Rewarding a brighter future

Screen shot of article in MJ
This article first appeared in the MJ on 29 October 2015

We have had landmark progress, with proposals for the devolution of unprecedented powers coming from more than 30 regions and local authorities. Chancellor George Osborne has taken it further, announcing that local authorities will be given control of all business rates revenue.

They will also have the ability to cut business rates in exchange for the gradual phasing out of revenue support grants. We welcome the chancellor’s initial announcement on the devolution of business rates and look forward to receiving further details about how these plans will work in practice. The Government’s policy follows the path recommended in our interim report with ResPublica: Power, People, and Places. This is a necessary step if we are to promote the accountability and responsibility of local authorities in securing economic growth for their constituents.

So much of this sounds positive, however – as with so many things – understanding the details will be absolutely vital for us to know whether it will really help us improve things for our residents. These changes take place against a backdrop of continued fiscal restraints. The spending cuts coming down the line may halve the money available to local government over the next four years.

The prime minister and chancellor have a responsibility to do all they can to help cities manage them – and that doesn’t mean washing their hands of it under the guise of devolution. Revenue support grants provide an important funding stream for many local authorities to deliver essential public services. They cannot simply be withdrawn and replaced with full business rate retention. The grants are decided by a complex formula that takes into account a range of factors beyond those that determine how much an area can raise in business rates.

The current proposals seem to focus almost exclusively on incentivisation, rather than compensation and redistribution. The Government needs to retain some fairness within the system. There must be some element to help areas that will not be able to make up for the loss of block grants by raising extra revenue from business rates. If there is not, the Government risks transforming local authorities from partners in the process of economic recovery, to screens for a major programme of spending cuts.

In the city of Sunderland, for instance, we will lose money if we simply replace central grants with full business rate retention. Sunderland City Council would be forced to pursue measures that would not suit the Government’s ambition for a high-wage, high-skilled, export-oriented recovery.

We could put up new shopping centres, since they can generate up to eight times more rates, with dense space utilisation comparable to industrial premises. But is Sunderland’s future and also the UK’s future going to be decided by placing all our bets on the retail industry?

We could also decide to approve a factory for a manufacturing firm. That would not generate much in the rates. Factories don’t pack as tightly as shops, so local authorities generate less revenue from them. But they do provide quality apprenticeships, well-paying and highly-skilled jobs, and exports to help Britain earn its way in the world. That is the sort of future I want for Sunderland.

That is the sort of future the Government wants for the country, but it is not a future which would pay off if local authorities only get rewarded for raking in business rates. Our city, for instance, has seen its national tax position improve dramatically as the council cooperates with local businesses to boost local growth.

Sunderland generates much more than its share of corporation tax receipts from businesses like Nissan, with whom we have worked closely to promote British manufacturing. But all those receipts go to Whitehall, and we rely on compensation through central grants. And we need to pay for the services our residents need, from housing, to youth services, and adult social care.

I believe the Government should be willing to take a broader view and find a way of taking into account the authorities that are leading the way in promoting a modern, innovative, inclusive economy. Without this, the gap will widen, not just between richer and poorer cities but between cities suited to our peculiar system of business rates and those which – like many of our Key Cities – are trying to find new ways of collaborative working to increase productivity across the country.

The Government has shown it is willing to break out of decades of consensus about the benefits of centralised control. We applaud that. We also believe, as our report with ResPublica has argued, that a settlement without fiscal devolution to encourage business investment and local development is incomplete and may put at risk the whole strategy.

So, we also applaud the chancellor’s steps over business rates. We must, however, remind the Government that business rates are not the only way in which a local authority can contribute to public finances. Moreover, businesses which are good for the rates are not the only businesses which can create a strong, globally competitive country with good jobs and a bright future.

The Government has said that it wants a rebalanced economy, based on high skills, innovation and exports. We are with the Government all the way. Now we want to see our cities rewarded for their contribution to the United Kingdom’s success.

Cllr Paul Watson chair of Key Cities and leader of Sunderland City Council