New analysis reveals that 100% business rate retention would pose challenges for county authorities

CCN Latest News, CCN News 2017 | 28 September 2017

New research reveals that 100% business rate retention could actually worsen the financial plight of county authorities rather than promote self-sufficiency over time, with income failing to match the growing costs of services.

The independent analysis undertaken by Pixel Financial Management for the County Councils Network (CCN) modelled the impact of 100% retention in England. The network has now published the findings as government considers future proposals on where to take the policy after legislation dropped off the Parliamentary calendar, with DCLG encouraging bids from all parts of the country to pilot full retention during 2018-19.

The analysis shows that under full business rate retention, the funding gap for county authorities could widen over time, increasing by £700m by 2029 on top of any existing gap at that point. This is because the analysis shows a potential divergence between what counties would retain in rates and their cost pressures, with business rate growth failing to keep pace with acute demographic and service pressures.

This is in contrast to other parts of the sector, such as London boroughs and district councils, who could disproportionately benefit.

CCN is releasing this body of evidence now to support its member councils who are considering supporting pilots, and shape the wider sector debate.

Download the report here. CCN’s submission to the DCLG business rates consultation can be downloaded here. CCN’s post-general election statement on its consultation response, updated after the general election, can be downloaded here.

Since the publication of pilot prospectuses CCN has raised concerns that DCLG has not included a ‘no detriment’ clause, which is in contrast to the previous round of pilots. Some county authorities believe the lack of this clause, coupled with only a year to pilot the policy, could deter bids. Similarly, this approach from DCLG may result in only ‘high growth’ counties coming forward to pilot, meaning that risk is not properly trialled.

Whilst Pixel’s findings has projected the potential impact of 100% retention over a long-term period of ten years, CCN argues the research showing a potential negative impact of the policy does raise a question whether it is equitable that the 2018-19 pilots are treated differently to the first round where a ‘no detriment’ clause ensured those councils would not be adversely impacted.

Considering that two tier areas are likely to submit bids to become pilots, CCN also said the modelling also provided important information on tier shares to inform local discussions.

Pixel’s modelling shows a higher share of rates for county councils – potentially as high 80% – would help reduce the funding gap by £150m and ensure a more balanced system between tiers and types of local authorities; with less redistribution required through top up and tariffs.

CCN said it was committed to working with the District Councils Network (DCN) to discuss the findings and future options for retained rates.

The research analysed retaining the levy on growth, which the original proposals would have abolished. Pixel found that retaining a reformed levy to simply ensure no council was able to build up disproportionate retained rates above their needs base would bring greater fairness and balance in a 100% retention system.

The findings also backed county-wide pooling arrangements. This is important in the current climate, with DCLG encouraging pooling as part of the pilot process. The modelling found that partners managing business rates together across a whole-county area could help to reduce unnecessary risk for individual councils. When looking at whole-county scale, growth is healthy and in almost all cases above baseline. The diversity afforded by this scale levels out shocks or decline in individual districts and to share the benefits of growth across the broader area.

A recent CCN survey of county leaders showed that 55% of leaders retain support for the implementation of full business rate retention, indicating a lack of universal support for the policy. At the same time, less than half of leaders surveyed believed that full retention of rates would be effective in mitigating against continuing reductions in county authority budgets.

CCN argues that possible options for government to consider could be for a mixture of retained rates – higher than the current 50% – and grant funding to ensure there is enough money in the system to ensure sustainable funding for all. The pilots would be informative in helping both local and national government explore future arrangements.

CCN Finance Spokesman and Leader of Leicestershire County Council, Cllr Nick Rushton, said:

“CCN is looking to set the pace in discussions over how local government could be funded during this reflective period. Our research does not aim to dissuade counties from taking part in the pilots, but as a supporting body of evidence to inform their decisions.

“The modelling we have released shows the unique challenges facing county authorities in implementing 100% business rates retention. CCN is supportive of moves towards greater local retention, alongside wider fiscal devolution, but we must ensure the system provides sustainable long-term funding and a platform to truly incentivise growth and self-sufficiency.

“Therefore, we believe more options should be on the table, something which Ministers have indicated is the case in halting the legislation. CCN will undertake further analysis to inform the debate and potential options.”

CCN repeated calls that full funding for unfunded and underfunded pressures, such as those in adult social care, coupled with a ‘fair’ funding formula that funds councils based on need, would be key to making business rate retention work.
With government still committed to needs-based fair funding review, CCN will continue to advocate a ‘cost-drivers’ approach to funding local government, one which takes into account changing demographics over time, and would strongly oppose any moves back towards a regressive model of funding councils.

Cllr Nick Rushton added:

“These findings clearly demonstrate the need for a fairer funding formula as part of wider reforms to local government finance. These reforms must stay on track and government should not shy away from adopting a new approach to measuring relative need; one based on real cost-drivers, not past spend.

“The current the system is completely unfair on county authorities. If government provides full funding for unfunded pressures through a transparent and fair funding formula it should feel confident it can win the support of the sector, and importantly, MPs.”