New business rates rules could cause widening divide in council funding, IFS says

Posted On: 
1st March 2018

New rules that will allow councils to keep more revenue from business rates could cause a widening funding gap between different areas, a leading thinktank has claimed.  

Councils will be able to keep more revenue from business rates by 2020

The Government has said that local authorities in England will be able to retain 75% of business rates revenue by 2020, up from the current 50%, and is piloting 100% retention in some places.

But in a new report, the Institute for Fiscal Studies has raised concerns about the change, suggesting councils that need more cash could get “left behind”.

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According to the organisation: “Significant divergences could arise in just a few years under 100% rates retention.

“This is because those councils which would have seen the biggest increases in their retained business rates revenues were often not the councils that experienced the biggest increases in their relative spending needs, for example, because their population became older, poorer or sicker.”

The thinktank also questioned the Government’s assumption that councils will respond by taking new measures to boost the local economy and grow revenues.

It states that it is “not clear that the incentives provided by rates retention will translate into faster economic growth.

“The report finds no relationship between changes in the councils’ business rates tax bases and local economic growth, or indeed employment or earnings growth, in recent years.”

In response to the findings Neil Amin-Smith, Research Economist at the IFS, suggested transferring greater financial responsibility to county councils.   

He said: “As we move to 75% and possibly 100% business rates retention, it is worth considering whether counties should bear a larger share of the changes in revenues.

“Doing this could help limit the scale of funding divergences among districts and stop counties – who fund social care services – from getting ‘left behind’.”