'Race to bottom' fear over change to business rates.
ARADICAL change to the way local councils are funded could lead to the richer parts of the country becoming richer and the poorer being stripped of vital resources, North East councils have said.
And authorities risk being part of a "race to the bottom" as they compete to cut business rates in a desperate attempt to attract new employers.
The warnings came from Newcastle, Gateshead and Sunderland councils.
They were responding to Chancellor George Osborne's plan to transform funding for local services provided by councils such as libraries, care services and emptying the bins.
Mr Osborne is to axe the existing grant from central government and instead will allow councils to keep all the money they receive from business rates, which is a tax charged on premises used by employers.
Announcing the change at the Conservative Party conference last year, he said the change would create jobs because it would encourage councils to support businesses and help their local economy grow.
Mr Osborne said: "Attract a business, and you attract more money. Regenerate a High Street, and you'll reap the benefits."
Councils will also be allowed to cut business rates, in order to attract new employers to the area.
And mayors in combined authorities, such as the planned North East Combined Authority, will be able to increase business rates by an extra 2% to pay for major infrastructure schemes such as transport projects, as long as local businesses agree. The change, due to come fully into effect by 2020, will revolutionise the way local councils are funded.
But local authorities have expressed deep concern about the proposals in papers submitted to an inquiry by the House of Commons Local Government Committee.
Newcastle City Council welcomed the proposals in theory, saying that the region had the potential to become a strong economy which raised money from local businesses.
But the council also warned that an existing scheme, which allows councils to keep around half of any increase in business rates caused by economic growth, had simply meant "wealthy and business-rich parts of London and the South East" had more money to spend.
It said: "Those losing most are poorer areas, smaller commercial and business areas and those with high rates of out-commuting to neighbouring urban conurbations.
"Due to the uneven British economy, the vast majority of areas throughout the North East, North West, Yorkshire and Humber, East and West Midlands and far South West, lose - as do many poor parts of London."
Some councils would simply find it harder than others to attract local businesses, the authority said.
Gateshead Council said that councils serving areas with fewer businesses would come under pressure to cut business rates to try to attract more firms.
It said: "The system has the potential to become a 'race to the bottom' as councils compete to offer incentives to new businesses."
And it added: "Poor areas can only get poorer as a result of the system being in favour of more affluent areas.
"More affluent areas have been cut less than poorer ones and as such will have more flexibility to cut rates to attract businesses, resulting in a downward spiral where councils will have to compete with one another rather than work together."
Sunderland City Council told the inquiry that the change would encourage councils to increase the number of business premises - which is not necessarily the same as creating new jobs.
It said: "The growth that translates into business rates income comes from the increase in the rateable value of commercial properties in a local area, i.e. occupation of additional floor space, the building of new hereditaments and the occupation of empty premises.
"Growth in businesses' turnover, staff numbers and online business do not impact on rates income unless it directly impacts on occupation of premises. It is important that these other areas of growth are not neglected in favour of increasing the area of commercial property occupied."
The Commons committee is to hold a series of evidence sessions in which local government officials and councillors, business leaders and government ministers will be questioned about the proposals, and it will publish a report with its findings later in the year.
Poor areas can only get poorer as a result of the system being in favour of more affluent areasGateshead Council