Government launches first phase of local government finance review

The Communities Secretary Eric Pickles has promised that “economically successful” councils will be able to become largely self-funding as he launched the first phase of the long-awaited review of local authority funding today.

The first phase of the review will focus on the establishment of a new system for Business Rates and Government Grant. The government said that it wanted to develop a “radical” new approach to reduce council dependency on central government funding by enabling councils to retain the business rates they collect, thereby incentivising them to encourage greater business growth in their areas.

As part of the first phase of the Local Government Resources Review, the Department will conduct extensive engagement with interested parties, including business of all sizes. The review will conclude in July followed by the necessary steps to implement the conclusions.

The terms of reference for the first phase include:

• how to allow local authorities to retain their business rates to incentivise growth, whilst ensuring that all have adequate resources to meet the needs of their communities;
• the extent councils can be freed from dependency on central funding, along with further financial freedoms, whilst protecting the interests of local taxpayers;
• what safeguards should be put in place to ensure that councils which collect insufficient business rates can be funded, how council tax levels should be kept under control, what the position of councils that collect more than current spending levels should be and how business can be protected from disproportionate rises in business rates;
• the implications for other policies such as New Homes Bonus, Business Rate Relief and Tax Increment Financing. The government insisted that it remained committed to enabling local authorities to borrow against business rate revenues to fund key infrastructure and other capital projects.

The government insisted that terms of the review are clear that any change must protect the interests of local taxpayers and the vulnerable, and that councils in more deprived areas will continue to receive central government support.

Secretary of State for Communities and Local Government Eric Pickles said: "We want every community to be open for business and rewarded for economic growth, but at the moment there is no motivation for councils to support local firms or create new jobs. One of the best ways we can change that is to free councils from their enslavement to Government grants and put them in control of their own destiny.

"By letting councils repatriate their business rate income you make the system more straightforward and councils more self-sufficient in one fell swoop, whilst deprived councils would still get the support they need. Scaling back central government's historic control and redistribution of this local business tax would also give councils a sudden shot of financial adrenaline and a legitimate stake in their economy with direct benefits for supporting new business and growth. It is what councils want and precisely what we mean by localism.

"Localism doesn't mean higher taxes. Indeed, councils' dependency on the whims of Whitehall has had a knock on effect for council tax bills in many areas. But greater local autonomy will require greater local accountability and local transparency to ensure sound finances. We will stand up and protect the interests of local taxpayers, as they've been taken for granted for too long."

The second phase of the review well focus on the role of Community Budgets. The Department for Communities and Local Government said that its terms of reference will be published “in due course”.

The full terms of reference can be downloaded in Word format by clicking the following link: Funding review doc