speri.comment: the political economy blog

Making sense of fiscal devolution in public-sector service delivery

Local authorities will be expected to fend for themselves within a new model of civic financialisation and entrepreneurialism

Kevin Muldoon-Smith, Lecturer in Real Estate Economics and Property Development, Northumbria University and Paul Greenhalgh, Associate Professor in Real Estate Economics, Northumbria University

muldoon-smith-greenhalgThe announcement in October at the Conservative Party Conference by Chancellor of the Exchequer, George Osborne, about the full localisation of business rate devolution took many by surprise. There was little subsequent detail in the Autumn Statement and Public Spending Review in November. However, what is positive is the exposure that this traditionally esoteric issue has lately received and the opportunity for debate that has been created in relation to the political economy of fiscal decentralisation, devolved economic power and the financialisation of public services in the UK.

The original Business Rate Retention Scheme (BRRS), introduced in 2013, gave local authorities the potential to retain 50% of business rate income and up to 50% any of growth in business rates revenue, synonymous with construction of new employment (commercial and industrial) floor-space. The remainder was returned to central government and redistributed in England in a similar way to the previous Formula Grant method of funding. The Chancellor’s recent announcement extended the 50% principle to 100%, but what does this actually mean for local areas, the provision of local services and the ability of local government to stand on its own two feet?

Upon closer examination, the gap between the rhetoric and reality of the announcement exposes iniquities in the future funding of public services. Local authorities will only be able to retain economic growth associated with the addition of new commercial development; any increase in the value of existing business stock is precluded. This means that any location which does not have the space to accommodate new construction, or does not have the underlying rental values to support new development (i.e. the majority), will be disadvantaged and face an uncertain future. Questions therefore arise. What type of local growth is being promoted? And is it indigenous economic growth, new job creation or the development of new floorspace in the minority of locations that have the underlying economic conditions to make speculative real estate development viable?

Osborne also suggested that local authorities will now have the power to lower the rate of business rate taxation in order to attract new businesses. This is potentially a positive development. However, it is important to note that the Uniform Business Rate has not been abolished; it will still exist (although it may be called something else). All that has changed is the ability of local authorities to lower this rate at the local level if they so wish. It is difficult, to say the least, to imagine local authorities already facing budgetary pressures agreeing to further decreases in local taxation, which means, presumably, that only those authorities with budget surpluses will have sufficient tolerance. There is also some uncertainty in relation to the flexibility of any reduction in the local business rate level. Will it be uniform at the local level or will local authorities have the ability to adjust taxation for different types of property, businesses and locations?

Furthermore, the current BRRS has a safety net in place for those local authorities that see a reduction in business rate income of more than 7.5%. Recent commentaries presume that this will stay in place at its current rate, but, as yet, there isn’t any confirmation of this. Indeed, the Chancellor has indicated that local authorities will now be able to keep all of the proceeds above their baseline funding position. In the current scheme this provision is capped and disproportionate income funds the safety net provision through a levy paid to central government (a kind of local finance quid pro quo). Now that this levy has been abolished (and given that the original levy contribution was not enough to fund the safety net in the first place), it’s unclear, to say the least, how the new safety-net provision will be funded.

Moreover, how will the new Local Infrastructure Levy (LIF) work in practice? At first glance it looks like a classic Business Improvement District (BID), where businesses in a defined area agree to pay an extra level of business rates, after a local ballot, to fund local improvements. Importantly, under a BID, a majority of businesses in a defined area have to vote in favour of an uplift in property tax. However, under the infrastructure levy there isn’t any provision for a local ballot; rather, an elected Mayor would only need to secure the agreement from a majority of private-sector Local Enterprise Partnership (LEP) members. This opens up questions about the democratisation of fiscal decentralisation, especially in relation to ‘who decides’ about and ‘who pays’ for new local infrastructure.

So: where are we? The Government has transferred 100% of existing business rates and potential growth to local areas; yet it also transferred 100% of the risk in relation to civic finance. It’s worth noting too that there isn’t any new funding in the Chancellor’s announcement: only the potential for business rate growth (and therefore conceivably in some locations100% of nothing!). At the local level net borrowing is sure to increase (the Office for National Statistics recently reported a £2bn increase in this financial year), while (central) Government borrowing decreases. Historically, the cost of borrowing at the local level hasn’t been an issue as local authority credit ratings have been closely aligned to the UK’s sovereign rating. However, the turn toward fiscal decentralisation and civic financialisation means that local authorities will henceforth be measured by their own characteristics with regard to lending security, which may well provoke a fragmentation of local authority credit rating, lending criteria and rates. Those local authorities able to exploit the growth potential in Business Rate Retention will get stronger credit ratings and have an advantage over their counterparts; those with weak credit ratings – typically locations already suffering from financial exclusion – will be regarded as greater risks and exposed to increased cost of borrowing which of course they are less able to afford.

There is thus still a great deal of uncertainty in relation to the 2020 business rate changes and their practical impact on local areas up and down England (Scotland is moving ahead even more quickly). However, what seems certain is that change is around the corner in England (and in the devolved administrations) and that local authorities will be expected to fend for themselves through a new model of civic financialisation and entrepreneurialism. There is real doubt about the uniform ability of authorities to exploit this civic financialisation to fund public services, generate local investment and, in general, react to the new needs of our times.

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