IFS: COVID-19 grant scheme for businesses inequitable and supports fewer businesses in areas with high property prices

A new report from IFS researchers – funded by the Economic and Social Research Council – examines the design of the grant and waiver schemes in terms of how eligibility for support varies across England, and how quickly, and how much, different councils are providing support. It finds:

·         Just a £1 difference in a property’s rateable value can lead to the amount of support differing by up to a full £24,300. This is inequitable.

·         Big differences in the proportions of properties eligible for support in different parts of the country due to interactions between policy design and local property values. This risks the scheme doing less to prevent enduring economic harm in areas with higher property prices.

·         Significant variation in how quickly councils have been able to pay out grants to businesses.

·         Councils will be left with at least £400 million of unspent funding, where the cost of grants looks set to come in lower than the government estimated, which government might want to claw back. 

The design of the support schemes

·         There are big differences in support by sector. Most properties in the retail, hospitality and leisure sectors are receiving a business rates waiver. They are also entitled to grants of £10,000 if their assessed annual rateable value is £15,000 or less, or £25,000 if it is £15,001 to £50,999. In contrast, properties in other sectors are only automatically entitled to grants of £10,000 if they are eligible for SBRR: that is, their assessed rateable value is less than £15,000 and the business occupying them occupies little or no additional property. 

·         The support provided to the retail, hospitality and leisure sectors is highly non-linear with respect to rateable value, creating inequities and risking distortions to competition. For example, a property with a rateable value of £50,999 is eligible for total support of £50,449, while one with a rateable value just £1 higher is eligible for little more than half this amount – £26,112 – as it is ineligible for any grant. Such big discontinuities could have been avoided by gradually tapering grants, as is done with the existing SBRR, which is gradually reduced from a 100% to 0% rates discount for rateable values between £12,000 and £15,000.

Variation in support across England

·         Over 20% of retail, hospitality and leisure properties in London have values too high to be eligible for grant funding, compared with less than 10% in the North, Midlands and South West of England. Differences can be even greater for individual councils: over half of such properties in the City of London, Kensington & Chelsea and Westminster are above the cut-off for any grant support, compared with less than 5% in 30 mostly rural council areas. One option to address this would be to set different grant eligibility thresholds for different regions of the country to reflect differences in rateable values.

·         Properties with high property values are less likely to be eligible for grant funding, but will benefit more from not having to pay business rates. The average property in the retail, leisure and hospitality sectors in Westminster will save almost £36,000 on its business rates bill over the next year, whereas the average property in Torridge in Devon was facing a rates bill of £1,800 before the crisis. 

Payments of grants by councils

·         Councils have so far paid out grants to 87% of properties they have deemed eligible for support, up from 73% at the start of May. In one in ten councils this share is less than 81% and in another one in ten it is more than 96%. Only a small part of this variation in payment rates can be explained by observed differences in the number and type of properties that different councils have to deal with. This suggests that some councils have been more cautious in authorising payments and/or had less capacity and/or been less efficient at making payments swiftly. 

·         One in five councils will spend more than their initial allocations of funding from the government for the grant scheme. The government has said it will top up funding where necessary. Another one in four councils will spend less than their initial allocations, with a particular concentration on the coasts of the South East and East of England. East Suffolk (£22 million), Bournemouth, Christchurch & Poole (£35 million) and Tendring (£43 million) look set to have the biggest amounts left over. Allowing councils, arbitrarily, to keep such large sums would be inequitable, so plans to recoup unspent money should be confirmed, including the potential to recycle this for general-purpose funding for all councils or further support to businesses across England. 

Kate Ogden, a research economist at IFS and an author of the report, said:

‘The scale of support currently being provided to businesses via grants and business rates waivers is unprecedented. And these schemes had to be designed and implemented rapidly given the sudden and large impacts of the public health response to COVID-19 on economic activity.

‘Even so, two changes to the grant scheme would have made it more equitable and better targeted at supporting businesses and should certainly be considered if further grants are paid out in future. First, having different thresholds for grant eligibility in inner London, outer London & nearby areas, and the rest of England would ensure more comparable amounts of grant funding were provided to businesses in different parts of the country. Second, sharp cliff edges in grant support – that create inequity and risk inappropriate distortions to competition – should be avoided through the use of gradual tapers.’

David Phillips, an associate director at IFS and another author of the report, said:

‘Councils were provided with funding rapidly so that they could pay grants to businesses as quickly as possible. The lack of a centralised business rates database means that it was inevitable the initial allocations provided would differ from the final cost of the grants paid out.

‘In most cases, the differences are relatively small. However, a few coastal councils are likely to spend tens of millions of pounds less than they have been allocated. Overall, more than £400 million of funding will have to be clawed back from LAs initially allocated too much funding – which could potentially be recycled for more general financial support for local government to address the costs of the coronavirus crisis or to provide more support for businesses across England.’