The complex web of business support

April 14, 2010 1:31 PM

Rdas With the country facing a fiscal crisis, one way to cut back on public spending would be to scrap the Regional Development Agencies (RDA). Taxing businesses too much and then handing some of the money back to selected organisations hurts fair and productive competition, and research shows that they haven’t achieved their key objective of correcting regional economic imbalances. What’s more, the system creates a reliance on grants, meaning businesses are less inclined to adapt to the prevailing economic conditions.

RDAs often distribute money through intermediaries, giving grants or support to bodies who then subsequently give loans to businesses. A good example from the West Midlands is the Black Country Reinvestment Society (BCRS). They receive support from the European Union from the European Social Fund, and were able to 'lever in' public funds from Advantage West Midlands, the RDA for the region. Given that the RDA’s raison d’être is to provide business support in the form of grants to alleviate regional disparities, it seems perverse and wasteful that bodies act as second-tier RDAs to give out loans. BCRS also receive support from the Community Development Finance Association, which in turn is funded in part by the Department for Business, Innovation and Skills. True, these sub-groups also receive some private finance, but we can see that public money is passed around a web of bodies and that makes for complexity and duplication.

A more sensible solution would be to scrap the grants and support, and instead cut corporation tax to improve the prospects of all businesses. We have set out a robust case for abolishing the Regional Development Agencies, freeing up billions of pounds. This would allow for significant cuts in the small business rate of corporation tax which means healthy, well-run small businesses would flourish, creating wealth and jobs. Ben Farrugia, writing in the research paper, sums it up well:
“This approach would remove the subjective assessment RDAs have to make when deciding on their investments. It would benefit all businesses, not simply the fashionable industries favoured by RDAs. No agency would need to administer it, meaning no attendant expense claims, excessive remuneration packages and waste stories. Taxpayers’ money would no longer be being spent by unelected, unaccountable bureaucrats. Regions would be able to develop as they see fit, not under plans laid out in Westminster."
RDAs will claim that they had a prominent role in the response to the recession: jobs were saved, businesses were kept afloat etc. And there was a role for business support during this recession, as the banking crisis meant that finance was sometimes scarce, but the RDAs are an extremely limited and clumsy way of addressing the issue of access to finance.

A simpler, fairer tax system would mean that there would be no need for these expensive quangos, especially when they have failed in their key objectives. After all, they were set-up in 1999 as a solution to correct regional disparities, not in 2009 as recession-busters.

As well as abolishing the ‘crony capitalist’ grant-dependency culture, genuine fiscal localism could encourage regional equality too. Giving local authorities more freedom to set business rates – by removing the centrally set multiplier – could mean that areas would compete to offer a more attractive business environment. Although the rates are based on the rateable value of the property (and therefore more economically deprived areas are likely to have lower business rates anyway), allowing local authorities to set their own rates would encourage councils to do more to help local economies. Mike Denham sets out how fiscal decentralisation would improve public sector efficiency and encourage GDP growth in a chapter of our new book, How to cut public spending (and still win an election).
Rdas With the country facing a fiscal crisis, one way to cut back on public spending would be to scrap the Regional Development Agencies (RDA). Taxing businesses too much and then handing some of the money back to selected organisations hurts fair and productive competition, and research shows that they haven’t achieved their key objective of correcting regional economic imbalances. What’s more, the system creates a reliance on grants, meaning businesses are less inclined to adapt to the prevailing economic conditions.

RDAs often distribute money through intermediaries, giving grants or support to bodies who then subsequently give loans to businesses. A good example from the West Midlands is the Black Country Reinvestment Society (BCRS). They receive support from the European Union from the European Social Fund, and were able to 'lever in' public funds from Advantage West Midlands, the RDA for the region. Given that the RDA’s raison d’être is to provide business support in the form of grants to alleviate regional disparities, it seems perverse and wasteful that bodies act as second-tier RDAs to give out loans. BCRS also receive support from the Community Development Finance Association, which in turn is funded in part by the Department for Business, Innovation and Skills. True, these sub-groups also receive some private finance, but we can see that public money is passed around a web of bodies and that makes for complexity and duplication.

A more sensible solution would be to scrap the grants and support, and instead cut corporation tax to improve the prospects of all businesses. We have set out a robust case for abolishing the Regional Development Agencies, freeing up billions of pounds. This would allow for significant cuts in the small business rate of corporation tax which means healthy, well-run small businesses would flourish, creating wealth and jobs. Ben Farrugia, writing in the research paper, sums it up well:
“This approach would remove the subjective assessment RDAs have to make when deciding on their investments. It would benefit all businesses, not simply the fashionable industries favoured by RDAs. No agency would need to administer it, meaning no attendant expense claims, excessive remuneration packages and waste stories. Taxpayers’ money would no longer be being spent by unelected, unaccountable bureaucrats. Regions would be able to develop as they see fit, not under plans laid out in Westminster."
RDAs will claim that they had a prominent role in the response to the recession: jobs were saved, businesses were kept afloat etc. And there was a role for business support during this recession, as the banking crisis meant that finance was sometimes scarce, but the RDAs are an extremely limited and clumsy way of addressing the issue of access to finance.

A simpler, fairer tax system would mean that there would be no need for these expensive quangos, especially when they have failed in their key objectives. After all, they were set-up in 1999 as a solution to correct regional disparities, not in 2009 as recession-busters.

As well as abolishing the ‘crony capitalist’ grant-dependency culture, genuine fiscal localism could encourage regional equality too. Giving local authorities more freedom to set business rates – by removing the centrally set multiplier – could mean that areas would compete to offer a more attractive business environment. Although the rates are based on the rateable value of the property (and therefore more economically deprived areas are likely to have lower business rates anyway), allowing local authorities to set their own rates would encourage councils to do more to help local economies. Mike Denham sets out how fiscal decentralisation would improve public sector efficiency and encourage GDP growth in a chapter of our new book, How to cut public spending (and still win an election).

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