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A Glimpse at the Direction of Travel for Local Government Retention of Business Rates

28-03-2018

By Joanne Pitt, Principal Advisor, Local Government, CIPFA

The Housing, Communities and Local Government Committee is always an interesting source of information, especially when the committee has a new MP in front of them. Accepting a level of political diplomacy in the answers, many of the responses provide an excellent insight into Whitehall thinking and the direction of travel for social policy. 

Recently the inister in the hot seat was Rishi Sunak MP, who tackled questions on business rates, fair funding and financing local government. All topical subjects at the current time, when council tax bills, with rises of 5%, are falling on the door mat (see CIPFA Council Tax survey, March 2018).

So what did we learn about business rates and funding?

The minister covered the forthcoming timetable around business rates and the fair funding review, which included technical papers in five specific areas in the spring of 2018, plus a fair funding technical paper in the summer. 

By this winter, there will be the publication of a broad outline of the way both business rates and fairer funding scheme will work, although no indicative numbers will be included. Following a consultation, spring/summer 2019 will see the release of some indicative numbers, which will probably coincide with the spending review that is expected early 2019.

For those of us that have just completed a response to the fairer funding consolation, it will be interesting to see how this broader system takes into account the responses to the consultation. CIPFA‘s response to the review contained a number of recommendations reflecting our concerns about the increasing disconnect between funding and service delivery expectations.

The minister went on to reiterated the fact that the 75% reduction in business rates had to be fiscally neutral, but when questioned about the 100% quantum, gave an indication that this would not necessarily be the case. Which could mean a little extra for local government, although not in the short term. This was repeated by the Chancellor, Philip Hammond, during his Spring Budget speech earlier this month, but the question of where that money will come from is still unanswered, especially if the slow economic growth continues.  

The members of the committee questioned the MP on income in a broader context and raised questions about the need to ensure all income was taken into account when looking at local government funding and distribution. The MP assured the committee that government are looking at other sources of revenue, such as car parking. This will be good news for some authorities, but less so for those authorities such as Westminster, which raised £73.2m in surplus car parking fees in 2016/17.

He wasn’t to be drawn in to a discussion on social care funding, but recognised the need to have sustainable long term funding. There are currently calls for evidence and suggested solutions on how this can be achieved. CIPFA’s recent submission to the long term funding of adult social care inquiry put forward the idea of setting the tax take dedicated to health and social care at 24%, rather than the current 22%, which would enable an extra £14bn to be invested. This is in line with CIPFA’s assessment of what the system is likely to need. 

What was worrying was a lack of a long-term planning for the future of local government funding. Short term we know about the changes in business rates and the projections of council tax revenue, however, there is still nothing really about addressing the disconnect between the funding envelope and the increase in demand for council services. Demographics and forecasting by the IFS suggest that there is very little to indicate that the economy will improve rapidly over the short term. It is increasingly important to consider a longer term approach to funding public services, one where we recognise that the current system of taxation, income generation and service cuts will not be sufficient to pay for services needed in the future.

This longer term question was not addressed by the committee, but it was raised and we look forward to seeing what Mr Sunak has to say about this in the coming months.