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Review could end council dependence on Whitehall grant

A vision of ‘self-funded’ councils that keep their local business taxes with central grant dependence scaled back except where it is needed …

This was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government

A vision of ‘self-funded’ councils that keep their local business taxes with central grant dependence scaled back except where it is needed to protect the interest of taxpayers is being put forward today by Local Government Secretary Eric Pickles.

The first phase of a review of council resources is being launched today to consider ways to establish a new system for Business Rates and Government Grant, which protects the interests of taxpayers, rewards local growth and job creation, and delivers a more self-sufficient income for councils.

At the moment, £20 billion of business rates collected by councils is pooled by central government and redistributed across all local authorities through an extremely complex grant system. As a result the cash return for economically successful councils is curtailed.

Ministers believe that councils’ dependence on Whitehall grant has also had a knock on effect on council tax in many local authorities - due to so-called ‘gearing’. As a result they want to explore a radical new approach to financing councils that reduces the current dependency on central redistribution for as many authorities as possible because it acts as a disincentive to local growth.

Ministers believe that allowing councils to repatriate their business rates could help introduce genuine local growth incentives for councils, which have a vital economic leadership role in new local enterprise partnerships, to support growth in the private sector and regeneration. Councils would have a direct stake in the future of their area with access to money and growth rewards.

The terms of the review are clear that any change must protect the interests of local taxpayers and the vulnerable, be fair for all councils, and encourage growth. Councils which are more deprived will continue to receive central government support.

The new Government is already acting to protect local taxpayers, by introducing a council tax freeze, scrapping the council tax revaluation, abolishing plans for new bin taxes, and increasing tax relief for small firms and small shops.

Secretary of State for Communities and Local Government Eric Pickles said:

We want every community to be open for business and rewarded for economic growth, but at the moment there is no motivation for councils to support local firms or create new jobs. One of the best ways we can change that is to free councils from their enslavement to Government grants and put them in control of their own destiny.

By letting councils repatriate their business rate income you make the system more straightforward and councils more self-sufficient in one fell swoop, whilst deprived councils would still get the support they need. Scaling back central government’s historic control and redistribution of this local business tax would also give councils a sudden shot of financial adrenaline and a legitimate stake in their economy with direct benefits for supporting new business and growth. It is what councils want and precisely what we mean by localism.

Localism doesn’t mean higher taxes. Indeed, councils’ dependency on the whims of Whitehall has had a knock on effect for council tax bills in many areas. But greater local autonomy will require greater local accountability and local transparency to ensure sound finances. We will stand up and protect the interests of local taxpayers, as they’ve been taken for granted for too long.

As part of the first phase of the Local Government Resources Review, the Department will conduct extensive engagement with interested parties, including business of all sizes. The Review will conclude in July followed by the necessary steps to implement the conclusions. The Terms of Reference for phase one are published today setting out what will be considered by Ministers. They include:

  • the best way to allow local authorities to retain their business rates to incentive growth, whilst ensuring that all have adequate resources to meet the needs of their communities
  • the extent to which these proposals can set councils free from dependency on central funding, along with further financial freedoms, whilst protecting the interests of local taxpayers
  • to ensure the right safeguards are in place: including how to fund those who collect insufficient business rates and keep control of council tax levels; the position of councils that collect more than current spending levels; and ensure protections for business
  • implications for other policies such as New Homes Bonus, Business Rate Relief and Tax Increment Financing which allows councils to borrow against future revenue.

There will also be a second phase that focuses on the important role of Community Budgets. It will be taken forward in parallel with the continued roll out of these Budgets. Detailed Terms of Reference will be published in due course.

Notes to editors

  1. In agreement with Her Majesty’s Treasury the full Terms of Reference for the first phase can be found at: (Word, 28k).

  2. The Government remains committed to providing more freedom to local authorities by introducing new borrowing powers against their business rate revenues to carry out Tax Increment Financing. Councils can use that borrowing to fund key infrastructure and other capital projects which will further support local driven economic development and growth.

  3. Following the announcements at the Spending Review, and through introduction of the Welfare Reform Bill, that Government will localise Council Tax Benefit, the Review will also consider the design of the new scheme (to be launched in 2013-14) and what flexibilities local authorities should have to help keep overall council tax levels down from that date.


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Published 17 March 2011