Sunday, June 02, 2019
London bankrolls the rest of the UK - and that's not healthy
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on This is an excerpt.

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, 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, 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, the capital’s hinterland, which in 2017-18 had a budget surplus of £20.4bn, The East of England, also influenced by the London factor, also had a surplus, albeit smaller, £5.9bn.

Outside these three parts of the UK, which together account for just under 37% of the national population and 16% of its land area, everywhere else runs a budget deficit. The biggest is in the north-west, £20.9bn. Scotland, based on a geographic share of North Sea revenues, had a deficit of £13.3bn in 2017-18, slightly smaller than that for Wales, which of course has a smaller population, which had a deficit of £13.7bn. Northern Ireland’s fiscal deficit was £9.2bn.

To be fair to the north-west, its large deficit partly reflects its size of population. On a per capita basis, the largest fiscal deficit per head in 2017-18 was Northern Ireland, £4,939, followed by Wales, £4,395, and the north-east, £3,667, the north-west, £2,884, and Scotland, £2,452. In all these places taxes raised fell short of public spending by thousands of pounds on average for every person.

But to also be fair to London, the south-east and the East of England, much of the recent improvement in the public finances would not have happened without their contribution, There were big improvements 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.

That is 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 on 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 over other regions.

It is not true. London has just over 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 to be something of a double-edged sword in recent years. In the period since 2010 roughly half a million public sector jobs have been cut.

Myth number two 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 like London has to be seen to be working, and has seen a lot of spending, from the Olympics through to the 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 has continued to run a fiscal surplus, because of its higher tax take. The southeast and the East of England, incidentally, both fiscal surplus regions, have the lowest public spending per head.

So what is it? 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 their headquarters 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 that 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 narrowing 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 over proposals to shift many of the Bank of England’s operations to Birmingham, though I doubt the City is ever going to 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, though 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 like 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 discovered.