Viewpoint - 12/04/2013

Funding responsibility makes councils nervous

Localism Act 2011 creates an even greater reliance on major local enterprise.

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Living in an area which is home to a major industrial enterprise can be a double-edged sword. Business operations such as airports, power stations, steelworks and manufacturing plant provide employment continuity and bring prosperity to the local economy. These vast enterprises rely upon local services, and are often outspoken proponents of the skilled local workforce.

However, there is also a downside to being reliant on a major local enterprise: the community is highly-sensitive to business decisions that are often beyond its control. The Localism Act 2011 furthers this issue, by creating new uncertainties in business rates yield.

Central government make councils responsible

The Localism Act 2011 passes a substantial responsibility for local government funding to local authorities. It makes council officials far more responsible for balancing tax receipts with their annual expenditures.

Each council has been set a baseline level of funding based upon their 2012 budget. In order that no council suffers a funding shortfall, roughly 50% of business rates collections will be held back by councils as the ‘local share’, with the rest being returned to central government for redistribution to under-funded authorities. Councils which encourage local business growth will be authorised to reinvest a percentage of the growth in business rates collected.

Councils may have to cope with yield shortfall

Some councils relish the prospect of greater self-determination, but others are rightly nervous. In four out of the past five years, the Government’s Office for Budget Responsibility has overestimated net yield from business rates, leading the Local Government Association to conclude that, “it is a near-certainty that some councils will face shocks [from the movement in business rate yields]”.

Consider the case of Hartlepool Borough Council. Home to Hartlepool Power Station, a nuclear facility which generates 2 - 3% of the country’s peak electricity demand, the power station pays an annual business rates levy of £4m; 17% of the area’s business rates receipts. It is one of just 20 companies which account for 50% of the area’s £29m rates levy. If the power station was able to temporarily exempt itself from rates, the council could face a funding shortfall. Under the rules laid down in the Localism Act, Hartlepool BC would be responsible for making up, from other local sources, 7.5% of the shortfall.

Harsh reality of business priorities

This map identifies the top rateable values in England. These sites likely represent a large proportion of the local council’s total business rates receipts, and whose commercial decisions may inadvertently cause the local council to suffer a funding shortfall. No doubt, both sides will strive to ensure security of funding for the area. However, the reality is that commercial considerations ultimately take precedence, leaving local communities to suffer the consequences.

Top rateable values in England



This article is part of the spring 2013 edition of Rating in Brief.

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