Will setting tax rates locally help to drive economic growth?

Whatever could be in that box? Image: Getty.

In its ongoing discussions about business rates devolution, the government is exploring the possibility of allowing local authorities to set their own rates.

This would probably be a popular move among local leaders: the latest communities department (DCLG) consultation on the subject reported that a significant number of local authorities were in favour of being granted powers to reduce the business rates in their areas, in order to gain more flexibility and encourage growth locally. But what impact might this have for local economic growth – and what issues might it raise?

While the What Works Centre for Local Economic Growth has not looked at the economic impact of setting taxation at the local level, it has looked at the impact of policies that offer local tax breaks, such as enterprise zones. Lessons can be drawn from these findings to help guide the localisation of the business rates multiplier.

The evidence found by the What Works Centre shows that enterprise zones can have a positive impact on both boosting employment and addressing unemployment inside the area they cover: out of 27 studies looking at the impact of enterprise zones on employment, 15 found a positive impact of enterprise zones, while seven out of nine studies looking at unemployment also found a positive impact. However, evidence of their impact on poverty and wages was mixed, with only half the studies investigating this issue finding a positive impact.

What’s missing from the existing studies is an assessment of the impact of the specific characteristics of different types of enterprise zones. For instance, some enterprise zones in the US and France only offer tax rebates on the basis that businesses hire a certain proportion of staff locally; but as there is no counterfactual (i.e. another similar area where firms would not have specific hiring requirements), there is no way to assess the influence of this precise characteristic on the overall success of the programme.

There are also potential risks associated with place-based tax rebates, although they are not fully understood. One major concern is displacement. Are enterprise zones successful at creating new activity? Or do they simply attract nearby companies, at the expense of those surrounding areas that do not benefit from the programme? Research seems to suggest that displacement effects are indeed common, meaning that the headline impacts of enterprise zones must be treated with caution.

Overall this suggests that local tax rebates can have a positive impact locally, but their precise factors of success and wider impact are not entirely clear.

Coming back to the current debate on business rates, this suggests that allowing local authorities to reduce the business rates multiplier could be investigated and implemented as a way to foster economic growth. But this would need to take into account a number of potential issues.


Firstly, there is a risk of job displacement between local authorities, with potential effects on neighbouring areas. Making sure there are specific safeguards to ensure good policy coordination (for instance, a limit on the multiplier reduction, a cross-authority pooling of revenues, etc.) will be critical.

Rates reduction should also be implemented under a strict assessment process, laying out clear objectives and risks. Local authorities are unlikely to provide the level of tax reduction that enterprise zones do – and in some areas a business rates rebate might be too modest to have a substantial impact of the economy, but large enough to significantly erode local revenues.

Ultimately, the effect of any fiscal incentive is unlikely to be significant, especially if applied in sluggish economies. The reason why some areas are less attractive to firms relates to their local characteristics, such as the level of skills of their population and the quality of their infrastructure.

Although fiscal incentives can act as an “extra push”, they do not tackle the core issues that must be addressed to make places more prosperous – and should not be considered as the Alpha and Omega for local economic growth.

Hugo Bessis is a researcher for the Centre for Cities, on whose blog this article originally appeared.

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To see how a city embraces remote work, just look to Helsinki

A deeply rooted culture of trust is crucial to the success of remote work. (Sean Gallup/Getty Images)

When I speak to Anssi Salminen, an account manager who lives an hour outside Helsinki, he’s working from a wooden platform on the edge of a Finnish lake. With a blanket laid out and his laptop set up, the sun low in the sky, Anssi’s remote work arrangement seems blissful. 

“I spend around half of my time working somewhere else other than the office,” he says. “I can work from home, or on the go, and I also travel to the Netherlands once a month and work from there.

“The emphasis in my work has always been that it doesn’t matter when or where I work, as long as I get things done.”

For many people around the world, the shift to remote work was sudden, sparked by the coronavirus pandemic. Finland, however, is finding the transition much less significant. Before Covid-19, the Nordic nation already displayed impressive levels of remote working, with 14.1% of its workforce reporting usually working from home. Only the Netherlands has a comparable percentage of remote workers, while the UK lagged behind at 4.7%, and the US’s remote workforce lingered at around 3.6%

Anssi works for one of many Helsinki-based companies that offers its employees flexible policies around when and where they work. That arrangement is in part due to the Finnish capital’s thriving start-up scene. In spite of being a relatively small city by global standards it is home to over 500 technology start-ups. These companies are leading the way when it comes to keeping employees connected wherever they choose to work.

“Our company has a completely location-free working policy,” says Kasper Pöyry, the CEO of Helsinki-headquartered software company Gapps. “All meetings are made available for online participants and facilitated accordingly. Some employees have worked extensively from abroad on a working holiday, whilst others prefer the comfort and social aspects of the well-stocked office. Whatever works for our employees is what works for the company.”

Like Gapps, many Helsinki-based firms are deeply preoccupied with providing the necessary technology to attract talent in a vast and sparsely populated country. Finland has only 15 inhabitants per square kilometre, and companies understand that in order to compose teams of specialised expertise, they may have to seek talent outside of the city. Local governments take a similarly proactive stance toward technological access, and Helsinki offers free, unrestricted, high-speed Wi-Fi from city-wide hotspots, while the country as a whole boasts some of the best coverage in Europe. 

But encouraging remote work isn’t just about optimising the potential of Finland’s workforce – companies in Helsinki also recognise that flexibility has clear benefits for both staff and employees. 

“The idea of a good work-life balance is ingrained in Finnish culture,” says Johannes Anttila, a consultant at organisational think tank Demos Helsinki. “It goes back to our rich history of social dialogue between labour unions and employers, but also to an interest in delineating the rules of working life and pushing towards people being able to enjoy their private life. Helsinki has been named the best city in the world for work-life balance, and I think that this underlies a lot of the mentality around remote work.” 

For Peter Seenan, the extent to which Helsinki residents value their free time and prioritise a work-life balance prompted his move to the city ten years ago. He now works for Finnair, and points to Finland’s summer cottages as an example of how important taking time to switch off is for people in the country. These rural residences, where city residents regularly uproot to enjoy the Nordic countryside, are so embedded in Finnish life that the country boasts around 1.8 million of them for its 5.5 million residents

“Flexible and remote work are very important to me because it means that I don’t feel like I’m getting stuck in a routine that I can’t control easily,” he says. “When I’m working outside of the office I’ll go down to my local sauna and go ice swimming during the working day, typically at lunchtime or mid-morning, and I’ll feel rejuvenated afterwards… In winter time especially, flexibility is important because it makes it easier to go outside during daylight hours. It’s certainly beneficial for my physical and mental health, and as a result my productivity improves.”

The relaxed attitude to working location seems to pay off – Finland is regularly named the happiest country in the world, scoring highly on measures such as how often its residents exercise and how much leisure time they enjoy. With large swathes of unspoiled countryside and a national obsession with the outdoors, sustainability is at the forefront of its inhabitants’ minds, leading to high levels of support for measures to limit commuting. In January, Finland passed a new Working Hours Act, the goal of which was to help better coordinate employee’s work and leisure time. Central to this is cementing in law that employees can independently decide how, when, and where they work.

Yet enacting the new ruling is not as simple as just sending employees home with their laptops. For Kirsimarja Blomqvist, a professor of knowledge management at LUT University, perhaps the most fundamental feature that remote work relies upon is a deeply rooted culture of trust, which Helsinki’s residents speak of with pride. The anecdotal evidence is backed up by data which suggests that Finland boasts one of the highest levels of trust and social cohesion in Europe, and equality and transparency have always been key cornerstones of political thought in the country.

“Trust is part of a national culture in Finland – it’s important and people value it highly,” she explains. “There’s good job independence, and people are valued in terms of what they do, not how many hours they work for. Organisations tend to be non-hierarchical, and there is a rich history of cooperation between trade unions, employers, and employees to set up innovative working practices and make workers feel trusted and valued. 

“It’s now important that we ensure that this trust can continue to be built over technology, when workers might have been more used to building it face-to-face.”

As companies begin to look hopefully toward a post-Covid future, the complexities of remote work are apparent. Yet amid issues of privacy, presenteeism, and social isolation, the Helsinki model demonstrates the potential benefits of a distanced working world. The adjustment to remote work, if continued after the crisis, offers a chance to improve companies’ geographical diversity and for employers to demonstrate trust in their workforce. On these issues, Blomqvist believes other cities and employers can learn a lot from Helsinki.

“People are now beginning to return to their workplaces, but even as they do they are starting to consider the crisis as a jumping point to an even more remote future,” she says. “The coronavirus pandemic has been an eye-opener, and people are now interested in learning from Finland’s good practices… We are able to see the opportunity, and the rapid transition to remote work will allow other countries to do the same.”