Eric Pickles: Councils should keep business rates

Communities Secretary Eric Pickles has told MPs the government is "determined" to allow councils in England to keep business rates they raise.

They raise £19bn in business taxes but the money is pooled by Whitehall and redistributed using a complex formula.

From 2013, Mr Pickles said that would change to give councils more incentive to boost business in their areas.

Labour's Caroline Flint said ministers were cutting funding and "leaving councils to fend for themselves".

Announcing the findings of a six-month review into council finance in Parliament, Mr Pickles proposed an overhaul of the current "formula grant" - one of the two main sources of local authority income alongside council tax - and said the government was "determined to repatriate business rates".

'Financial freedom'

Under current arrangements, business rates charged on most non-domestic premises, including shops, offices, pubs and factories, are calculated and collected by local authorities and put into a central pool before being redistributed to all councils.

The system - in place since 1988 and which generated £19.6bn in income last year - is used to pay for services like the police and fire brigade.

By "localising" business rates from 2013, ministers say councils will get more financial freedom and give them more incentive to invest resources as they see fit to attract businesses and jobs.

Councils currently generate less than half of their income but ministers believe this figure could ultimately rise to 80% or more if they get the the power to retain business rates.

Mr Pickles said councils would be able to fund major projects by borrowing money against future revenue from business rates.

He said: "No more will proud cities or historic counties be forced to come to the national government with a begging bowl. Councils will have a greater control over the cash, helping them plan for the longer term."

But fears have been expressed that poorer areas, which have trouble attracting businesses, will be left worse off.

At the moment, the amount raised via business rates varies widely from £1.8bn in Westminster in central London to £8.5m in West Somerset.

'Empty assurances'

Mr Pickles said the new system would be "balanced, fair and equitable... creating the right incentives to grow while protecting the most vulnerable".

He said councils which raised the most could expect to subsidise those which raised the least, through a new system of tariffs and top-ups.

But his Labour shadow, Caroline Flint, accused him of making "vague empty assurances" and suggested that, after the first year, the government would "wash their hands of the problem, cutting funding and leaving councils to fend for themselves".

She said: "Cutting funding to areas of the highest need doesn't free councils from central control or empower them, it stops them from doing the things their communities need of them.

"Yes, we want a funding system that supports jobs and encourages enterprise - but not every area has the same ability to attract investment and new business, not everywhere can be Westminster or the City of London."

Mr Pickles said there would still be a "tally and a levy" in place after the first year and said he did not expect a significant change in the estimated £2.5bn of rates which was currently transferred from the south of England to the north.

It comes as the government makes substantial cuts in funding for local government.

Budgets will fall by 26%, in real terms, over the next four years - overall allocations dropping from £29.7bn in 2011 to £24.2bn in 2015.

The Local Government Association has welcomed the thrust of the government plans.