The business rates system needs to go

By Sir Stephen Houghton | 18 September 2020

If there’s one thing that has united this country during the pandemic it has been admiration for the dedication and commitment of front-line workers in our public services. While council workers may not always receive the praise they are due – as Boris Johnson told council leaders this week, they are the ‘unsung heroes’ of the pandemic – it is obvious how much we all rely on the quality public services they provide.

However, one thing the pandemic has reinforced is that the current system of funding these services is not sustainable. Following a decade of cuts, council financing is too reliant on non-needs based local income generation of which business rates are a big part. During an economic crisis like the one we are currently witnessing, when the need for public services is at its greatest, income streams dry up putting services at risk. 

The coupling of local services to Business Rate yield has over recent years resulted in the widening of gaps both economically and in service provision between councils and areas. As COVID outbreaks continue to flare up around the country, it is increasingly clear that the current system is bad for councils, bad for residents and bad for businesses.

Local estimates for business rates vary each year but, in 2018-19 for example, many of those who would have gained most from a distribution based on need were in the same poorer urban areas currently experiencing increased lockdown. The worst 10% in 2018-19 actually experienced a decline rather than growth, despite the national overall growth above base of 7.2%. No account was taken of this when allocating COVID emergency funding.

The current system ensures that rather than ‘levelling up’ it compounds existing deprivation by rewarding thriving communities. Local lockdowns have predominately occurred in the North and Midlands. Currently the areas of local intervention are located in the North West (11 Councils), West Yorkshire (3), the North East (7) and the Midlands (4). These are the areas where businesses will need the greatest support to get back on their feet, but those same areas require money for vital services to combat the virus. The current dilemma is how councils can support both when there is direct conflict between the two needs. Moving to a system based on need will remove this dilemma.

We need to accept that looking to the future we have to decouple the links between business rates and services if we are going to have any chance of solving any of the problems of either. I have constantly called for services for our communities to be based on the needs of those communities. What cannot be delivered locally from council tax (a system also in need of reform) should be met from national taxation.  If we don’t take this step and businesses continue to fail due to COVID, a council will inevitably fail - a disastrous outcome for residents and businesses.

If the government is committed to its ‘levelling up’ agenda then to support our business communities decoupling would allow them to consider any system reform and support without worrying about the impact on local services. We need a grant-based system calculated by need with the government to decide the quantum, ideally setting out what councils will receive over a multi-year period to guarantee stability for the sector. To ensure there is no concern of political preference an independent body should decide the formula on how that is divided up. It is only once councils have their base needs funded that any growth incentive should kick in.

Cllr Sir Stephen Houghton is chair of the Special Interest Group of Metropolitan Authorities (SIGOMA)

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