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Councils warn business rate changes could cost North East £320m

Richard Moss | 09:51 UK time, Friday, 4 March 2011

South Shields

Towns like South Shields look to have plenty of shops, but the North East has fewer businesses than other regions.

Councils often say they want more freedom from central government, more control over their own destiny.

The Coalition says it is keen on doing just that.

And so it is considering handing control of business rates back to local authorities.

They would be able to keep rates they raised locally, and potentially even decide what rate to charge businesses.

Sounds great, yet some councils are already protesting about plans which on paper hand them both more power and control over their finances.

The problem is that some areas can raise more from their business rates than others.

Councils in central London and the South East gather billions in rates, while local authorities in poorer parts of the North can only raise a fraction of that.

At the moment that is not a problem because business rates might be collected by councils, but they are all sent back to the Treasury's coffers in London.

The Government then redistributes it on the basis of population and deprivation.

The result is that southern business rates end up subsidising northern councils.

So if you localised rates completely, it could cause a financial catastrophe in the North East.

According to figures provided by parliament, one council - Stockton - would gain an extra £4m per year.

But every other local authority would lose out.

Here they are in ascending order of financial loss per year:

Darlington £352,000
Gateshead £10m
Newcastle £10m
Hartlepool £16m
Redcar and Cleveland £18m
North Tyneside £19m
Middlesbrough £27.5m
Northumberland £40m
South Tyneside £46m
Sunderland £49.5m
Durham £84m

Pretty serious stuff. It amounts to a net loss to the region of £320m. It's estimated that Yorkshire and the North West could lose a similar amount.

Add that kind of loss to the cuts they are already facing, and our councils could be devastated. Durham County Council says it would add up to half its budget.

Frederick Street, South Shields

Streets like this in South Shields show why North East councils struggle to raise as much in business rates as their southern counterparts.

In contrast, councils London and the South East would be the big winners - gaining £3bn. Westminster Council alone would get an extra £1bn every year.

That contrast was raised in the Commons this week by the Bishop Auckland MP Helen Goodman.

But Local Government Secretary Eric Pickles insisted that those figures were nonsense, because the Government would still find a way through its grants to redistribute money to poorer councils.

That has not allayed the fears of our councils though.

Durham County Council leader Simon Henig fears the redistribution will not be big enough to make up for the financial black hole.

And he may have a point. The Government believes handing back control of rates to councils would give them the incentive to attract more businesses into their area.

That wouldn't work so well if you continued to use southern rates to subsidise our region to the same amount.

But there may be another consequence too.

The Government could also decide to let councils set the rate locally (currently every part of the country pays a uniform rate).

That was the system in use before 1990.

It fell into disrepute when some councils began to hike up rates to make up for the money they were losing in cuts.

Businesses also hated the chaos of different rates in different areas.

And the North East Chamber of Commerce is concerned that rates would almost certainly head upwards if they were set locally, damging the economy.

Lord John Shipley

Former Newcastle Council leader Lord Shipley thinks business rates could fall if councils gained control of them.

But supporters of the idea disagree. The former Lib Dem leader of Newcastle Council, Lord Shipley, believes it could lead to a closer relationship between businesses and councillors.

And he thinks councils might even decide to cut rates to encourage more companies in.

He also points out that rates currently rise with inflation anyway - up to 5% this year - and that local authorities could choose to vary that to help companies out.

The problem is the Government still hasn't published its proposals on business rates and council finances.

There appears to be some wrangling between the Coalition partners about how far to go.

The Lib Dems want to give councils much more latitude, creating self-financing "free councils" by allowing them to keep the area's road tax receipts or levy local sales taxes.

The Conservatives though are nervous about handing that sort of power to local authorities.

They would though be keen to end their dependence on central government finance.

And Labour councils in the North East fear that would leave communities sinking rather than swimming.

The subject will be discussed on the Politics Show on 6 March at 12pm on BBC1.


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