New business rate to go to councils

Gordon Brown will make a significant gesture today towards greater local autonomy when he announces that he is willing to see councils retain up to £1bn extra funding from business rates over three years.

He will make the announcement when he addresses the Local Government Association's (LGA) annual conference in Harrogate.

Whitehall is debating with local government the degree of autonomy councils should have. Mr Brown is moving towards giving them greater control as long as he believes they are working efficiently.

In a consultation paper issued today he will suggest that they should be entitled to retain the extra income from the creation of new businesses. He will insist that central government must retain control of the level of business rate and not lose any of the existing cash it receives from local businesses.

The income to be retained by councils would consist of business rate income above the current baseline. The Treasury is trying to analyse why relatively few businesses are started in rundown areas. It is to undertake a study of the problem in coordination with the social exclusion unit.

Mr Brown and the deputy prime minister, John Prescott, realise that councils have little incentive to encourage fresh businesses since they receive none of the extra business rate income but incur the extra costs in terms of pollution, transport congestion and planning dislocation.

Mr Brown will tell the meeting that few councils have had any incentive to create local businesses. He will say that councils have to deal with the social and environmental consequences of economic development but the financial gains are passed back to the Treasury.

Until 1990, when the shortlived poll tax was introduced, councils set and collected the business rate, which together with domestic rates accounted for about half of their spending. The remainder came from a government grant.

But for the past 13 years business rates have been set nationally and pegged to the inflation rate. The income is then distributed by Whitehall to councils. It amounts to £15.6bn annually.

The LGA has been pressing the Treasury for an equalisation formula to underpin the latest plans by ensuring that councils in London and the south-east, which have a higher than average level of business starts, do not benefit disproportionately from the scheme.

It will be introduced in 2005 to coincide with a council tax revaluation, when all properties in England will be regraded.

Steve Lord of the LGA said: "We have been working to devise a system that is not horrendously complicated and is fair to authorities with different circumstances."

Yesterday the Tory leader, Iain Duncan Smith, was heckled at the conference when he promised that a future Conservative government would give councils greater financial freedom.