Making sense of fiscal devolution in public-sector service delivery

The announcement in October at the Conservative Party Conference by Chancellor of the Exchequer, George Osborne, about the full localisation of business rate devolution took many by surprise. There was little subsequent detail in the Autumn Statement and Public Spending Review in November. However, what is positive is the exposure that this traditionally esoteric issue has lately received and the opportunity for debate that has been created in relation to the political economy of fiscal decentralisation, devolved economic power and the financialisation of public services in the UK.

The original Business Rate Retention Scheme (BRRS), introduced in 2013, gave local authorities the potential to retain 50% of business rate income and up to 50% any of growth in business rates revenue, synonymous with construction of new employment (commercial and industrial) floor-space. The remainder was returned to central government and redistributed in England in a similar way to the previous Formula Grant method of funding. The Chancellor’s recent announcement extended the 50% principle to 100%, but what does this actually mean for local areas, the provision of local services and the ability of local government to stand on its own two feet?

Upon closer examination, the gap between the rhetoric and reality of the announcement exposes iniquities in the future funding of public services. Local authorities will only be able to retain economic growth associated with the addition of new commercial development; any increase in the value of existing business stock is precluded. This means that any location which does not have the space to accommodate new construction, or does not have the underlying rental values to support new development (i.e. the majority), will be disadvantaged and face an uncertain future. Questions therefore arise. What type of local growth is being promoted? And is it indigenous economic growth, new job creation or the development of new floorspace in the minority of locations that have the underlying economic conditions to make speculative real estate development viable?

Osborne also suggested that local authorities will now have the power to lower the rate of business rate taxation in order to attract new businesses. This is potentially a positive development. However, it is important to note that the Uniform Business Rate has not been abolished; it will still exist (although it may be called something else). All that has changed is the ability of local authorities to lower this rate at the local level if they so wish. It is difficult, to say the least, to imagine local authorities already facing budgetary pressures agreeing to further decreases in local taxation, which means, presumably, that only those authorities with budget surpluses will have sufficient tolerance. There is also some uncertainty in relation to the flexibility of any reduction in the local business rate level. Will it be uniform at the local level or will local authorities have the ability to adjust taxation for different types of property, businesses and locations?

Furthermore, the current BRRS has a safety net in place for those local authorities that see a reduction in business rate income of more than 7.5%. Recent commentaries presume that this will stay in place at its current rate, but, as yet, there isn’t any confirmation of this. Indeed, the Chancellor has indicated that local authorities will now be able to keep all of the proceeds above their baseline funding position. In the current scheme this provision is capped and disproportionate income funds the safety net provision through a levy paid to central government (a kind of local finance quid pro quo). Now that this levy has been abolished (and given that the original levy contribution was not enough to fund the safety net in the first place), it’s unclear, to say the least, how the new safety-net provision will be funded.