Will business rate devolution drive up council debt?

Devolution of UK government is once again in the media, this time in relation to the Conservatives' financial reforms. While decentralisation could eventually transform the entire political landscape, councils are currently preoccupied by Chancellor George Osborne’s announcement that local authorities will be given control over business rates. Observers disagree as to whether rate devolution offers a solution to shrinking council budgets – will the change increase revenue, or could councils see a rise in debt? 

Stimulating growth

Some commentators view the devolution of fiscal authority as a rare opportunity for councils to increase income in a time of austerity. Extra cash would in theory stem from local authorities being allowed to reduce rates and attract businesses – a higher number of firms paying a slightly lower rate should be more profitable than a few companies paying more.

Increasing debt

The prospect of business rate devolution has not, however, been welcomed unequivocally. This is mainly due to the fact that some councils could receive less cash from Whitehall under the new system, and may not be able to recoup the difference without raising rates and scaring off SMEs. Areas that are dependent on government support are less likely to have an existing business base, and the next round of devolution will force these localities to attract an initial cluster of flagship businesses in order to benefit from new powers. Financing plans such as these often requires increased borrowing, which could cause a spike in council debt with no certainty of return.

Potential impact

Some observers have also noted that giving councils greater responsibility for their finances may result in local authorities being treated as separate entities for credit assessment purposes. Though it's much too early to say, this could mean that councils’ credit ratings will no longer follow the UK’s sovereign rating – if a local authority receives a low credit score as a result of this 'decoupling', devolution would actually deter investment and make it difficult to find new creditors.

Dealing with uncertainty and future transformations to fiscal autonomy will be much easier if councils start from a baseline of secure cash flows and minimal debt write-off. If you work for a local authority and are concerned about what the future holds, contact a Dukes Debt Advisor to discuss how our ethical service could help.