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We need a strategy to reward thriving places, not empty properties

The vacuum around business rate retention offers an opportunity to rethink the policy – and its contradictions – and consider more progressive ideas, as Kevin Muldoon-Smith explains.

There is a rabid interest in the value of land and property and its potential taxation as a panacea for the largely unfunded future requirements of welfare, infrastructure and economic development. Land value capture, infrastructure premiums, local asset backed vehicles, direct property investment, more efficient exploitation of local authority assets and the sweating of local anchor institutions, have all received new attention in recent years.

One of the flagship policies for this agenda is the 50% business rate retention strategy (BRRS), introduced in 2013, and the more recent announcement of 100% BRRS (planned for introduction in 2020).

However, rarely has a policy been so ill defined, and received so little scrutiny, aside from the political corridors of central government, the technical environment of the Local Government Association and the opaque deal making of privileged locations.

‘In the current strategy empty property

is rewarded more than thriving business centres’

More recently, the future of business rate retention has been put in doubt. Perhaps reflecting the lack of detail on, and realistic pathway for, fiscal decentralisation in England, none of the major political parties mentioned it in their election manifestos.

Concurrently, the legislation that underpins 100% business rate retention, the protracted local government finance bill, fell following the announcement of the recent national election. There is now a vacuum of uncertainty as the revenue support grant recedes from view. The new funding situation will likely be a compromise based on the rhetoric of devolution and fiscal decentralisation and traditional redistribution levers controlled by central government.

However, although potentially pragmatic, falling back on (or continuing with) a comfortable system of centralised redistribution is a missed opportunity for a progressive, well financed, system of local devolution. The BRRS, in its current 50% guise and its proposed 100% evolution in 2020, has inherent contradictions and does not account for the messy variegation and uneven geography exhibited in England. However, the previous system of central grant was equally troublesome.

Current strategy contradicts idea of place-based economy
Efforts to improve the business rate retention strategy have involved complex alterations to the underlying administrative mechanism.

However, such changes to the technical fabric of public administration will not alter the underlying flaws in business rate retention, nor help it towards a more useful future – a more comprehensive debate is needed.

For example, the existing system only rewards business rate growth generated from new property development – any growth derived from existing property is stripped out of the business rate retention mechanism. Furthermore, empty property is rewarded more than thriving business centres – this is because empty property rates are levied on the maximum business rate multiplier rather than the lower small business rate. Moreover, only buildings with large floorplates generate tax as small businesses now largely exist outside of the business rate mechanism.

The incentive to grow local economics through business rate retention does not coherently translate into economic development. For example, those locations with buoyant rental levels that can attract new commercial development have an advantage over areas where demand is low and viability is a challenge. There remains an implicit assumption that new property development can act as a proxy for economic development – however, this is not borne out in reality. This is where the folly of using new real estate development as a convenient proxy for economic growth comes to the fore.

Certain locations with buoyant job prospects, for example the A19 corridor dominated by Nissan in Sunderland or the Golden Logistics triangle in the Midlands, do not benefit in any great degree from business rate retention. This is because industrial property, although space hungry, does not translate into significant business rate income due to its low rental value. This demonstrates a clear contradiction between models of fiscal decentralisation, the National Industrial Strategy and a place-based economy that works for everyone.

A policy that rewards creative investment in places is needed
On one hand, the recent radio silence in relation to business rate retention has only contributed to the uncertainty about how local services will be funded post 2020. However, on the other hand, this hiatus gives academics and practitioners some time to reflect on how the policy can be improved to better support local welfare requirements, and in order for it to more coherently translated into local economic development and growth.

While some local authorities in England will no doubt have breathed a sigh of relief when the planned government legislation for 100% retention receded from clear view, this lull in activity should be used by government, practitioners, academics and opposition parties as an opportunity to better design fiscal decentralisation.

In order to do so, those involved in devolution and decentralisation should broaden and reinterpret the all too narrow consensus of real estate, as it is defined, in the business rate retention strategy.

Hitherto, real estate has mostly been associated with new development opportunities, and the potential investment of new property tax. Instead, public policy that is reliant on property value, tax and underlying urban economics, should seek a more comprehensive approach that combines the societal, environmental and economic value of real estate opportunities.

A different type of incentive mechanism could work,

one that rewards creative investment in local places’

One way of improving this situation is to reduce the rate of empty property rate taxation below the small business rate multiplier. This would be an easy win, as it would incentivise local authorities and landlords to promote small business growth, rather than rewarding dormant potential.

It still remains the case that local authorities can potentially make more income from empty rates than business rates – this became more pronounced when the government significantly increased the threshold for small business rate relief. More problematic, but potentially more beneficial, is to lever in the potential value growth of existing commercial property.

Currently, any new value due to improved design, individual placemaking, infrastructure and transport is lost. While the added worth derived from improvement in building performance, designed to deal with issues such as climate change, economic productivity and new ways of working, cannot be easily captured. The challenge for those interested in fiscal decentralisation is understanding how this fairly rigid administrative system of property valuation and tax, upon which fiscal decentralisation is reliant, can be adapted to capture a more comprehensive account of economic value as it is reflected in local property markets.

One argument that has gained a lot of traction is that redistribution, or a renewed emphasis on central equalisation, will paper over the cracks in the existing model of fiscal decentralisation.

However, under conditions of property oversupply (caused by the incentive to build new property), there is a real risk that property values will decrease, providing an incentive for businesses to leave less wealthy areas to newly affordable premium destinations. This is a kind of reverse gentrification, where less wealthy businesses capitalise on falling rents in more attractive locations due to over-supply and move up the property ladder (often taking advantage of inducements from more wealthy local authorities). Under these conditions, redistributed property tax, compensating poorer locations with growth from elsewhere, will do little to remedy displaced economic activity in less buoyant locations.

Unfortunately, the recent obsession with Brexit has pushed much of the devolution and fiscal decentralisation debate off the political agenda and even further from the public consciousness. This needs to be countered, recognising that the largely political project of Brexit, much like austerity before it, is potentially less important than the real crisis of how we manage and pay for public welfare in the future. A different type of incentive mechanism could work, one that rewards creative investment in local places, rather than new development alone.

  • This article is part of a new research project in the Department of Architecture and Built Environment at Northumbria University, led by Dr Kevin Muldoon-Smith and Dr Paul Greenhalgh. The project focuses on the relationships between devolution, fiscal decentralisation and property value and tax. Building on previous scrutiny of the Business Rate Retention Strategy in England since 2013, it is conducting an international comparison of fiscal decentralisation policies and the utilisation of property value and tax to fund process of devolution. The objective is to inform and contribute to the debate around more progressive place based fiscal decentralisation policies in the UK.

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