1. Economics
October 8, 2015

Devolution: could cutting business rates attract new businesses to councils?

By Paul Swinney

The chancellor’ s announcement this wek that local authorities will be able to cut their business rates has led to questions as to whether this will lead to a “ race to the bottom” as they compete to attract businesses. In order to answer this, we need to answer two further questions. Would it appeal to business? And could local authorities afford to cut their rates?

Would varying the business rate appeal to business?

This is likely to depend on the type of business we’re talking about. If we’ re talking about a low-skilled business that trades beyond its local market, such as a large distribution centre, then the answer could well be yes. These businesses are looking to minimise costs as much as possible, and so are looking for cheap land, cheap workers, cheap taxes and/or a subsidy from the government.

The picture is likely to be somewhat different for a high-skilled business that trades beyond its local market. For these businesses, access to a large pool of skilled workers that they can recruit from, and proximity to clients, collaborators and even competitors, is a more important influence on where they locate than property costs.

The concentration of these businesses in the pricey offices of central London is testament to this. While of course these businesses aren’ t immune to cost increases, a couple of pennies difference on the business rate is not likely to sway their decision to change address.

Then there is a third type of business – the newsagents, hairdressers and other similar businesses. The location of these companies is determined by the location of their customers rather than tax rates. A rate cut would just keep more money in their tills.

Could local authorities afford to cut their rates?

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Even with the ability to vary the business rate, continued austerity in the public sector is likely to mean that the vast majority will not be in a position to do so.

Local authorities have been in a position to offer a business rate discount to businesses for some time, with the authority itself repaying any shortfall back to the Treasury. To our knowledge Bradford is the only authority that has done this to date. There is also a question as to whether rents would rise in response to any cuts in business rates as landlords try to capture a larger slice of the pie.

This would suggest that very few local authorities would be willing to use their newfound flexibilities to cut the business rate. And even if they did, it would do little to make them a more attractive place to do business from the perspective of a high-skilled company.

Paul Swinney is senior economist at the Centre for Cities. This article originally apeared on the think tank’s blog.

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