Conservative party conference 2015: George Osborne's business rates announcement will mean commuter towns face serious funding issues

Jon McLeod
It will make it easier for Osborne to make headline income tax cuts in the run-up to 2020 (Source: Getty)

By George he's done it! Yesterday's business rates announcement by the chancellor has made local government finance sexy again for the first time in 25 years.

Back in 1990, the poll tax perished in a bonfire of political vanity after a furore over the botched scheme to reform domestic rates, a bugbear of the Tory shires.

The poll tax's introduction was twinned with the uniform business rate (UBR), which saw the Treasury set a single rate by which the rateable value of business premises would be multiplied to produce the rates bill.

Read more: Forget "fiscal neutrality": Business rate changes will hurt

Under the system, which still prevails, the Treasury gets all the UBR income and then shares it all out to councils on a per capita basis. A top-up grant then supplements those payments to take account of the broad needs of each local authorities, who get the rest of their income from council tax.

The chancellor's plan will strip away that top-up and leave councils with just their business rates income to pay for schools, social services, public health, roads, bins and libraries.

The argument is that councils will be incentivised to welcome new businesses into their areas - or allow new development.

But, because of the strict limits on council tax levels, it is the reformed business rate system that will be expected to bear the brunt of the growth in demand for key services.

More and more is being expected of councils, under models like the Northern Powerhouse, and as a result of our ageing population.

George Osborne's announcement sees the Treasury wash its hands of those costly services and shunts the fiscal responsibility onto business.

As if that weren't base enough, there are real questions as to whether the reforms will work in practice. There's no doubt that some local authorities in London, such as Westminster and Tower Hamlets - drawing from Canary Wharf - and the South East will be able to support services with business rates income alone - but what about Sunderland? What about outer boroughs such as Bexley, Havering, or Haringey?

Not only that, but even in regions like the South East, there are local authority areas like Surrey, apparently wealthy, but where there are relatively few businesses to tax.

Commuter towns and predominantly residential areas will face serious problems funding public needs.

Council services are often statutory services that have to be provided by law – for example social care, street cleansing, highways and planning. Historically, central government has recognised that variations in local needs and in the tax base of individual local authorities mean that adjustments in financial support need to be made to ensure that the public can receive broadly the same level of services from the Scilly Isles to Berwick-upon-Tweed.

Yesterday's announcement blows that wide open in a way that will leave businesses holding the baby, and the chancellor better able to make headline income tax cuts in the run-up to General Election 2020.

Now why would he want to do a thing like that?

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