London bankrolls the UK – and that’s not healthy


Ben Jennings 28.7.16

By: David smith

Today I want to talk about something — based as always on statistical fact — that is guaranteed to raise the hackles. If you live in London and the southeast you will be even more convinced that your taxes are subsidising the ne’er-do-wells in the Midlands, the north of England, Scotland, Wales, Northern Ireland and even parts of the south.

If, on the other hand, you live in those other regions and countries, you will be confirmed in your view that the UK economy is dangerously London-centric and tilted towards the gilded south-eastern corner of the country, a situation that urgently needs tackling.

The figures, from the Office for National Statistics and released a few days ago, show that in 2017-18, the latest fiscal year for which this kind of detail is available, London ran a fiscal surplus, a budget surplus, of £34.3bn. Taxes raised in London exceeded public spending in London by a very large amount.

London has the biggest fiscal surplus, followed by the southeast, which in 2017-18 had a budget surplus of £20.4bn. The east of England, influenced too by the London factor, also had a surplus, albeit smaller: £5.9bn.

Outside these three parts, which together account for just under 37% of the UK national population and 16% of its land area, everywhere runs a budget deficit. The biggest is in the northwest, £20.8bn. Scotland, based on a geographic share of North Sea oil revenues, had a deficit of £13.3bn, slightly less than that of Wales, which of course has a smaller population; its deficit was £13.7bn. Northern Ireland’s was £9.2bn

To be fair to the northwest, its large deficit partly reflects its population. On a per capita basis, the largest fiscal deficit in 2017-18 was Northern Ireland, at £4,939 per head, followed by Wales at £4,395 and the northeast at £3,667, the northwest at £2,884 and Scotland at £2,452. In all these places, taxes raised fell short of public spending by thousands of pounds for every person.
However, to be fair also to London, the southeast and the east, much of the recent improvement in the public finances would not have happened without them. There were big upturns in the fiscal positions of London and the southeast between 2015-16 and 2017-18, while deficits were becalmed in many other regions. London and the southeast did the heavy lifting.
Enough figures. What does it mean? We are a single country, the UK, and as such very good at redistributing these surpluses and deficits. The taxes raised in London and the southeast make possible higher spending on public services, and on benefits and tax credits, in the rest of the country.
Just to illustrate that, in 2017-18, London’s tax take was £150.1bn and the southeast’s £121.4bn, a large chunk of the UK total of £753.1bn. The UK’s average revenue per head was £11,434, figures greatly exceeded by London, £17,090, and the southeast, £13,427.
Before coming to what all this means, let me address a couple of urban myths. One is that, because London is awash with civil servants, it is not surprising that it has an economic advantage. It is not true. London has some 80,000 civil servants, less than a fifth of the national total, and dependence on public sector employment is typically higher elsewhere. Past regional policy involved the dispersion of civil service and other public sector jobs to the regions. This has proved something of a double-edged sword in recent years; in the period since 2010, roughly 500,000 public sector jobs have been cut.
Myth No 2 is that London gets the lion’s share of infrastructure spending, without somehow paying for it. It is true that the capital has dominated infrastructure spending, on the far from irrational grounds that an international city such as London has to be seen to be working. It has seen a lot of spending, from the Olympics through to the as yet uncompleted Crossrail project.
This spending is, however, included in the figures. So far this century, London has the third-highest spending per head, including capital spending, in the UK, after Northern Ireland and Scotland, but continues to run a fiscal surplus because of its higher tax take. The southeast and east, incidentally, both fiscal surplus regions, have the lowest public spending per head.
Many years ago, researching a book, North and South, I tracked the decline of regional headquarters in favour of London. Companies that used to have head offices close to their production facilities — in Leeds, Manchester, Birmingham, Liverpool, Glasgow, Cardiff or Belfast — no longer did so, in many cases because those production facilities had been moved offshore. This “headquarters effect” boosts London’s tax take at the expense of the rest of the country. In that respect, perhaps, the streets of the capital are paved with gold.
It is part of a wider phenomenon. The City of London is a huge generator of tax revenues, and the combination of financial centre — the biggest in Europe — commercial centre and seat of government guarantees the dominance of London and its hinterland. In America, the financial centre, New York, is different from the seat of government, Washington, as it is in Germany, with Frankfurt and Berlin. France is Paris-centric and Italy Rome-centric for the same reason the UK is London-centric.
Can and should anything be done about it? Brexit, according to the government’s own cross-Whitehall assessments, will widen the regional divide rather than narrow it. It will hurt the fiscal deficit regions of the Midlands and north, as well as Wales, Scotland and Northern Ireland.
Labour has been mulling proposals to shift many Bank of England operations to Birmingham, though I doubt the City will ever move meaningfully from London. The fact that the Houses of Parliament are falling down is seen by some as an ideal opportunity to move the seat of government northwards (I have not detected much appetite for that in Westminster).
Spending more on infrastructure in the regions would help but would not be a panacea. We can build on successful initiatives such as the Northern Powerhouse but, as noted, this has not yet steered the northwest towards a fiscally sustainable position.
The challenge is to spread the success of one economically and fiscally successful part of the country, London and the southeast, without damaging it. It is a challenge with no easy solutions, as successive governments have found.
Delaying Brexit beyond March 29 may have gone down like a lead balloon for the Tories in the European Parliament elections, but it has helped lift consumer confidence off the floor. The May reading for the closely watched GfK consumer confidence survey showed a three-point rise to -10, from -13 in March and April.
Households are quite upbeat about their own personal financial situation, with a balance of 5% expecting an improvement over the next 12 months (those expecting an improvement minus those expecting a deterioration), up from zero in April.
They are a little less suicidal about the general economic situation, with a balance of 29% expecting things to get worse over 12 months, down from 34%. Overall, confidence is still lower than it was a year ago, when the index reading was -7, and GfK warns of dark clouds on the horizon as we approach the next Brexit deadline of October 31.
GfK does not expect a return to the positive confidence readings last seen in January 2016 until, as it puts it, consumers are “convinced in heart, head and wallet that Brexit’s murkiness has finally come to an end”.
Consumers may be somewhat less gloomy, but this does not apply to business, watching with trepidation as the Tory leadership contest unfolds and hoping that it does not turn into a policy freak show. The latest Lloyds Bank business barometer shows a fall in confidence, while the CBI’s last readings for the service sector showed a fall in pretty much every measure, including business volumes and confidence.
I cannot begin to think about the state of confidence in the vehicle industry, in the eye of the Brexit storm. The Society of Motor Manufacturers and Traders (SMMT) reported that car production in April was a massive 44.5% down on a year earlier as factories were shut to avoid Brexit-related disruption.
If you think that was bad, the SMMT also reported that commercial vehicle production in April was down by no less than 70.9% on a year earlier. The fact that this rigmarole may have to be repeated later in the year only makes it more depressing.

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