Headlines: October 25th, 2016

Major changes to councils’ funding are making councils much more dependent on the amount of council tax and business rates raised locally. The Business Rates Retention Scheme currently allows local areas in England to keep up to 50% of the growth in their business rates revenues that result from new developments.

According to the Institute for Fiscal Studies report published today. 52 smaller councils are forecast to see their overall funding boosted by 5% or more by the scheme between 2013–14 and 2016–17, compared to what they would have received if business rates had been pooled and the amount received by each council had instead increased in line with national growth in business rates revenues.

The 119 larger councils, including most county councils and metropolitan boroughs, will be relative losers under the scheme, though none will have lost more than 2% of their funding.

As part of truly revolutionary reforms to local government in England, by 2020 councils will retain 100% of business rates revenues. This will provide a stronger financial incentive for growth but also mean more budgetary risk: councils’ potential gains will be larger, but so too will their potential losses. Greater funding divergence could lead to greater divergence in council service quality across England.

If it works like the current system, some councils could gain and others lose significant sums, even if business rates revenues grow at the same rate across all councils. This rather counter-intuitive outcome could be addressed via some simple technical changes to the way the scheme works, without blunting the financial incentives for growth it is meant to provide.