Joint HMT and ODPM press notice
4 July 2003
Government's £1 billion boost for local government
A £1 billion boost for local government, backing enterprise for the regions, was launched today, as John Prescott and Gordon Brown launched a consultation paper on the new Local Authority Business Growth Scheme at the Local Government Association Conference in Harrogate.
The scheme, which will reward local authorities for encouraging business in their area, will allow councils to retain money from business rates where there is increased economic growth in their area. It should start in April 2005.
The Deputy Prime Minister said:
“This scheme should give councils a real incentive to work together with business to create enterprising and thriving communities. We want to create a win-win situation where flourishing businesses will benefit everyone in the community.”
The Chancellor said:
“For the first time, all of us in partnership can each secure financial benefits from creating new businesses. Based on historical data, we estimate that, as a result of this measure, local authorities could gain up to £1 billion over the next three years – showing that the next stage of our employment and growth strategy for Britain can only succeed with greater initiative and engagement by local areas. Further reforms in the Pre-Budget Report will reflect this.”
Responses to the Consultation Paper are invited by the end of October.
Below is an executive summary of the proposals
Notes to editors
The Government and the LGA propose to host a joint seminar on the scheme before the end of the consultation period. Further details of this will follow in due course.
1. The Business Growth Incentives scheme was first announced by the Chancellor in the Pre-Budget Report in November 2002.
2. The necessary powers to introduce the scheme are contained in Clause 71 of the Local Government Bill currently going through Parliament.
3. ODPM undertook to consult on the scheme in Summer 2003.
4. Copies of Local Authority Business Growth Incentives – A Consultation Paper (54 pages) are available from the LGA Staff Office, from the ODPM website, and from ODPM distributors:
ODPM Free Literature
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Tel: 0870 1226 236
Fax: 0870 1226 237
ODPM Press Enquiries: 020 7944 3042 Out of Hours: 020 7944 5945
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Office of the Deputy Prime Minister website
Treasury Press Office: 020 7270 5238
Local Authority Business Growth Incentives - A Consultation Paper
Executive Summary
July 2003
Office of the Deputy Prime Minister
Executive Summary
E.1. The Government’s central economic objective is to achieve high and stable levels of growth and employment. Improving the economic performance of every locality in England is an essential element of that objective. This is firstly because we are committed to delivering fairness and opportunity for all in every region and community in the country. It is also because unfulfilled economic potential in every locality must be released to meet the overall challenge of increasing the UK’s long term growth rate.
E.2. This document sets out the objectives, principles and concepts that will guide the Government in designing a scheme to allow local authorities retain some of the revenue from business rates. The primary legislation for the scheme is being sought in the Local Government Bill now in Parliament. This document only applies to the proposals for the scheme in England. This is a devolved matter and the devolved administrations in Scotland, Wales and Northern Ireland will be deciding policy separately.
E.3. At a local level there is currently a mismatch between the costs of economic development and the benefits that accrue from it. Economic development poses direct costs on local authorities in terms of greater congestion on local transport and impact on the local environment. Potentially it also imposes costs on other local authority services, most obviously housing, education and community safety.
E.4. In contrast, the benefits of economic growth typically accrue either to individuals, through more and better employment, or, in tax terms, at a national level. This suggests that whilst costs of economic development accrue at a local authority level, the benefits accrue at a wider level.
E.5. This scheme will change this situation. Currently, all business rate revenues are collected by local authorities and passed into a central pool. These revenues are then re-distributed on a per capita basis. This scheme will allow local authorities to individually retain some of the business rate revenues that are associated with growing the business rate tax base at a local level.
E.6. This scheme will create positive financial incentives for local authorities to work in partnership with business, Regional Development Agencies, Learning and Skills Councils and other key local and regional players to maximise economic growth. The Government’s approach to economic policy is most effective when it is based on maximising growth in each locality. This approach can only be delivered by effective economic leadership from local authorities, providing what business in the area needs to fulfil its potential.
E.7. The scheme will follow the approach to Local Government set out in the 2001 Local Government White Paper Strong Local Leadership – Quality Public Services. Revenues from the scheme will not be ring fenced and local authorities will be free to decide whether and how to maximise local economic growth so as to benefit from the scheme.
E.8. This document is focused on the principles and concepts that will underlie the Government’s approach to the scheme and the choice between options. The Government would welcome comments on these proposals by 31 October 2003. All comments will be carefully considered before the Government puts forward firm proposals for the exact mix of variables during the course of next year. The scheme will be launched on 1 April 2005.
E.9. The document is set out as follows:
- An opening chapter on objectives and principles for the scheme
- A chapter which sets the scheme in the wider policy context
- Two chapters which introduce some of the variables for the scheme and the ideas on which the Government is consulting
- A chapter setting out next steps and the timetable for introducing and evaluating the scheme
- Two appendices containing the technical working of the scheme and model baselines.
The Policy Context
E.10. This scheme fits firmly within the Government’s existing approach to economic, enterprise, local government and business rates policy.
E.11. Analysis presented in this document suggests that if local authorities successfully respond to the incentives created by the scheme, this will have a beneficial impact on local productivity and growth leading to stronger economic performance. Also, one of the key principles for this scheme is that the incentives should be relevant to all local authorities. This means that the scheme underpins efforts to reduce differentials in economic growth throughout the country whilst maximising overall economic growth.
E.12. This scheme is also a key part of the Government’s new approach to local government. The revenues raised from the scheme will not be ring fenced and local authorities will be free to spend them as they choose on local priorities. The scheme provides the tools and incentives to deliver the demands of local people with regard to economic growth without prescribing what those demands should be or how to deliver them.
E.13. The scheme also complements existing business rates policy by encouraging greater co-operation with business. It is not intended in any way to pre-empt findings of the wide ranging review into the balance of funding in local government finance.
Baselines
E.14. The key technical variable underlying the scheme is the setting of baselines. These drive the expected performance of each local authority and therefore the distribution of incentives and revenues from the scheme.
E.15. The chapter on baselines proposes five different models, each of which creates different incentives, distributional impacts and is more or less intelligible to those who need to respond to and operate the scheme.
E.16. Currently, the two models the Government favours are:
- The National Historic Growth model which groups local authorities nationally and then separates them into five sub-groups depending on relative historic performance; or
- The Sub Regional model which groups local authorities according to their Government Office for the region and then separates them into three sub-groups depending on relative historic performance.
E.17. The Government believes that these models best provide a challenging incentive to authorities with high historic growth and an achievable target for authorities with low historic growth ensuring that overall the scheme provides a relevant incentive to all local authorities. The Government invites consultees to indicate which model they prefer and why.
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Floors, Scaling Factors, Ceilings and Tiers
E.18. The other controllable variables for the scheme are the floors, scaling factors, ceilings and tiers. The floor denotes the level, relative to the baseline, above which a local authority will retain revenues. The scaling factor determines the percentage of revenues retained, the ceiling the maximum amount of revenue retained and the tier the relationship between lower and upper tier authorities. These factors interact to maintain equity between options and ensure a balance between an overall strong incentive and the distribution of that incentive amongst authorities.
E.19. The Government has identified two main options for delivering floors and scaling factors:
- A high floor / high scaling factor option. Under this option individual local authority floors would be set high, so that only around 50% of authorities would receive benefit from the scheme without improving performance. However, this will be compensated for by a high scaling factor, allowing retention of, say, 95% of revenues above the floor. This option creates a relatively stronger incentive to do better.
- A medium floor / medium scaling factor option. Under this option, individual local authority floors would be set so that around 75% of authorities would receive benefit from the scheme without improving performance. However, there would be a lower scaling factor with local authorities allowed to retain around 65% of revenues above the floor. This option provides greater up front support to do better.
E.20. The Government believes that overall these options provide the best match of incentives to improve and up-front support so as to enable local authorities to deliver better economic performance. The Government invites consultees to indicate which option they prefer and why.
E.21. Further work is needed on whether and how to distribute revenues between London Boroughs and the Greater London Authority and between shire districts and shire counties. The Government invites consultees to indicate how they believe this should be done.
E.22. As a ceiling, the Government proposes a restriction on gains of 1% of Formula Spending Share per annum rising as the scheme rises and therefore reaching 3% of formula spending share in year 3.
Administrative Requirements
E.23. The growth incentive scheme will require some changes to local authorities’ existing administrative arrangements. It will also require local authorities to supply some information to central government so that it can monitor the additional revenue retained.
E.24. During the course of 2004 we will then be testing and refining these through an administrative dry run of the scheme with a group of local authorities. As part of this consultation the government is inviting local authorities to volunteer for being part of the administrative dry run.
Evaluation and Revaluation
E.25. It is the Government’s intention to evaluate thoroughly the operation and effectiveness of the scheme once it has been operational for two to three years. At that time the Government will review the long term design of the scheme.
E.26. The Government is determined to ensure that the 2010 revaluation does not obscure the economic effect of the scheme or result in windfall gains for certain authorities at the expense of others. Details on how this will be achieved will be published nearer the time.
Summary
E.27. To summarise, the Government sees this scheme as an important part of its economic policy and its approach to local government. The scheme creates strong incentives for local government to maximise economic growth in a manner that most suits the local electorate and in this way the scheme is part of the Government’s new approach to Local Government building on the vision of the 2001 White Paper.
E.28. However, the scheme is also new and the Government’s approach is therefore cautious. In particular the scheme includes several elements designed to ensure that the distributional impact of the scheme is fair and an incentive to all. The Government is committed to an evaluation process to assess the impact of the scheme before deciding on the long-term design of the scheme. Nevertheless, the Government is committed to ensuring that the scheme continues for the foreseeable future so as to realise the full benefits from a culture of enterprise and partnership between local authorities and the business community.
Productivity in the UK 4: The local dimension
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