Tax competition and transport investment: Why business rate reform is a big boon for London

Local government finance is at the best of times unlikely to set the pulse of a Morning Wire reader racing. The way in which our councils collect business rates, and how this is dished out by Whitehall, is a convoluted process to say the least, and hardly the most exciting corner of public policy. All the more remarkable, then, that George Osborne chose to devote nearly 10 per cent of his conference address on Monday to business rate reform. 

 

The better known and much unloved council tax grabs many headlines. But perhaps surprisingly, it only represents a little more than one pound in every ten spent by London local government. London business rates raised an estimated £6.2bn in 2013-14 – more than twice council tax revenues. One pound in every four of all UK business rates come from London. Between them, Harrods and Selfridges pay more in rates than all the businesses in Hastings combined. In the capital, business rates are serious public money.

 

For Londoners, the reforms the chancellor announced this week will matter. When fully implemented, councils will be able to keep 100 per cent of the growth in business rates in their areas. This will now flow to London councils looking to fund public services and investment, rather than being sent to other parts of the UK. 

 

 

Over time, revenues are likely to grow. The GLA thinks around 40,000 additional jobs may be created in London every year for the foreseeable future. That will increase the demand for business space and rates paid. In addition, as the value of business premises increases, so will the taxes generated. From 2020, councils will be able to use their new-found freedom to help stimulate growth and investment.

 

Furthermore, where more investment is required – such as for transport infrastructure or regeneration projects – Osborne has signalled that some authorities will be able to raise business rates by as much as two pence in the pound.

 

In London, if this came on top of existing arrangements, that could potentially generate more than £8bn over a 20 year period. That could pay for hundreds of new tube trains and buses, or help with the cost of new lines or extensions and the provision of more affordable housing. Councils may also be able to use business rate income to hold down or reduce council tax levels.  

 

Some commentators are concerned that, even after various safeguards, the proposed reforms will lead to growing inequality between different parts of the UK. But many people in London and the South East will benefit. And while there is a risk that economically depressed areas may lose out, the reality is that centralised control of local government expenditure over the last 25 years has not stopped that process.

 

In some cases disparities have become worse. And cities in the Northern Powerhouse will be able to make the case for pro-business policies confident in the knowledge that they can reinvest locally to the benefit of their residents and local enterprises. 

 

Read more: Industry groups welcome Osborne's promise on local authorities' funds

 

Councils may also choose to cut their business rates to attract investment. That may lead to an element of tax competition between authorities as has been seen in the United States. But the statutory requirement for councils in Britain to balance their books means that reckless policies are unlikely to be pursued. And UK local authorities have never defaulted on their debts.

 

As we know from the private sector economy, choice and competition often leads to higher quality and lower costs – something that the public sector is increasingly under pressure to deliver.

 

By international standards, the chancellor’s reforms are perhaps modest. Whitehall still dominates the UK government machinery and how taxes are raised and distributed. Austerity measures mean that local authorities face enormous challenges in delivering services with shrinking budgets. But the Treasury has finally moved in a meaningful way to reconnect councils with the businesses that help to fund them.

 

Over the longer term, fiscal devolution means resources for investment in transport, housing and regeneration will be unlocked. That’s something hard-pressed commuters really can get excited about.