Special fund to siphon off cash raised by wealthiest councils under business rates reform

Published by Ross Macmillan for 24dash.com in Local Government and also in Housing

Town halls will be able to keep more of the revenue they raise through business rates, the Government has said.

Communities Secretary Eric Pickles said the new system would be "balanced, fair and equitable" by allowing councils to keep more of the proceeds from the tax on businesses, despite calls from Labour that the plans will disproportionately affect poorer areas.

But Labour claimed local authorities in deprived areas would be hit hardest as they rely on extra cash from wealthier councils which they will no longer receive if the Government's proposals go through.

Under the current system, town hall chiefs in England raise £19 billion through business rates but the money is then passed on to the Treasury which calculates how it should be redistributed through a complex funding formula.

Mr Pickles said his reforms would give councils greater financial security while ensuring no local authorities would be worse off.

He said the Government "was determined to repatriate business rates", allowing councils to invest the money they raise to redevelop their town centres or spend on other infrastructure projects.

"No more will proud cities or historic counties be forced to come to the national government with a begging bowl," he told the Commons.

"Councils will have a greater control over the cash, helping them plan for the longer term."

He added: "Councils should see a direct link between the success of local businesses and their own cash flow. This will create the right incentive for them to work closely with local businesses.

"I am determined that the transition to a new scheme will be both responsible and fair."

But, Mr Pickles told MPs, councils which generate the most money through their business rates could expect to subsidise the poorest local authorities under a new system of tariffs and top-ups.

A special fund would siphon off money raised by the wealthiest councils, he said, and this would be used to protect the most disadvantaged town halls.

Mr Pickles told MPs: "It is also of paramount importance to ensure that our proposals on local government finance are balanced, fair and equitable, creating the right incentives to grow while protecting the most vulnerable."

Shadow communities secretary Caroline Flint said councils could see their funding cut within five years as the Government looks to reduce its budget deficit.

She said business rates accounted for 76% of the formula grant for local authorities, adding that "vague empty assurances" about how the Government plans to support the poorest areas "just won't cut it".

Ms Flint said: "It is telling that whenever the Government is challenged on what the long-term effects of reforms to business rates will be, they have said it is up to local councils.

"What that really means is that after the first year they are washing their hands of the problem, cutting funding and leaving councils to fend for themselves."

She added: "No sleight of hand or temporary transition grants or safety nets can hide the consequences of these reforms, because if the wealthiest councils are not giving up the rate that they collect locally for redistribution, where will funding for those who rely on redistribution to survive come from?"

Mr Pickles said the reforms, to be introduced in 2013, would also allow councils to fund major infrastructure projects by borrowing against future revenue from business rates.

The changes would restore the financial autonomy of local authorities, he said, telling MPs the current system created the perverse situation where town hall bosses "talked down their successes while talking up their difficulties" to secure the largest possible government grant.

Ms Flint said the announcement had betrayed the Government's "real intent".

"Cutting funding to areas of the highest need doesn't free councils from central control or empower them, it stops them from doing the things their communities need of them," she said.

"Yes, we want a funding system that supports jobs and encourages enterprise - but not every area has the same ability to attract investment and new business, not everywhere can be Westminster or the City of London."

Mr Pickles said: "Nobody's going to be left after the first year, there will continue to be a tally and a levy."

He said that under the new system, Ms Flint's constituency of Doncaster would do "particularly well".

Labour former defence secretary Bob Ainsworth also raised concerns that the system would redistribute wealth from the least affluent areas to the richer areas.

Mr Pickles replied: "Roughly now, £2.5 billion is transferred from the south of England to the north of England. I do not anticipate a significant change to that amount."

He said poorer areas would continue to benefit from the levy.

Labour former home secretary David Blunkett said: "You've already confirmed that the national business rate will be set by Government, that the growth will be held by the authorities which have encouraged that growth, and somehow it's also going to be distributed to authorities that don't get growth."

Mr Pickles replied: "Frankly, it's no good being in favour of repatriation of business rates unless you're also prepared to put in something that is fair and is equitable and is to look after the vulnerable, and I'm sorry you don't seem to realise that."

Senior Labour MP Clive Efford asked how local authorities would generate the growth.

Mr Pickles said: "Gawd help us if you don't understand that. Local authorities do work hard to bring new things to their area, they do things to ensure there's a balance.

"But the difference between this system and the existing system, all the things they do, we take the money away from them, it goes back into a central pool.

"Now they'll keep that money, that incentive."

Tory Gavin Barwell (Croydon Central) welcomed the statement and said those councils that would benefit would not be those in affluent areas, but those with "relatively high" economic growth.

"At a time when our country is crying out for economic recovery, surely that is a very strong and sensible piece of public policy," he said.