The Chancellor today (5 October 2015) set out major plans to devolve new powers from Whitehall to local areas to promote growth and prosperity.
By the end of the Parliament, local government will be able to retain 100 per cent of local taxes – including all £26 billion of revenue from business rates – to spend on local government services. Fixing the current broken system of financing local government will be a huge boost to local growth, help attract business and create jobs.
The government will also abolish the Uniform Business Rate and give local authorities the power to cut business rates to boost enterprise and economic activity in their areas. Local areas which successfully promote growth and attract businesses will keep all of the benefit from increased business rate revenues. At the same time, the core grant from Whitehall will be phased out, and local government will take on new responsibilities.
Those areas which choose to have city-wide elected mayors will get even greater flexibilities, also being given the power to increase rates for spending on local infrastructure projects, as long as they win the support of local business.
The reform will mean local government retaining all revenue from business rates for the first time since 1990.
These new powers must come with new responsibilities, as well as phasing out the main grant from Whitehall, to ensure the reforms are fiscally neutral. Local government will of course also need to contribute to fiscal consolidation over this Parliament, and the government will set out further details in the Spending Review.
Since 1990, local business rates have been set by central government at a uniform national rate. Rates are collected locally, but then transferred to central government to be distributed back to local areas in the form of grant.
Since 2013, local councils have been enabled to retain 50 per cent of the proceeds of rates, to ensure that when local areas take steps to boost business growth in their area, they should see the benefit.
The latest reforms go much further, moving to 100 per cent retention of the full stock of business rates by 2020. It will mean that all income from local taxes will go on funding local services.
Local authorities will be able to cut business rates as much as they like. Directly elected mayors – once they have support of local business leaders through a majority vote of the business members of the Local Enterprise Partnership – will be able to add a premium to business rates to pay for new infrastructure. This power will be limited by a cap, likely to be set at 2p on the rate.