1. Governance
October 7, 2015

"You cannot have capitalism in one borough": what will local business rate retention mean for London?

By Richard Brown

The pathway to local government devolution is rocky, with surprises waiting round every corner. Just when we had got used to the asymmetric “city deal” model, and to a deafening silence on fiscal devolution, the chancellor unveils another surprise – full devolution of business rates to local authorities.

This measure, recommended by the London Finance Commission in their 2013 report, is good news for London and other local authorities, a tentative first step away from the centralised funding model that came in with Council Tax. There are still details to follow, and there will doubtless be all sorts of devils lurking in them, but the starting point will be each local authority retaining all the business rates it collects, with a corresponding reduction in central government grants.

Grants will then be frozen, so any increase in business rates from local growth will be retained by the local authority; any reduction will hit budgets. This creates an incentive to promote business growth (though it would be hard to find a councillor who didn’t already want more businesses on his or her patch).

Councils will not have unfettered power to vary the level of business rates charged locally. They will be able to give discounts as an incentive to attract or retain businesses, but will only be allowed to increase the rate charged locally in limited circumstances (essentially, for infrastructure investment, in consultation with local businesses, and in places where there is an elected mayor – the approach that part-funded Crossrail).

Commentators have observed that, if London continues to grow faster than other UK cities, further measures will be needed to rebalance taxes between the regions (which risks undermining the incentives). But London also presents a microcosm of this challenge in itself, as a result of its pronounced split between central business districts and residential suburbs, many of which have significant proportions of poor people.

London has some of the biggest tax generators in the country but also some of the areas with biggest concentrations of need. If there was no equalisation in place, some London boroughs would be able to fund their services with huge surpluses to spare, while others would be among the most underfunded in the country. Research by Local Government Chronicle suggests that City of London, Westminster, Hillingdon, Camden, and Kensington and Chelsea would be the five best-funded councils in the country; Lewisham, Waltham Forest and Haringey would be among the worst-funded.

While the equalised starting point would level the playing field on day one, the mayor’s infrastructure plan suggests that growth will continue to be spread unevenly between boroughs, with central London gaining most ground. All other things being equal, therefore, outer London councils would gradually lose funding while inner London councils would gain.

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Outer London councils might try to remedy this by aggressively cutting local business rates to attract more businesses. But even assuming it was successful, this “race to the bottom” would quickly create conflicts with the assumptions of the London Plan and Transport for London’s strategy, which assume a hierarchy of business districts.

The end point of this approach, making London into 33 self-sufficient local economies would not just go against decades of policy, but would fly in the face of London’s status as a world city. To paraphrase Engels, you cannot have capitalism in one borough.

Alternatively, and as suggested by the Finance Commission, London boroughs and the GLA will need to find a new way to allocate funding, so that the boroughs with most businesses share the proceeds of growth with the boroughs that house their workforce. The GLA and London boroughs have strengthened their ties in a number of ways already; perhaps fiscal devolution will push them to take their relationship a step further, and open a joint account.

Richard Brown is research director at the Centre for London.

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