Wednesday, 13 July 2011

Before commenting on local government finance it helps to understand its basics


Lord Palmerston once said of the Schleiswig-Holstein question:

"Only three people have ever really understood the Schleswig-Holstein business—the Prince Consort, who is dead—a German professor, who has gone mad—and I, who have forgotten all about it."

So it is with the financing of English local government where, as we all find out some tine, a little knowledge is dangerous as it leads to great ideas that are really rather silly.

Town halls should be allowed to retain between 40 and 60 per cent of business rates generated in their areas, a new report urges.

Research by think-tank the Centre for Cities claims that the measure would give local authorities a much-needed incentive to say ‘yes’ to the development needed to drive economic growth.

You see, at the moment, business rates are collected locally but aggregated centrally into a single pot (the National Non-Domestic Rates fund - NNDR). These funds are then reallocated to local councils as part of 'formula funding' - distributed according to an estimation of 'need' (don't ask, really. Don't ask) rather than on the basis of how much is raised in the particular locality.

So for every winner under such a scheme there is an equivalent loser. And it's no good saying that it will provide an incentive for "cities to develop their business base". Economic growth just doesn't work like that - it really doesn't. The activities of local councils - and the relatively small amounts (relative to the economy that is) involved in business rates - have little or no impact on business innovation, location or start-up.

And bear in mind that local councils spend that NNDR on ordinary everyday stuff like emptying bins, sweeping streets, looking after the frail elderly and protecting children (OK, they also waste a load on paying union officials, having massive climate change units and having a press office that seems to have more staff than the local rag has journalists). The NNDR isn't directed exclusively to promoting business - indeed it couldn't be since it represents roughly two-thirds of the 'formula grant' (£20bn out of about £30bn).

And since, prior to the invention of the Poll Tax, business rates were collected and spent locally (without equalisation) we know that the proposal would not:

"...fundamentally alter the way that local government in England is financed, incentivising local authorities to be far more pro-growth and pro-development". 

We know that because the reason in was centralised was because local councils used the rate as a soft way of raising money. Business didn't have a vote so business rates were raised while domestic rates were kept low (except in places like Lambeth where both rates went through the roof leading to an exodus of wealth and business from the borough).

The Centre for Cities haven't come up with a jolly whizzo scheme at all, merely a different way of distributing resources that are already being spent by local councils.


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