18 June 2024

Labour’s building plans need a carrot as well as a stick

By Sam Bowman & Ben Southwood

Labour has pledged to make decisions on important infrastructure projects, like data centres and prisons, at the ministerial level, instead of letting the local council decide. The hope is that this will allow them to approve these projects even when there is a lot of local opposition.

Overriding local objections will help. But we already use national decision making for a whole range of projects, and these projects are still regularly blocked by the intense opposition of local interests.

We propose a straightforward way to get more buy-in from locals, on top of what Labour is planning: for the kinds of infrastructure projects deemed to be nationally important, let the local council retain 100% of the project’s business rates bill, permanently, instead of up to 50% that they would retain temporarily under the status quo.

This can be done quickly, doesn’t need new legislation, wouldn’t involve any new spending or borrowing, and could be targeted at the things most urgently in need of building – things like data centres, prisons, nuclear power stations, and other green energy projects. And it would only apply to new projects, so no existing tax revenues would be affected.

Everyone knows the UK has a huge problem with building infrastructure of all kinds. Much of the time the problem comes down to these projects having benefits that are widespread across the country, and costs that are concentrated in the local area that the project is trying to get built in.

How business rates encourage development
How did projects like these ever get built? In part, because local governments were rewarded for it. Business rates (officially ‘non-domestic rates’) are a tax paid by businesses that have existed in some form since 1601. Today, rates charge companies for the property they occupy, at 51.2 % of their rateable value, an estimate of how much they are worth annually in rent. Heathrow Airport today has a rateable value of £210 million and pays over £100 million in business rates each year, whereas a typical shop on a London high street might pay £1,500 to £3,000 annually.

One important upside of business rates is that local communities get some benefit when valuable investments are made in their area. For example, Brixton Prison has a rateable value of £545,000, meaning it pays £279,040 every year, of which about half is retained by the local authority (Lambeth). Local residents might prefer it wasn’t there, but they do see some benefit from it being near them, since the council can then spend the money on local services – or use it to cut their taxes.

Between the 1600s and the Second World War, local councils retained 100% of the non-domestic rates paid in their area. They also set the percentage rate it was paid at, whereas today the rates and reliefs are uniform. This meant that the construction of a new prison, shopping centre, or electricity substation, for example, would mean a new revenue stream for the local authority. So while locals would still face the frustrations of living near these projects, they’d also enjoy some of the benefits from them as well. What could be a win/lose was, in some ways, a win/win.

This started to change in 1948, when rates began to be ‘equalised’ between areas, meaning that central government paid for most of local government spending through block grants, giving local governments that raised less money through local rates more money in block grants. By the time the system was scrapped in 1988, £1 extra in rates tended to mean almost exactly £1 less in central funding.

The current system was brought in in 1990. Now, councils could not vary the tax rate, and the money raised from business rates went entirely into a central pot, to be redistributed back to councils according to need.

Since 2012 local councils have in theory retained 50% of what they collect, but what could have been a positive step was fatally undermined by making the retention only temporary.

Getting data centres built
Our proposal is to allow new projects of certain kinds – data centres, prisons, nuclear power stations, and probably some other types of infrastructure – to have their entire rates bill go to the local authority permanently, not just 50% of it temporarily.

Rates from existing data centres (and prisons, and other infrastructure included in this policy) would continue to be split between the local council and the centre as usual. Nothing would change for anything that exists right now. But a new data centre or prison would pay its rates entirely to the local council, for as long as it was around.

This would mean that a local authority that gets a new project of the scale of Stockley Park (the UK’s largest data centre) would collect the entire £7.4 million/year rates bill that it pays, not the £3.7 million it would under the current regime until the reset. In other words, the fiscal reward for accepting it would be twice as large as it is now.

To put this in context, this would completely cover Havering council’s adult social care overspend if it was built there, and the entire overspend of the average District council.

Under this approach, local councils would have a much higher incentive to accept projects of these kinds. While this would not eliminate NIMBY objections to these projects, it would weaken them.

This would create a carrot to go along with the stick Labour is proposing. In fact, the national need for these kinds of infrastructure projects is so great that there is a case for greater than 100% rates ‘retention’ – ie, some kind of top-up from the rest of the country to areas that permit essential infrastructure to increase the incentive to accept these projects even more. But this would obviously be more costly to enact than what we’re suggesting here, and we recognise that funds are scarce.

Doing this would be surprisingly easy. It would not need any new primary legislation, other than a line in the next Budget’s finance bill.

The approach we outline would not solve every problem. Locals often still object to projects with high rateable values. But local councillors may decide that the prospect of a larger revenue return from a proposed project is worth the political flak they will take from their constituents if it goes ahead. They may also be able to communicate the benefits to their voters in more tangible terms that assuage their objections enough to get it built.

Labour’s current proposals will not fully solve the problem that local concerns about developments can still be effective at the national level – the campaigns against the A303 Stonehenge Tunnel and the Aquind interconnector in Portsmouth are proof of that. One small, easy-to-enact change to business rates could go a long way to helping Britain to build things again.

This is an edited version of a piece originally published in full at Consumer Surplus.

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Sam Bowman and Ben Southwood are co-founders and editors of WorksinProgress.co.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.