has predicted battles ahead between better off and poorer councils after the government unexpectedly published legislation to allow business rates devolution.
In a move that took the sector by surprise, the government last week published the Local Government Finance Bill, which will enable local government to retain 100% of the income it collects through non-domestic rates.
But big divisions within the sector remain over how the needs of poorer authorities can continue to be met without reducing incentives for councils that encourage growth.
Management and finance consultant Stephen Fitzgerald said: “It is encouraging that rates are going to go back under local authority control but the lack of a reformed equalisation method means that the wealthy will get wealthier and the poor will get poorer.”
Despite the publication of the Bill, details of how the new system will operate will remain unknown until work is completed by a steering group made up of government officials and local government representatives.
The work is expected to take a minimum of 18 months, according to those close to the process.
But Fitzgerald raised doubts about the ability of the steering group to resolve divisions between richer and poorer authorities.
He said: “I think it is a big ask for them. It is a political problem — are the better off councils prepared to sacrifice a chunk of their business rate gains so less affluent areas can provide decent services? I don’t see it.
“The local government lobby did a great job putting the argument for rates retention but they never have been able to answer the question about how equalisation will work.”
Richard Harbord, former chief executive of Boston District Council, told Room151: “All pretence that councils will retain 100% of what they raise through business rates has gone, but there is a long way to go to resolve differences over how much richer authorities will be expected to pay in order to ensure poorer ones can meet needs.”
“The work on the fair funding formula being carried out by the working groups looking at this has not got very far. There is still a huge amount of work to do.”
Harbord also said a similar debate is now likely to be sparked by the government’s announcement that central government will fund losses on business rate appeals through a top-slice system that will share the burden between all councils.
He said: “A lot of authorities are not happy about top slicing. There is a group of them that stand to lose more under this system than they currently lose through appeals. There are likely to be big arguments about how top-slicing will work.”
Claire Kober, chair of the Local Government Association’s resources board, welcomed the announcement on appeals.
She said: “Reforming the business rates appeals system is essential to protect councils from the growing and costly risk of appeals.
“Councils have been forced to divert £2.5bn … from local services to cover the risk of paying half of appeals and refunds over the past five years.”
But she warned that the reform has to happen before local government keeps all of its business rates income so councils can avoid being liable for 100% of refunds.
The sector also faces a £60m hit after the government announced that the Bill will give utilities companies a tax break for up to five years on the new infrastructure they lay for full fibre broadband.
Mike Suarez, chief executive of Cheshire East Council and SOLACE spokesperson on local government finance, said: “There is an ongoing dialogue about localisation of business rates retention and national government setting the incentives for rural rate relief and broadband.”
