Business rates in Wales, local retention and regional growth deals: policy report

This paper is an extended version of the policy report that was published in March by Wales Public Services 2025 (Kapitsinis and Luchinskaya, 2018). It provides the full, underpinning analysis and all the associated data. As a contribution to a UK-wide programme on the future shape of local government finance being led by the Institute for Fiscal Studies, this report considers the issue of local retention of business rates by local authorities in Wales, and highlights important questions that should be asked. In particular, it looks at the argument for retention in the context of the new and emerging regional growth partnerships in Wales (City Regions1 ) and their role in promoting regional economic development. In doing so, the report recognises the new economic and financial circumstances which are anticipated following Brexit, and takes into account the devolution of fiscal powers to Wales and the impact of the UK Government’s ‘austerity’ policy on public spending in Wales and local authority budgets. This report describes existing business rates arrangements in Wales, summarises the current approaches to business rate retention in England and Scotland, and discusses existing proposals for NDR change in Wales. It then explores a conceptual city-region shared-gain business rates incentivisation model which would enable regional growth partnerships to retain a portion of the business rates they generate and incentivise them to grow their business rate tax base. Importantly, it should be emphasised that the report does not claim that business rates retention itself would necessarily lead to a significant growth in total NDR revenues beyond what would happen in the absence of retention. Instead, the report shows how business rates retention would lead to gains for the Welsh Government and the councils resulting from any extra rates growth due to City Region deals. This provides incentives for councils and Welsh Government to support projects related to the City Region and Growth Deals (and more broadly) to encourage regional development. Underlying the discussion is the trade-off between redistribution on the one hand and incentives to grow the tax base on the other, which raises questions of what is a ‘fair’ business rate retention system. Is too much business rate revenue divergence detrimental to regional cohesion? Is it equitable for some councils to do better and others – much worse? Or are differential outcomes appropriate and justified given councils’ differential performance? It would be up to policymakers to take a stance on these questions, while keeping in mind the economic implications of their decisions.