George Osborne has promised to hand councils full control over business rates, a decision that threatens to lock local authorities into competitively cutting taxes to attract local enterprise.
Announcing the surprise reforms at Conservative party conference in Manchester, Osborne promised a “devolution revolution” as announcing new freedoms for councils to retain the £26bn in business rate income at local level and to cut the level of the rate.
Osborne told delegates at the Conservative party conference: “Today I am embarking on the biggest transfer of power to our local government in living memory. We’re going to allow local government to keep the rates they collect from business. That’s right, all £26bn of business rates will be kept by councils instead of being sent up to Whitehall.”
A corresponding power for local government to raise rates will only be given to councils that agree to be governed by a directly elected city-wide mayor, such as in London, and only do so long as the extra revenue is spent on infrastructure rather than services, and the plans have the majority approval of local businesses.
Such councils will be entitled to raise rates by 2p, providing a big incentive for councils to agree to follow Osborne’s favoured model for local government, and so raise additional cash to invest in housing and transport.
The reforms partly remove controls Lady Thatcher imposed in an era of leftwing local government in 1990. But Osborne put the changes in the context of his long term plan to empower local government and build the “northern powerhouse”, an experiment in government and economic regeneration that he frankly admitted may not work.
He said he was trying to slay all the dragons that lay in Britain’s way, adding repeatedly that “we are the builders”. The overall theme of the speech was for the Conservative party to extend its hand to working people now that Jeremy Corbyn had taken Labour to the fringes of the left. He insisted the Conservatives are the party of work, the only true party of labour.
In his key reform, Osborne said the uniform national business rate will be abolished and councils will still be able will be able to keep all the business rates that they collect from local businesses meaning that power over £26bn of revenue from business rates will be devolved from Whitehall.
The Tories introduced a business rates retention scheme in 2013 that allowed councils to keep up to 50% of local business rates.
In his speech Osborne said he was taking the move further and that by 2020 English councils will be entitled to keep all the business rates. Full devolution of business rates will give local government control over an extra £13bn by 2020, said the Treasury.
In practice an existing system of top-ups, transfers and tariffs will continue that takes account of the fact that some wealthy councils, such as Westminster City council, earn vastly more in business rates than most councils. But the existing level of transfers will be frozen, slowly reducing the value of the transfers. Increasingly councils that experience economic growth will become wealthier as they retain more the additional revenue.
The chancellor said: “Any local area will be able to cut business rates as much as they like to win new jobs and generate wealth, It’s up to them to judge whether they can afford it. It’s called having power and taking responsibility.”
A Treasury official confirmed the chancellor was content for councils to cut the business rate to attract companies to their locality. There will be a safety net for any council who loses 7.5% of their business rates revenue in a year.
Currently only 17% of local government money is raised through local taxation – compared to an average of 55% across the OECD – and councils only directly control and raise 5% of their money in the form of council tax. This means that councils currently gain a limited amount from business growth in their area.
Jim McMahon, Labour leader of local government and leader of Oldham council, welcomed some of the changes but warned the reforms may over time lead to greater inequality in the ability of councils to raise revenue.
Tony Travers, director of the London local government group at the London School of Economics, said the scheme is designed to incentivise councils to be pro-enterprise, but Labour warned councils could be forced into a competitive battle to woo business by repeatedly cutting rates to attract companies to invest in their council.
Chartered Institute of Public Finance and Accountancy chief executive, Rob Whiteman, said ministers must now make clear how the decentralising process will work, including the procedure for worst-case scenarios and how high-need authorities, who currently have a net reliance on central funding, will be supported.
“They must also make clear exactly which services such as police, public health and special education needs local government will be expected to fund from business rates.”
The Centre for Cities thinktank welcomed the reforms – some similar to proposals set out by Labour ahead of the 2015 election saying they “signal the government is now ready to devolve significant fiscal powers alongside the strategic planning, transport and skills powers included in devolution deals to date”.
CBI director general John Cridland said the reform would be welcome as long as it didn’t lead to higher costs for businesses.
“If this bold announcement on business rates is a way to cut them, then it will spur councils to take a pro-growth approach, and has the CBI’s support. But this must not be a way to increase rates without the consent of the local business community.”
Osborne also confirmed that he was setting up a National Infrastructure Commission to be chaired Lord Adonis by the former Labour cabinet minister. Adonis will no longer take the Labour whip in the Lords but remains a Labour party member.
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