George Osborne to 'fix' the way the country is run with a 'devolution revolution'
Chancellor George Osborne today set out major plans to devolve sweeping new powers from Whitehall to local areas to promote growth and prosperity. Fixing the current broken system of financing local government will be a huge boost to local growth, help attract business and create jobs.
Local government will be able to keep the rates they collect from local businesses. Power over £26 billion of revenue from business rates will be devolved, the Chancellor said.
The Uniform Business Rate will also be abolished. Powers to reduce business rates will be devolved to all local authorities, giving them major new freedoms to make decisions to boost enterprise and economic activity in their areas. Councils which successfully promote growth and attract businesses will be better off, keeping the benefit from increased revenues.
Those areas which choose to have directly accountable elected city-wide mayors will get even greater flexibilities, also being given the power to increase rates for spending on local infrastructure projects up to a cap, as long as they win the support of local business.
The reform will mean local authorities retaining all revenue from business rates. At the same time, the core grant from Whitehall will be phased out, and councils will take on new responsibilities.
The Chancellor George Osborne said:
"It's time to face facts. The way this country is run is broken.
"People feel remote from the decisions that affect them. Initiative is suffocated.
"Our cities held back. There's no incentive to promote local enterprise.
"It's time we fixed it."
Since 1990, local business rates have been set by central government at a uniform national rate. Rates are collected locally, but then transferred to central government to be distributed back to local areas in the form of a grant.
Since 2013, local government has been enabled to retain 50 per cent of the proceeds of rates, because ministers believe it is right that when local areas take bold steps to boost business growth in their area, they should see the benefit.
Because some areas collect a lot of business rates and others less a system of top ups and tariffs was introduced in 2013 to transfer business rates revenue between councils so that their overall revenue stayed the same at the point of devolution.
However, some areas still face a 75 per cent marginal tax rate on business rate growth because they only retain 50 per cent of any receipts – and then even on the amount they do keep, they are hit by a 50 per cent levy on any business rate growth they see above RPI inflation.
The latest reforms go much further, moving to 100 per cent retention of the full stock of business rates by 2020. It will mean that all income from local taxes will go on funding local services. Full devolution of business rates will give local government control over an extra £13bn by 2020.
The system of top ups and tariffs will be extended and the Safety Net policy which protects local area against big drops in business rates will also be maintained. But for future growth after the point of devolution, councils will see all the gains of success, because the Levy on growth will be abolished.
The established transfers will be there on day one, but thereafter, the growth in revenue will be kept in that local authority.
Since 2013 the fastest growth in revenues as a share of spending is in the East Midlands, and second fastest was in Yorkshire, meaning these areas would have done best.
Right now, we collect much more in business rates than we give back in grant. So the local government grant will be phased out altogether, and councils will take on new responsibilities.
The Uniform Business Rate will also be abolished. Local authorities will be able to cut business rates as much as they like.
Directly elected city-wide mayors in cities like London, Sheffield and Manchester, will be able to add a premium to business rates to pay for new infrastructure, as long as they have support of local business leaders, through a majority vote of the business members of the Local Enterprise Partnership. This power will be limited by a cap, likely to be set at 2p on the rate.
The devolution package builds on reforms in the last Parliament. The Chancellor has agreed to devolve powers over areas including transport, housing, planning, policing and health for cities and regions that introduce directly elected mayors.