New law before Parliament shows growth agenda on course, says Minister
Government plans to allow councils to retain more of the money they raise from business rates could boost the economy by an estimated ten billion pounds, Local Government Secretary Eric Pickles announced today.
As Members of Parliament prepare to debate a key part of the Government’s growth agenda and its legislative plans for this Parliamentary session, new economic analysis research reveals the potential benefits of giving greater financial incentives to councils that support local firms and local jobs.
The local growth reforms are part of the Local Government Finance Bill that will have its third reading in the House of Commons next week. The Bill was not directly mentioned in the Queen’s Speech because it was ‘carried over’ from the previous legislative session.
The Bill seeks to create a new incentive for local government across England to support growth by directly linking a council’s financial revenue to the decisions they take to back local firms and local jobs. Councils will be able to keep 50 per cent of their business rates, providing a strong incentive to go for growth.
A set of papers on key aspects of the Local Government Finance Bill have been published today. Departmental analysis shows that the projected economic benefits of the new business rate retention scheme could add an additional £10 billion to national Gross Domestic Product over the next seven years.
The new system will be fair and equitable for all areas with protections for vulnerable or less prosperous areas. Business rate growth would be shared evenly between central and local government. The ‘local share’ would be retained in full by councils and would be set at 50 per cent for the seven year period. The full ‘central share’ will always be returned in grants to local government.
In addition councils would get to keep 100 per cent business rates from new renewable energy projects. These would not count against the local-central shares.
A centrally run safety net fund would provide support should a council’s income drop below a set baseline, protecting areas which suffer a downturn.
Secretary of State for Communities and Local Government Eric Pickles, said:
The current flawed system of government handouts to local authorities encourages a begging bowl mentality, with each council vying to be more deprived than its neighbour. Our reforms will allow councils to stand tall, and reward them for supporting local jobs and local firms. All councils, including the least prosperous, have the opportunity to gain from this system.
These new laws and reforms deliver an opportunity for a £10 billion boost to the wider economy, and more business rate revenues for councils. Councils will have a strong incentive to go for growth, generating more money to support frontline services, help pay off the deficit and still protect vulnerable communities.
Notes to editors
1. The Local Government Finance Bill is major step towards two of the Government’s major priorities: putting power back into local hands and creating the conditions for economic growth. The Bill has had extensive consultation with local authorities, professional bodies as well as revenue and benefits professionals. The technical documents being published today cover:
Business rates retention - to strengthen the incentive for councils to support local firms and local jobs.
Statements of intent covering renewable energy; the central and local shares of retained business rates; and the safety net and levy
A technical paper setting out proposals on pooling arrangements for local authorities
An analytical paper - The economic benefits of local business rate retention.
Localising support for council tax - to strengthen the incentive for councils to help their residents get back into employment.
- Statements of intent covering forthcoming regulations and requirements for preparing a scheme; transitional arrangements; prescribed requirements for schemes; council tax base adjustments and risk sharing of financial pressures
- A consultation on the funding of localised support for council tax.
Further documents as well as key draft regulations will be published before the summer recess.
The full set of documents have been published today following a Written Ministerial statement and are available here under ‘Related publications’: www.communities.gov.uk/localgovernment/localgovernmentfinance/lgfinancebill/.
2. Last year the £19 billion in business rates collected by councils was recovered by Government and redistributed through a complex process known as ‘Formula Grant’. The renowned Organisation for Economic Co-operation and Development has called this one of the most centralised systems in the world. USA, Spain, France, Germany and Japan all have greater autonomy over local budgets than English councils.
3. The reforms within the Bill are part of the wider Government approach to give local people and local communities far greater control over the decisions that affect them. For example the Growing Places Fund, the New Homes Bonus and Community Infrastructure Levy.
4. There will be no difference in the way businesses pay tax or the way the tax is set. Rate setting powers will remain under Central Government control and the revaluation process will stay unchanged. Importantly there will be no changes to the rate bills that local charities, amateur sports clubs, voluntary groups, those in hardship, rural firms and small businesses pay. Those businesses and voluntary groups will continue to get the national discounts and reliefs they have always been offered.
5. The Bill would support the sucess of the 24 confirmed enterprise zones across the country by enabling the uplift in business rates on those sites to be retained locally and invested back into growth projects across the local enterprise partnership area. This Bill would also allow councils to pay for future infrastructure developments by allowing them to borrow against projected business rate growth. Councils are not currently permitted to retain their rates so cannot borrow against them. Rates retention would remove this barrier.
6. The economic benefits analysis, available here: www.communities.gov.uk/publications/localgovernment/businessrateseconomic, models the potential additional GDP from the proposed rates retention scheme, with varying labour productivity and floorspace growth scenarios, and estimates that under seven year reset period, 50 per cent local share and central incentive assumptions would be an additional £10 billion could be created. This is based on scenarios modelled over a range from around £2 billion to just under £20 billion. The analysis was externally reviewed by Professor Henry Overman, Director of the Spatial Economics Research Centre, who endorsed the approach.
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