IFS: 100% business rates retention pilots could generate £870 million in extra funding

A new Institute of Fiscal Studies report, 100% business rate retention pilots: what can be learnt and at what cost?, has found that English councils piloting 100% business rates retention could gain as much as £870 million in extra funding in 2018–19.

Historically, these forecasts have tended to over-estimate revenues: but the IFS reports that even if 2018–19 forecasts were 2.3% too high,the gain to pilot councils would still amount to around £650 million.

The pilots may help the government maintain momentum behind its changes to the local government finance system. But it is unclear how much can be learnt from them, says the IFS

The pilots may not last longer than a year, limiting the potential to learn about how councils would respond to a longer term scheme. Furthermore a ‘no detriment’ clause guarantees councils won’t lose out, which means we cannot learn much about how they would respond to the risk of bigger falls in income that could arise if the policy were rolled out nationally.

David Phillips, Associate Director at IFS and an author of the report said: “The English councils piloting 100% business rates retention are set to gain hundreds of millions of pounds in extra funding as a result this year.”

“An alternative use of the same funds would have been to boost grants to all councils by 2%, or £16 per person. While many of those chosen as pilots would have gained less, such a funding boost would have been welcomed by councils that have not been chosen as pilots.”

Neil Amin-Smith, Research Economist at the IFS and another author of the report said: “Given pilots are guaranteed for a year only, and councils are prevented from losing out, the potential for learning about the impact of a long-term 100% business rates retention scheme is limited.”

Responding to the report, a Local Government Association spokesperson said:

“It is vital that we maximise the potential that the further localisation of business rates offers to our local communities and businesses.

“With local government facing an overall funding gap that will exceed £5 billion by 2020, we remain clear that councils must first and foremost be able to use extra business rates income to plug this growing gap.

“Certain aspects of further retention can be tested through pilots and it is positive that, with the new ten pilots for 2018/19 in addition to the pilot covering London and the continuation of the 2017/18 pilots, almost half of all authorities are now covered by a business rates pilot.

“At the same time it is important that the existence of pilots do not affect other authorities now, or when further business rates retention is implemented. The Government also needs to add clarity about what happens to the pilots when 75 per cent retention is introduced.

“Councils must be rewarded for growing their local economies but areas less able to generate business rates income need to remain protected.

“Councils will see their core funding from central government further cut in half over the next two years and almost phased out completely by the end of the decade. This means councils are facing a financial cliff-edge that the Government has to address.”