Lord Adonis, the Labour Party’s shadow infrastructure minister, may like train travel – the first time I saw him in person was on a Virgin train on our way back from his party conference, where he was killing time during a delay by listening to his iPod and drinking three cans of Heineken – but his long-awaited review into bulking up the economy published today doesn’t say as much about infrastructure as I, and others, had hoped.
However, the plans did include a proposal to devolve all business rate income to local and combined (multi-local) authorities. Business rates are levied on local businesses by local authorities and usually paid to central government, but in 2013-14 the government introduced something to England and Wales called tax incremental financing.
Basically this scheme, which had already been tried out in Scotland, allows councils to borrow money, use it to fund infrastructure or urban renewal projects, and then repay the money by retaining business rates in the area affected by the project, on the forecast that the rates will rise due to the amenity added to the area by the project. The first English project being financed in this way is the redevelopment of Nine Elms in south London, where the Northern Line is being extended at a cost of £1 billion.
The Adonis review, however, takes things a step further by devolving all business rate revenue to councils, creating a sort of tax incremental financing on steroids. That amounted to just over £26 billion in 2012-13 and could fund some serious local infrastructure. Maybe a top-of-the-range fibre-to-the-home broadband network or some of those light rail projects promised, but largely never delivered, by Labour when they were last in power?
Of course, this fall in payments from councils to government is likely to be balanced by a fall in revenue to them from government. In order not to get left out of pocket, councils will need to be sure that they can really ramp up their rates income through the enhancing power of infrastructure and urban renewal. And that’s a bigger risk than other, more traditional ways of financing infrastructure as it’s more imponderable and tied to the volatile property market (business rates are based on the rental value of business property). As this FT article from last year notes, there’s some scepticism that that could be a successful model outside London.