Placing faith in the pilots

By David Phillips and Neil Amin-Smith | 17 April 2018

The business rates retention scheme (BRRS) was set up in 2013-14 to provide English councils with stronger incentives for growth. Initially, councils bore (up to) 50% of the real-terms changes in local business rates revenues. Of course, as well as providing stronger incentives, such a system poses greater risk of divergences in funding, as different areas may see revenues perform differently.

Just over two years later, George Osborne announced that in order to further strengthen incentives, councils would bear 100% of the real-terms changes in local business rates revenues from 2020. In April 2017, four city regions (and Cornwall) began piloting what the Government calls 100% retention in anticipation of the planned national roll-out.

However, the legislation required to enact 100% retention as a national policy did not survive the June 2017 election. Instead a further 11 pilot areas were selected – including London, Kent, and Gloucestershire – and moved to 100% retention this month. This second wave of pilots has been instituted with the explicit aim of learning more about how national 100% retention might function.

In our new paper 100% business rates retention pilots: what can be learnt and at what cost, we explain why we are doubtful how much can be learnt from the pilots and why the Government’s claim that the pilots are ‘cost-neutral at the point of delivery’ is unlikely to be true.

Opportunities for learning limited by pilot design

The pilots represent a varied cross-section of English councils – covering both rural and urban and northern and southern areas (see map). In this sense, they might seem well set up to be informative about how 100% rates retention could work in different parts of the country. However, there are reasons to believe the scope for learning is limited.

Foremost among these is the fact that the 2018-19 pilots are only guaranteed to run for one year. There is an inherent limitation to how much one can learn in such a short period, especially given that the impact of 100% retention on funding levels and risk would tend to grow over time. Furthermore, councils’ responses to 100% retention under such a short time-frame may differ substantially from how they would respond to longer-term implementation.

In addition to these concerns, the very design of the pilots seems likely to affect how much it will be possible to learn from them. All pilots operate under a ‘no-detriment clause’, which guarantees them against receiving less income than they would have received under 50% retention. Such a policy would almost certainly not be applied under a nationwide system of 100% retention, meaning that pilot councils are not facing the level of risk that would accompany national roll-out.

Pilot councils forecast to gain £870m

The Government has claimed the pilot schemes are cost-neutral at the point of delivery because alongside moving councils to 100% retention it is abolishing grants and adjusting councils business rates ‘tariffs’ and ‘top-ups’.

These adjustments, however, were in effect based on real-terms business rates revenues as of 2013-14. As a result, pilot councils will retain 100% rather than 50% of any real-terms changes in revenues since that year – not just from when they joined the pilot schemes (in April 2017 or April 2018). Since almost all pilot councils saw real-terms growth in business rates revenues between 2013-14 and 2017-18, this can represent a significant increase in their funding.

Indeed, using councils’ forecasts of their 2018-19 revenues, we have estimated that pilot councils will receive extra funding of £873m in 2018-19 due to the pilot scheme. This is equivalent to an average increase of around 3.6% in their core spending power.

Such an average, however, masks considerable differences between pilot councils. For example, London councils are forecast to receive an extra £431m (equivalent to 4.9% of core spending power or £49 per person) and the Berkshire pool an extra £53m (8.4% or £59 per person). By contrast, in areas where rates revenues have grown less, pilot councils are set to see smaller gains – Liverpool, for example, is set to receive £2m, equivalent to only 0.6% of its core spending power or £5 per person.

The extra funding represents an opportunity cost to government – and perhaps other councils

The extra funding flowing to pilot councils represents a cost to central government. This is money that could, in the absence of the pilot schemes, have been spent in other ways. For instance, the revenues could have been used to reduce the overall budget deficit, fund tax cuts or increase central government spending – including on grants to councils. In fact, £873m represents an amount equal to 2% of all councils’ core spending power.

We have examined what the impact would have been if this money had instead been allocated across all councils according to their official assessed spending needs. The graph (pictured) shows how much each upper-tier council area (or pilot pool) is forecast to gain or lose from the 100% pilot schemes, relative to what each would have received under such an alternative.

Most pilot councils have gained, and some significantly, from funding being allocated through the pilot schemes rather than according to assessed need. However, there are some pilot areas that would have been better off if the extra funds had been allocated by need. These tend to be metropolitan districts with low revenue growth and/or high needs, such as Liverpool and Oldham.

All non-pilot areas, of course, implicitly lose out under such a comparison. Northamptonshire, for example, could have shared an additional £10m between its county council and constituent districts.

So what might the Government be hoping for from the pilots?

When the cost to central government is considered alongside the obstacles to learning substantive lessons about 100% retention from the pilots, it is easy to wonder what else might have motivated the implementation and expansion of this particular policy.

The answer may lie in the Government’s strategic objectives. The 100% pilots may be seen as a way of maintaining momentum behind local government finance reform – reform that seemed on the verge of stalling after the June 2017 election. Also, excess demand from councils to become pilots could have given the Government greater leverage. For example, in order to maximise their chances of securing pilot status, prospective pilot groups may have proposed changes that align with the Government’s objectives but that councils would have been less willing to accept if imposed centrally. The changes to tier shares (how revenues are split between upper and lower tier councils in two tier areas) implemented by some pilot areas illustrate this – such changes may have proved controversial if imposed by central government.

Or perhaps, the opportunity to increase funding to some if not all councils, by labelling a scheme cost-neutral and avoiding cross-departmental wrangling, was motivation enough.

Neil Amin-Smith is a research economist and David Phillips is an associate director at the Institute For Fiscal Studies

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