Seeing through ‘the fog’: Local government resource review in London

The votes are in but the verdict is far from conclusive for the Local Government Resource Review consultation, which closed this week. Announced by Eric Pickles in July, the LGRR set the tone for the coalition’s localism agenda, with plans for a radical review of the local government financing system. Now the debate returns to the house where they will be hard-tasked to get this right.

The LGRR is a complete shake-up to the way local authorities are funded and presents a real opportunity to give strong incentives for councils to say ‘yes’ to the development needed for economic growth. Such major changes are never without contention, and this proposal has generated significant debate among businesses, politicians and media.

One of the emerging criticisms is that the consultation proposals are extensive and complex. Earlier this year, Centre for Cities published research, Room for improvement: Creating the financial incentives needed for economic growth, which found that in order for incentives to be effective they need to keep things simple, targeted, predictable and long-term. Accordingly, we advocated that councils should be allowed to retain between 40% and 60% of all their future business rates growth.

This week in a new report, in collaboration with Future of London, we built on our national level research to look at how these changes would affect the local authorities of the UK’s biggest city.

Our report, Capital Gains: What does the Local Government Resource Review mean for London?, found that London as a whole would fare well if the changes in the LGRR are bold enough to incentivise councils to bring forward local development.

London hardly needs incentives to invest in growth – of the £20bn in business rates collected in England in 2010/11, London accounted for £5.4bn or 27%. This growth however, has been uneven and, similar to what we found at the national level, some local authorities would be better placed to take advantage of the opportunities created than others.

Whilst most of London’s authorities experienced growth in their business rates between 2000/01 and 2010/11, some places, such as Camden, Tower Hamlets and Southwark, experienced significant increases. Tower Hamlets saw their business rates grow by 103% during this period. If these authorities were allowed to retain a fixed portion of their future business rates growth, they would have additional resources to further support the economic growth of their local businesses and invest in their communities.

When thinking about London’s economy, the administrative boundaries of individual authorities make little sense. For London, although applicable for other city-regions like Manchester, Sheffield and Leeds, to ensure that all councils gain from business rates retention Centre for Cities’ report argues for a system of pooling.

So, how would this work? A portion of each authority’s business rates gains would be put into a central London pot to be used to support those places where their budgets would be squeezed. The money would also be used to fund strategic projects that would benefit all of London’s businesses and communities. Examples of this might be transport upgrades similar to Crossrail or the Northern Line extension to Battersea.

If the LGRR proposals go far enough, London’s local authorities would be individually financially rewarded for generating more commercial development. Collectively they would benefit from pooling into a central London pot used as funding for pan-London projects, and also the rest of the country would benefit from greater amounts of business rates to be redistributed via the government.

The government doesn’t have an easy road ahead, but, it must use the LGRR to make the difficult decisions for growth. Policymakers should avoid overcomplicating the reforms and should not be afraid to be bold. If the incentives are bold, cities such as London, Manchester, and Leeds could see significant benefits for their economies. It is a waiting game now but the onus is on the government to get this right for the benefit of cities across the UK.