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Government / Local politics

Devolving business rates isn't enough. England's cities need full control of their finances

The government’s commitment to devolve business rates to local government after 2020 is a significant and positive announcement, in as much as it demonstrates a willingness to give more control to local government over the taxes that are raised in their area.

There remains much detail to be clarified regarding how the new devolved version of an already complex and partly localised tax will work – but we do know that the devolved tax will replace the current revenue support grant funding to local authorities to pay for public services.

Yet this raises questions about how sustainable a model of local government funding, heavily reliant on this one revenue stream will be. These questions are especially important in those places less able to generate high revenues, such as rural and less economically successful urban areas.

This is illustrated sharply in the Liverpool City Region: on 2013-14, business rates generated in the area accounted for less than half the amount of funding received to provide local government services.

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Our latest briefing, which builds on our report that maps national tax and spend data across the country, shows that £471m was collected in business rates across Liverpool, St. Helens, Wirral, Sefton, Knowsley and Halton local authorities in 2013-14. Meanwhile, the area received approximately £1bn in grant funding from central government (which includes revenue support grant plus the local share of business rates under the current scheme).

The government has indicated there will be a safety net for those local areas facing this kind of shortfall, and that some kind of re-distribution will remain in the new system, to help offset some of the differences in business rate bases that exist between city regions. But if the new arrangements are to provide an effective growth incentive, some places will do better than others.

These figures don’t just highlight the potential scale of the challenge that a more devolved funding regime for local government poses for Liverpool: these are issues that will also affect other city regions such as the West Midlands, the North East, Greater Manchester, and South Yorkshire.

That’s why it’s vital, that as the fiscal devolution debate moves forward, a wider range of revenue streams and service delivery options are considered, to make sure authorities are not overly dependent on a narrow tax base to fund their activities in the future. Getting these arrangements right will be crucial in ensuring that the government can deliver a more sustainable local government funding system – and in enabling city-regions to address both the challenges and opportunities that greater fiscal autonomy will offer.

Louise McGough is a policy officer at the Centre for Cities. This article was first posted on the think tank’s blog.
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