Wednesday, 7 October 2015

They own land, give them money

From the FT

George Osborne announced the biggest shift in financial control from Whitehall to town halls in decades, pledging that local areas will fully benefit from growth in their business rates in the latest phase of his devolution “revolution”.

The chancellor on Monday said he would overhaul the system of local government finance introduced by Margaret Thatcher in 1990, vowing that he would also give councils the power to cut — but not raise — business rates, a uniform tax on the value of business premises.

It's not hard to see where the Tories are going on this one: give the local authorities the power to cut business rates and they will do it, eager to attract businesses to their "low rate area". No doubt businesses will come, lured by the promise of paying less in business rates, but wait. Almost immediately the price of commercial land will rise in these low-rate boroughs. So also will the rents on premises to let. Then rent review by rent review, the commercial rents will rise to the point where the entire saving in rates is absorbed by additional land costs. The net result will be that landlords will have more tenants and higher rents and the local authority, if it is lucky, will find that the increase in business might just about pay for the rate cut.

I think it's called "bait and switch".


Rich Tee said...

I understood that it was Thatcher who centralised business rates in the first place to stop loony left councils abusing them for political purposes.

Well, my council has turned left again after being a coalition for a few years so it's putting the loonies back in control the asylum here.

Bayard said...

RT, as far as I remember, that is what happened. I think it was the People's Republic of Lambeth, as it was known then, who were mainly responsible.

I have the opposite type of council here, not loony left, but lazy right. The councillors in the ruling party do f*ck all, just draw their Special Responsibility Allowances and leave everything to the officers.

Mark Wadsworth said...

Full and fair summary.

And if councils keep the tax rate the same, then the benefit to London will be double what it is elsewhere.

DBC Reed said...

Bayard nails it.

Ben Jamin' said...

Sure you can lower rents to attract more business, but that will be below the revenue maximising price i.e the equilibrium. So, councils may well cut BRs and attract more business, but landlords will just put up rents and business will just relocate again.

All else being equal, any effects will be short term.

mombers said...

The savvy business will move regularly from council to council as they drop rates to woo more businesses. It will take a few years for rents to go up to a level that captures the full reduction in rates so they will enjoy a reduction in overall costs, then move to another location.

What I would like to have seen is councils being allowed to shift to at least partial land taxation like they have in parts of Pennsylvania, and of course making the landowner pay so they can eliminate bad debt and minimise collection costs. And also get rid of 80% discount for charity shops.

Mark Wadsworth said...

M, it won't take years for the rents to go up. This will happen at the next rent review or vacancy/new tenancy.

Bayard said...

Can anyone think of a policy of this current government that doesn't end up transferring more public money into landowners' pockets (whatever it is dressed up to do on the surface)?

Mark Wadsworth said...

B yes - the housing benefit cuts/cap. Inadvertently, they did the right thing there.

Ben Jamin' said...

@ MW

Yes, but those cuts find their way back to taxpayers, which goes back to higher HP,s further up the market.

Which is more just than subsiding peoples occupation of high value locations, creamed off by one section of the population. ie landlords.

More of a shift than a cut.

Mark Wadsworth said...

BJ, I wouldn't go that far.

HB goes directly into landlords' pockets as inflated rents, directly and indirectly because it pushes up rents for competing non-claimants. So £1 HB = £1.50 for landlords.

If HB cuts were matched with a general tax cut (it hasn't been of course, taxes keep going up under the Tories) then only part of that would go into higher rents. Maybe a third, maybe two-thirds, maybe most, but not all. So a £1 tax cut = maybe 50p more for landlords.

Mark Wadsworth said...

The point is that rents are set at the margin. The land rent at the margin is always £nil.

So that if there is an across-the-board income tax cut of £2...

People in the lowest paid areas are 50p better off because of a tax cut, then the land value in that marginal area is still nil, because it is the worst area.

People in the highest paid areas get a £1.50 tax cut. This increases the differential - the surplus available for rent - between lowest and highest paid areas to £1. So rents go up here by £1.

Therefore, in this scenario, total rents go up by £1 for a £2 tax cut.

Bayard said...

"Inadvertently, they did the right thing there."

I suppose their desire to have a go at people on the dole overrode their desire to stuff landowners' pockets.

Ben Jamin' said...

@ MW

HB is a hard one because it's not spread evenly. Middle income earners are priced out of nice-ish areas because their taxes subsidise HB. Everything is artificially flattened out. I personally think scrapping HB will raise rents a bit in middle/nice areas, lower them in very poor areas, but not make much difference overall. By that I mean total aggregate land rent ie £200bn pa. I don't think that would change much.

If they were spread evenly then yes, your 1:2 ratio seems right.