The Local Finance Bill Digested

A key plank of the Government’s Localism Agenda upon assuming office was the implementation of major financial devolution to local authorities across the country. Faced with a stagnating economy, the need to incentivise local areas to promote growth has become all the more urgent.

It is within this context that the Government launched its Local Government Finance Review earlier this year. A number of documents were published outlining a range of options for reform, including local retention of the business rate, and the introduction of long sought after tax increment financing powers. These proposals were the subject of much scrutiny, including by Future of London and Centre for Cities, who earlier this year joined forces to analyse their likely impact for London.

The Government has now published plans for the Local Finance Bill, to be introduced in Spring 2012 and Royal Assent by the Summer, as well as a detailed response to this consultation process. By their nature, these proposals are extremely technical, but what are the headline implications for London?

London Boroughs will see their budgets change – some for better, some for worse

Initial proposals for a portion of locally generated business rates to be retained have been confirmed within the Governments response, meaning that inevitably, some London Boroughs will do better than others from this package of reforms. In order to provide a baseline upon which to judge growth, the Government proposes to take an average of business rates collected by Borough over a number of years (factoring in a number of pre-defined “allowable deductions”). A system of tariffs and top ups will ensure that all Boroughs start from the same base position, and that each will therefore benefit from business rate growth in their area. The specific share of business rate growth to be retained locally will be announced in Spring 2012, with the aspiration for retention to take place over a fixed term ten year period before any reset of the system is undertaken.

The Government is determined that these measures will deliver a strong growth incentive where all authorities can benefit from increases in their business rates growth. However, the consultation response also seeks to ensure that checks are put in place to prevent disproportionate benefits, including the introduction of a levy to be set for each local authority, which will seek to claw back business rate reciepts over a certain level. And to ensure sufficient stability in the system, the Government proposes to use monies raised through this levy to introduce a safety net should an authority’s rates drop by more than a certain percentage below its baseline rates.

In addition, the Government intends to roll in the revenue elements of the Greater London Authority general grant and fire funding from the outset of the business rates retention scheme in 2013. Therefore, the Greater London Authority will receive a percentage share of business rates in the future scheme.

Despite the checks and balances outlined above, by its very nature as an incentive based scheme, some London Boroughs will benefit more than others from this package of reforms, and this has the potential to create significant implications for service provision and infrastructure development across the Capital.

Both models of Tax Increment Financing that were consulted on will be introduced

A number of authorities within London have long been interested in the prospect of tax increment financing. Perhaps the most high profile exploration of this new mechanism has been in the context of funding the extension of the Northern Line to Battersea Nine Elms. In its initial consultation document the Government set out two differing approaches to tax increment financing – one with specific limits set on the mechanism including being subject to broader business rate reforms, and the other set aside from other reforms, and with a longer retention limit on new business rates.

Many in the sector were concerned that placing limits on tax increment financing would limit its use in terms of potential borrowing periods and the total sums that could therefore be raised. In light of this, the Government intends to introduce both models, albeit with a limit on the number of type two TIFs it will allow at any given period. In addition to this, the Government has confirmed that Enterprise Zones will benefit from type two TIF powers as a matter of course. This is big news for areas like Battersea, and the Royal Docks, and could see a significant boost to infrastructure investment in these areas and others in the years ahead. However, with most growth in London focusing primarily on housing developments, it remains to be seen how much additional finance can be raised by this method in the Capital.

Pooling of revenues will be voluntary with no fresh incentives provided to do so

There has been much discussion as to the possibility of London Boroughs, or groups of London Boroughs, coming together to pool a portion of their retained business rates to fund sub-regional or London-wide infrastructure priorities – see London Councils’ response to the initial consultation. However, in the initial proposals, it was felt there were insufficient incentives for Boroughs to come together in this fashion, given the inherent political challenges involved with doing so.

In its response, the Government makes clear that it believes pooling contributions should take place on a purely voluntary basis, and that there will be no incentives provided to encourage authorities to do so. While it acknowledges the potential benefits of pooling, the Government is keen to stress that such a decision should be taken at a local level only. However, those authorities keen on forming a pool, will need to submit an application to Government to allow them to do so, to ensure that they meet a series of criteria and that all parties are fully bought in to the arrangement. It remains to be seen whether any groups of London Boroughs will take up this opportunity.

There are many other elements to the Local Finance Bill that will have a significant impact on London Government. Future of London will be exploring the challenges and opportunities posed by this package of reforms throughout 2012.

Ben H