Mark Wadsworth

This is a spare 'blog in case my main 'blog at isn't working

Simple answer to a stupid question

From the Blue-Yellow Corner: Councils in England will be allowed to keep the business rates they collect rather than paying them into Treasury coffers, under new government plans.

Deputy PM Nick Clegg said councils had no financial incentive to boost growth and prosperity in their areas. But he said changes would be “fair” and poorer areas would not get less money than they do under the current system. Business rates are charged on most non-domestic premises, including warehouses shops, offices, pubs and factories.

This is a very good idea, as I explained when The Morbidly Obese one suggested it back in March (it was of course in the UKIP manifesto as well, and I should know because I wrote those bits).

From the Red Corner: Caroline Flint MP, Labour’s Shadow Secretary of State for Communities and Local Government, responding to Nick Clegg’s speech at the LGA Conference, said:

“Nick Clegg must explain how he intends to localise business rates without pulling the rug from beneath the finances of councils in Britain’s most deprived areas. If business rates were completely localised, Westminster Council would gain over a billion pounds*, the City of London would gain half a billion, but many other areas would lose hundreds of millions in vital funding.”

That’s the easy bit.

Remember that local councils get (say) 75% of their funding from Whitehall and 25% from Council Tax, so keeping it ‘fair’ is quite simple; on Day One of the transition, each council’s central grant is reduced by the amount of Business Rates it could or should be collecting and in future years, the grant is kept constant and it’s up to the council to collect as much in Business Rates as possible (any further ‘equalisation’ makes a mockery of the whole thing, of course).
So far so good.

What former Housing Minister Ms Flint overlooks is that her successor-but-one, John Healy applied the same good logic to social housing receipts (please read my crash course for an overview of the topic) as the current lot apply to Business Rates, and proposed that instead of councils collecting rents and handing over the proceeds to Whitehall, only for Whitehall to hand it back to pay for the running costs, he would simply allow councils to keep their own rents and pay their own running costs.

So we could do the same exercise with social rents – deduct the amount which councils could or should be collecting in rents and deduct the notional running costs to arrive at a net figure**, which they also knock off each council’s current grant and then it’s up to each council to maximise rental income/minimise running costs.

As it happens, Council Tax, total (potential) rental income from council housing and Business Rates are of the same order of magnitude – about £25 billion a year each, which would mean that local councils are about 75% self-funded – and all out of taxes and rents on or from land and buildings. If we then doubled Council Tax we could reduce the central grants to more or less nothing and we’d be half way there.

* City of Westminster is a special case, its annual expenditure appears to be about £1 billion a year anyway, in other words to keep things even on day one, if it were allowed to keep all Business Rates receipts (£1.1 billion, as it happens) its theoretical central grant would be negative, so in future it would then have to hand over a net figure to Whitehall, or even better to Transport for London.

** Whether you count ‘Housing Benefit’ as a reduction in income or as an expense is a separate topic (at present, it’s an expense to one government department the DWP and income for another branch of government, local councils), but as far as I am concerned, they might as well scrap it completely and leave it up to local councils to charge below-market rents if they so choose but at their own cost.


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