Local government finance reform – two good, two bad

What do the Chancellor’s announcements in his speech at Party Conference mean for local authorities?

Osborne, while not yet setting the world alight in terms of delivery, knows how to use a speech to set the agenda. And he certainly did that today with his announcement on local government finance reform.

His proposal – effectively to allow councils to retain all business rates generated in their local areas, and for this to gradually replace formula grant – is something local government has always campaigned for. And he went further, stating that business rates will not be set centrally, meaning local authorities have the opportunity to set them at their preferred level.

Why this is a good thing

  1. The current mess of local government finance – which sees councils collect business rates only to send the proceeds on to the Treasury, and then receive some of this money back in formula grant – is ridiculous. It needs reforming and if devolution is to work, there must be a stronger connection between taxes raised in a local area and its public services.
  2. It shows that the Treasury is prepared to give up its grip on a key plank of UK tax revenue. Treasuries aren’t normally known for their willingness to loosen their grip on the cash (they tend to block this sort of thing, actually) and this is another smart play from Osborne to demonstrate a commitment to devolution.

Why this is a bad thing

  1. We don’t yet know how long the transition period will be. Say you are a rural authority or a mainly residential local authority in a loose city region, how long do you have to start finding the cash you currently rely on from Government? And will you ever dislodge the already established business rates winners and attract their businesses to set up in your area?  Obviously councils will use discounts to attract which business might like, but what will it mean when setting up multiple offices across the country? A small headache…
  2. This also signals a funding squeeze from central government. This is obviously well anticipated but the tendency of Osborne economics had always been to devolve the things the Government didn’t want to cut to ensure councils had to make the tough decisions. The spending review is fast approaching but the message to local authorities from Government is pretty clear – don’t expect much from us. You’re on your own.