Jasna Begum

Department for Communities and Local Government
Eland House Zone 5/H2
Bressenden Place
London
SW1E 5DU

Dear Ms Begum

Reforms to the Local Authority Business Growth Incentives (LABGI) Scheme

Thank you for the opportunity to comment on the issues paper relating to the reform of LABGI. The County Council's response to the specific questions in the consultation paper are attached.

The County Council is however very concerned that the scheme has been suspended in 2008/09 while the review is taking place and about the relatively small sums that it is intended to distribute via the incentive scheme in 2009/10 and 2010/11 compared with the £400m earmarked for the scheme in 2007/08. Nor does there appear to be any compensating increase in other forms of non ring-fenced local authority funding, and combining LABGI funding with the net AEF reported in CSR07 indicates that general grant support for local authorities in 2008/09 will be lower in real terms than in 2007/08.

For authorities below the grant floor such as Hampshire County Council, LABGI has provided some small compensation for receiving lower formula grant increases than most authorities and for no longer receiving grant increases that are responsive to changes in need.

Yours sincerely

Jon Pittam

County Treasurer

Incentives for local authorities to promote economic development

1 Do you agree with the need for an incentive?

Hampshire County Council supports the view expressed in the Lyons report that a mechanism is needed to allow local areas to capture financial benefits from economic growth to offset the potential costs of that growth and to give local authorities a more direct incentive to promote the health of the local economy.

2 Should it become a permanent part of the local government finance system?

Yes. The County Council supports the relocalisation of the business rate, but an incentive scheme could operate within the context of a local business rate.

Objectives of reform

3 Taking account of the lessons learnt from the current LABGI scheme, how we achieve an incentive scheme that achieves a good balance between:

a) stronger, simpler and more predictable incentive structures with fairer mechanisms for every authority and

b) the stability of funding and the timeliness of rewards?

A scheme that is relatively simple and transparent is bound to involve some unfairness, in the extent to which the allocation of grant reflects the effort that a local authority has made to support business growth and its infrastructure needs arising from that development. Given the bluntness of the incentive, the payment of grant does not need to be based on growth in the immediately preceding period, and an annual payment set prior to the beginning of the financial year based on comparing a 3 year rolling average with the historic trend is proposed.

4 What do you consider to be the relative importance of the objectives and the balance to be struck

The importance of fairness is affected by the sums of money being distributed, the distribution of a smaller sum than in the current scheme reduces its importance, relative to simplicity and predictability. Stability of funding is as important as timeliness, given the imprecise link between business rate growth and local authority support for business, and an annual allocation based on a rolling 3 year average rate of growth would achieve these objectives

5 Are there any other objectives that you would like the scheme to take into account?

The distribution of grant in two tier areas should broadly reflect the responsibilities for providing the service infrastructure affected by the rate of economic growth.


Defining a measure of growth

6 Do you agree that a reformed LABGI scheme should continue to use `business rates' as the basis for rewarding growth?

The County Council supports the view that using a measure of business rate growth is the simplest and most transparent basis for a reformed LABGI scheme.

7 If not, what alternative measure would you suggest?

Not applicable.

8 Which measure of business rates should we use?

Rateable value rather than business rate yield.

9 What, if any, adjustments should be made?

Adjustments for the effect of business rate appeals and empty business properties are appropriate, as within the current approach

10 Is there any other basis that we might use for measuring business rates growth?

No.

Options for stronger links to local business rates

11 Do you have a preference for any of the three approaches, and if so, why?

Option 2 is the most effective in linking reward with growth. The loss of some medium-term predictability is not critical as LABGI is not a main funding source. The advantage given to larger authorities is appropriate as there will be more service support impacts from the growth in larger authorities.

12 Do you think the hybrid approach can combine the advantages of the two other approaches, while mitigating some of the risks?

No it over-complicates the issue.

13 If so, do you have a view on the relative weighting between growth and total (if not, please state reason)

Not applicable.

Options for delivering fairness alongside simplicity

14 Are you in favour of adjusting each Local Authority's payment rate according to its total `business rates'?

No, it would treat larger Local Authorities unfairly and if applied as a principle to splitting the grant between tiers, fails to take account of the fact that the majority of the key services are provided by the upper tier authority. Having regard to historic growth rates is an imprecise way of taking account of the relative challenge affecting different authorities, but is probably the best option for delivering fairness and simplicity.

15 Are you in favour of adjusting each Local Authority's payment rate according to its business rates per capita?

No, this dilutes the incentive to promote business growth for authorities with high business rateable value relative to population.

16 Do you have any comments on the re-adjustment or methodology for applying this

No, any such recalculation of baselines would not be an immediate priority.

17 Do you believe that other differences between Local Authorities should be addressed?

No.

18 If so, how would you suggest adjusting them?

Not applicable.

Limiting excessive payments

19 Do you believe a ceiling should be used to cap payments?

No, because this defeats the objective of LABGI in recognising the infrastructure implications of substantial growth and could undermine business growth incentives. In any event, the Treasury CSR2007 proposals reduce the value of the new scheme to 16% of its current value in 2009/10 and to 33% in year 2010/11, so that all authorities are likely to receive only a small part of the additional business rate income generated from increased rateable value.

20 If so, in isolation, or with other adjustments?

Not applicable.

21 Should the ceiling be absolute or relative?

Not applicable.

22 Do you have views on appropriate measures to use as a ceiling?

Not applicable.

23 Do you have views on where to set the ceiling to maintain the balance between the incentive effect and equity?

Not applicable.

Options for balancing stability with strong incentives

24 Which approach - year-on-year payments, or lagged payments given as part of three year settlements - do you prefer?

An approach based on year-on-year allocations announced prior to the commencement of the financial year is preferred.

25 Is there an alternative approach that you would prefer (if so, please explain this approach)

No

Other issues

26 How do you think that business growth incentives should be split between different tiers?

The split should be revised so that the upper tier authority receives a larger share of the grant.

27 What should be the guiding principle for deciding this split?

The level of influence and responsibilities that Local Authorities have on impacting economic development, together with the significance of development for their overall service provision. Upper tier authorities have a broad impact through skills, infrastructure etc. New developments also place more service demands on upper tier authorities.

Ring-Fencing funds

28 What are your views on ring-fencing LABGI revenues, and what are your views on aligning or committing LABGI within the LAA structure?

Ring-fencing of LABGI revenues would run counter to the policy of seeking to reduce ring-fenced funding within CSR2007. Local area agreement grant is also being discontinued as being no longer consistent with the new more widely-based local area agreement and the introduction of area based grant, so it is not clear what the arguments are for seeking to make LABGI an LAA grant. Local authorities should expect to have to demonstrate how their services support the local economy, but how this is achieved using formula grant, area based grant and/or LABGI should be a matter for the local authority.