1. Governance
October 9, 2015

Business rate reform: What will George Osborne's latest wheeze mean for England's cities?

By Jonn Elledge

Note: The headline of this story originally referred to “Britain’s cities”. However, a reader has since pointed out that local government finance is a devolved matter, and so Osborne’s policies only apply to English councils. Oops. We’ve left the Centre for Cities charts in tact, but edited the text to make this clear.

Earlier this week, that cheeky tyke George Osborne did something pretty radical: he became the first chancellor in a generation to give local councils more control over their finances.

Since 1990, councils have collected business rates, a form of property taxes charged on commercial sites. But they’ve not been able to decide what rate to charge those taxes at, or even keep the money: instead, they’ve sent it to Whitehall, where some civil servants decide how much each council needs based on its demographics.

Under Osborne’s reforms, all that will change. In future, councils will collect and keep their own business rates. They’ll be able to cut the rate at which they are charged. A lucky few – those with elected mayors – will even, after consulting local businesses, be able to raise them, to pay for specific infrastructure improvements.

Maybe – I know this sounds unlikely, but let the idea breathe for a minute – maybe he’s not kidding with all this devolution stuff.

This has predictably caused a bit of a flap in the Labour party, which warned that it’ll mean taking money from councils in poor areas to give to those in rich ones.

And they’re not wrong. The reforms will mean the end of the system of redistribution currently in place to even local government finances out.

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At first the grants through which money is redistributed will remain in place, to make sure the new system doesn’t provide any major shocks. Over time, though, they’ll be phased out, and cities will need to grow their business base to ensure that they don’t lose money.

So how will this change affect things? Here, with the help of some charts from the Centre for Cities, are a few lessons.

Councils are getting control of a substantial chunk of national tax revenue

The £26bn of revenue currently raised from business taxes is about 5 per cent of all tax paid in Britain.

Now, this is an unusually centralised country: in many places, substantially more than 5 per cent of the tax is raised and spent by local government. (Also, this figure presumably includes business rates paid in Scotland, Wales and Northern Ireland, which aren’t being devolved.) Nonetheless, in a British context, this is a significant change.

Cities will do much better than suburbs

Some areas will do better than others: Osborne’s critics are right about that much.

For one thing, some local authorities are largely dormitory suburbs for commuters who work in business centres over the border. Consider these charts, showing the share of business rates raised in the various local authorities in Britain’s three largest conurbations:

Source: Figure 14, Mapping Britain’s Public Finances, Centre for Cities, July 2015

Westminster, Manchester and Birmingham will do a lot better out of this deal than Sutton, Stockport and Sandwell. It seems likely that city regions and combined authorities will need some form of pooling arrangement to balance this out, to ensure that the councils providing the workers benefit from their labours.

And some cities will do better than others

Here are the top 10 combined authorities (covering some urban areas) or local enterprise partnerships (covering everywhere else). They include Edinburgh and Glasgow, which, alas, won’t benefit from the new policy.

London unsurprisingly is way, way out ahead. Its population is about three times bigger than the Birmingham and West Midlands conurbation – but its business rates are nearly seven times that.

And this is only the top 10. Other major cities including Liverpool, Sheffield, Bristol, and Nottingham don’t make this list at all. They’re bringing in just a fraction of the business rates that the biggest cities do.

Things are slightly different when you crunch the numbers per worker

That said, London is a lot bigger than Liverpool: you’d expect it to bring in more taxes. What happens when you look at the figures per capita?

Suddenly, less likely places like Hull (Humber) and Middlesbrough (Tees Valley) are climbing the rankings.

Now “per worker” isn’t “per head” – areas with lots of business premises but high unemployment might rank surprisingly highly. But one would assume that an increase in employment would be accompanied by an increase in business rates too. It’s hard to read this as bad news for Middlesbrough.

(Incidentally, GCGP is Cambridgeshire; Enterprise M3 is Surrey and Hampshire.)

But inevitably, there will be winners and losers

Imagine national distribution had been abandoned in 1999. This chart shows which areas would have benefitted, or lost out, over the next 11 years.

This, unlike the previous chart, is bad news for Middlesbrough. And Hull. And Liverpool, Sheffield and, worst of all, Birmingham.

What this suggests is that, if Britain were to abandon business rate redistribution over night, a lot of mostly southern cities (and Leeds) would do very nicely out of it. A lot of mostly northern places (and Birmingham) would get stiffed.

But we aren’t abandoning redistribution over night. We’re phasing it out, which gives cities time to adjust. And…

Business rates generally grow over time

In the decade to 2010, 55 of Britain’s 56 largest cities saw their business rate base grow:

Source: Table 1, Room for Improvement, Centre for Cities, July 2011.

The vast majority didn’t just grow, they grew by 10 per cent or more. The only one that saw its tax base shrink was Bradford.

Now the past can’t always be used to predict the future. And this data doesn’t cover rural regions either. But what this suggests is that it is at least plausible that most places should be able to adjust to the removal of redistribution.

Osborne’s reforms probably aren’t really motivated by a deeply-felt desire to give away power (I mean, really). But they probably aren’t just about sharing the blame for austerity either.

If they go to plan, they should change the function of local government, from service delivery to something else. For the first time in decades, councils have a direct financial incentive to encourage business growth in their own areas.

This, one suspects, is the whole point.

Jonn Elledge is the editor of CityMetric and tweets as @jonnelledge.

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