1. Governance
October 17, 2016

“A tax which reflects inequality of prosperity can't correct inequality of opportunity”: on business rates

By Paul Watson

On 30 September, for the first time since 2010, the Valuation Office Agency published revised property values used to calculate how much firms across England only owe in business rates. The government says that the revaluation would be fiscally neutral – but while the overall burden will not rise, but rather will be redistributed across the country.

Here, Paul Watson, the Labour leader of Sunderland council and chair of the Key Cities group of 26 mid-sized cities, warns that the change could disadvantage areas of the country beyond the rich south east.

We have heard a lot in recent weeks about the effect the business rate revaluation will have on businesses. London Mayor Sadiq Khan has called it a “kick in the teeth” for the capital, and many businesses have expressed fears that it will stifle entrepreneurship and employment.

I think we can all conclude from the process that it is better if in future, we don’t bottle up major changes in business taxation, only to open the floodgates all at once. Especially following the referendum result, businesses are craving certainty to lay plans for the investment our country needs. Major changes in their tax burden may contribute to the overall perception of instability.

But business rates, despite the name, are not just a business concern, and there is another side to the story: public services. Business rates are a critical source of revenue for our councils. The tax funds about 17 per cent of local council spending on housing, social care, bin collections, and other services we provide.

Of course the rateable value of property varies across the country, and the revaluation reflects that – in London, rateable values will rise about 11 per cent on average. In the North East, they will fall 11 per cent. In fact, they will fall on average in every region outside London.

Now, normally, we account for this variation: central allocations of revenue smooth out the differences between the regions. The last chancellor George Osborne, however, announced that local authorities would have full retention of business rates by 2020. As I reflected last October, however, without some element of fairness and redistribution, full retention will be a blunt and crude instrument which will undermine public service delivery by many local authorities.

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The facts are clear: we can’t rely on a tax which reflects the inequality of prosperity across our country to correct the inequality of opportunity we see. Business rates reinforce the income of councils in areas which have benefited from the economy we have built over the last 30 years.

And we know that the British people want a different economy. The one we have now has excluded too many people from sharing the benefits of growth – a concept that has only really been accepted by policy makers following the EU Referendum.

It is especially important to remember the key facts even as the mood music from the government shifts. The Chancellor of the Exchequer has made welcome noises about abandoning the previous chancellor’s significant deficit reduction targets and about expanding infrastructure investment.

We hope that this is followed through to action. But it cannot conceal the fact that local authorities have taken budget cuts greater than almost every other part of government in the last six years.

We are still under pressure. The cuts we have made are not being restored. If the government moves toward full retention of business rates without that element of fairness and redistribution, our revenues will fall still further even as our residents’ needs keep rising. Less affluent local authorities will be punished with another major round of spending cuts.

T0hat threatens to stop the devolution agenda in its tracks. It threatens to stop any inclusive industrial strategy – which the government has been keen to stress as its priority – in its tracks as well. It threatens the people of my city, and the people across the Key Cities group, with the risk of falling further behind the South East.

It also risks failing to heed one of the key lessons of the EU Referendum result – that we have still not done enough to spread growth around the country.

The task of building an inclusive economy with meaningful devolved power is so much more than passing on the responsibility for cuts. That’s why we need to take the opportunity of the revaluation to reflect on the resources local authorities need, particularly in areas which voted Leave, to turn around years of an economy that didn’t work for them. Abandoning a policy that risks entrenching unequal growth would be a good place to start.

Cllr Paul Watson is leader of Sunderland City Council and chair of the Key Cities group of 26 mid-sized cities. 

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