Business rates are a major source of locally-raised finance used to fund locally-administered spending. The Government announced in Autumn Statement 2015 that it would let English local authorities retain 100 per cent of business rates by the end of the Parliament. This box outlined the change in local government financing arrangements and the responsibilities that might be devolved, as well as how these changes would affect our forecast.
The Government announced in Autumn Statement 2015 that it will let English local authorities retain 100 per cent of business rates by the end of the Parliament. It has stated that the reform is intended to be fiscally neutral: as part of these reforms, the main local government grant will be phased out and additional spending responsibilities devolved to local authorities. These details have not yet been confirmed. The reforms are subject to a number of rounds of engagement and consultation over the next two years and will require primary legislation. The final policy package is therefore not expected to be agreed until at least early 2017. The Government announced in the Budget that it is piloting this, but we were not informed in time to factor this into our forecast.
Business rates are currently classified as a central government tax, but they are levied on non-domestic properties by local authorities and raise around £26 billion a year in England. The tax is levied as a proportion (‘the multiplier’) of the market rateable value as estimated by the Valuation Office Agency; the multiplier is currently increased in line with RPI inflation each year. The Budget announced that indexation would switch to CPI inflation from April 2020. From 2013, local authorities have retained around 50 per cent of receipts from business rates. The new reforms will mean that the remaining 50 per cent of business rates would also be retained. Local authorities will also be given powers to cut business rates, while mayoral authorities will be given the power to increase business rates to fund infrastructure projects, provided that they have the support of the local business community via an agreed process. As in the current business rates system, there will also be a need for redistribution via a top-up and tariff system.
Since the Autumn Statement, CLG has issued a consultation on The provisional Local Government Finance Settlement 2016-17 and an offer to councils for future years. This set out some examples of grants and responsibilities that might be devolved, including:
- the main local government grant;
- the responsibility for funding the administration of housing benefit for pensioners;
- Transport for London’s capital grant;
- the public health grant; and
- additional responsibilities to provide support for older people with disabilities or care needs, who would currently be supported via attendance allowance.
These items are subject to further consultation, so do not represent firm Government policy. Once the proposed transfer of grants and responsibilities is known, we will scrutinise all parts of the proposed package in detail to consider any direct and indirect effects. The latest information that the Treasury has given us suggests that formal consultation will commence in summer 2016, with primary legislation to follow as soon as possible. That would suggest the final package will not be firm enough to incorporate in our forecasts until Budget 2017, at the earliest.
The channels by which these changes could affect our forecast would include:
- if the package was completely fiscally neutral, public sector current receipts and total managed expenditure would be unchanged – it would just be the balance between central and local government that would change;
- spending on items funded by the main local government grants, other components of local government DEL, the housing benefit administrative subsidy, and the public health grant would shift from RDEL (which would be lower) to current LASFE in our AME forecast (which would be higher);
- the Transport for London capital grant would move from CDEL to capital LASFE; and
- spending on attendance allowance (AA) in England would move from welfare spending to current LASFE within our AME forecast (at the Great Britain level, we forecast AA will rise to £6.4 billion by 2020-21 (see Table 4.22) – in 2014-15, 84 per cent of AA spending was in England).
This box was originally published in Economic and fiscal outlook – March 2016