100% business rates retention scheme to present 'risks', watchdog warns

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A radical overhaul of local government funding could put councils' financial sustainability at risk unless the scheme is properly planned and designed, a spending watchdog has warned.

Under Government plans, councils in England will retain all the business rates they generate, a move aimed at incentivising authorities to boost their local economies.

But the National Audit Office (NAO) said the Department for Communities and Local Government (DCLG) faced a "significant challenge" in implementing the 100% business rates retention scheme by 2019-20.

It also said the DCLG must ensure councils have enough money to fund services at the time the new scheme comes into force.

"There are risks in designing and implementing the 100% scheme," the NAO report said.

"These include short-term risks whereby failing to deliver the scheme on time or to provide the sector with enough information in advance could undermine local financial planning.

"There are also more significant long-term risks whereby poor planning and design could deliver a scheme that puts local authorities' financial sustainability at risk or fails to create a mechanism that delivers local economic growth."

The NAO said there had not been a formal assessment of whether the current scheme, which allows councils to retain 50% of business rates income, had promoted economic growth.

It pointed out the policy encouraged local authorities to grow their local tax bases, but because firms could move from one area to another, it might not necessarily boost economic growth overall.

The report acknowledged that the DCLG had learned lessons from the 50% scheme and was applying them to the 100% plans.

But the move to promote financial self-sufficiency through the 100% scheme comes in the context of real-terms cuts to council funding, with spending power falling by 25.2% from 2010-11 to 2015-16 and expected to decline a further 5.4% by 2019.

The report said: "Government projects such as this are prone to over-optimism and the department needs to avoid this. The department needs to ensure that the design is not compromised by the pressure to deliver to a tight timetable."

It said the DCLG "must ensure that the level of funding in the system at the start is sufficient to meet the sector's needs" and called for greater focus on ensuring that the scheme is configured to maximise economic growth rather than simply tax base growth.

NAO chief Amyas Morse said: "The department faces a significant challenge in implementing 100% local retention of business rates by 2019-20. It has benefited from the experience of delivering the 50% local retention scheme and is using this experience effectively.

"The key question is whether there is enough money in the system to let services be delivered on the right scale and for self-sufficiency to be seen to succeed."

A Government spokesman said: "As the NAO recognises, we've made great progress towards introducing 100% business rates retention by 2020.

"Local government has campaigned for over a decade for this. So working closely with them, we're designing a system that helps promote economic growth.

"Alongside these reforms, we've given over £200 billion to local authorities through the historic four-year funding settlement. This gives them the certainty they need to plan ahead with confidence."