Written statement to Parliament

Local government finance: March 2011

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

I would like to make a statement on the work of the Local Government Resource Review. The current dependency of councils on central grant…

I would like to make a statement on the work of the Local Government Resource Review.

The current dependency of councils on central grant allocations makes planning difficult, weakens accountability, and stifles local innovation. In the future, I am keen to move to a radically different system of funding and support for councils that is built on strong incentives, is driven by local decision-making and breaks this dependency.

I have therefore set up a review of local government resources that will consider how we can recast the distribution of business rates and Formula Grant to deliver a more effective income stream for councils. The focus will be to free up as many local authorities as possible from dependency on central government funding, as well as develop better incentives for local authorities to promote economic growth in their areas and to benefit financially from that growth. The first phase of the Review will deliver proposals for reform by July 2011.

The Review will consider the way in which local authorities are funded, with a view to giving local authorities greater financial autonomy and strengthening the incentives to support growth in the private sector and regeneration of local economies.

It will look at ways to reduce the reliance of local government on central government funding, increase local accountability and ensure that the benefits of economic growth are reflected in the resources authorities have.

The review will include consideration of changes to the business rates system, and focus in particular on:

  1. the optimum model for incentivising local authorities to promote growth by retaining business rates, whilst ensuring that all authorities have adequate resources to meet the needs of their communities and to deliver the commitments set out in the Spending Review;
  2. the extent to which these proposals can set local authorities free from dependency on central funding;
  3. considering how to fund authorities where locally raised funding would be insufficient to meet budget requirements and control council tax levels, as well as councils who do not collect business rates, such as upper tier authorities, recognising that some parts of the country are currently more dependent on government funding;
  4. reviewing the scope for greater transparency and localisation of the equalisation process;
  5. the position of councils whose business rate yield would be significantly higher than their current spending;
  6. how to ensure appropriate protections are in place for business, within a framework of devolving power to the lowest level possible;
  7. how to deliver Tax Increment Financing proposals against a context of greater retention of business rate revenues;
  8. how various aspects of the business rate system, including business rate revaluation and reliefs, should be treated;
  9. examining the scope for further financial freedoms for local authorities, while standing up for and protecting the interests of local taxpayers; and
  10. the wider implications of rates retention for related policies, including the work of the Commission on the Funding of Care and Support and the Government’s other incentive schemes (the New Homes Bonus and the commitment to allow communities to keep the business rates for renewable energy projects).

The Review will take account of the responses made to the questions in Local growth: Realising every place’s potential. It will also conduct extensive engagement with interested parties, including businesses of all sizes, to ensure that all views and perspectives are taken into account. In developing the proposals, the Government is clear that businesses should not be subject to locally imposed increases in the burden of taxation that they do not support.

Following the announcement 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.

The first phase of Review will conclude by July 2011, followed by the necessary steps to implement the concluded reforms.

The second phase of the Local Government Resource Review will commence in April 2011 and will focus on community budgets. It will be taken forward in parallel with the continued roll out of these Budgets. Detailed terms of reference will be published shortly.