Business rate retention: growth vs equity

The government has launched its consultation on allowing local authorities to retain business rates. The problem: Commercial development imposes costs on local authorities (to provide services to businesses) and to local homeowners, while the benefits are spread more widely. In other words, commercial development generates benefits for others (externalities) that are ignored when making decisions on whether to allow development. This means that local government will tend not to provide enough sites for businesses. The obvious solution (if you believe in decentralised decision making) is to allow local authorities to retain some of their business rates. This will provide better incentives. But these incentives come at a cost - some councils where the business base doesn't grow will be worse off than they would be under a system which redistributes all business rate growth.