12 March 2018

Government plans to increase the share of business rates English councils retain from 50% to 75% in 2020, with 100% retention being piloted in some parts of the country, could cause problems according to a new study.

Published by the IFS think tank and funded by its Local Government Finance and Devolution Consortium, this highlights the risks of growing divergences between the funding available to different councils.

According to IFS, significant divergences could arise in just a few years under 100% rates retention.

This is because those councils which would have seen the biggest increases in their retained business rates revenues were often not the ones that experienced the biggest increases in their relative spending needs, for example, because their population became older, poorer or sicker.

This implies that central and local government face a difficult trade off when moving to 75% or 100% rates retention, the report argues.

"Spending needs, tax revenue capacity and the business rates retention scheme" is available at http://bit.ly/2F64rCZ.

IFS Associate Director David Phillips explained: "The lack of relationship between changes in business rates and economic and employment growth is important. Areas seeing lots of new developments aren’t guaranteed strong economic growth. And growth doesn’t necessarily rely on large-scale property development."

Indeed, the report finds no relationship between changes in the councils’ business rates tax bases and local economic growth, or indeed employment or earnings growth, in recent years.