A few weeks ago, before we all got caught up in Brexit, Jeremy Corbyn used his six questions at PMQs to challenge David Cameron on his failure to re-balance the economy since taking office in 2010. The Labour leader argued that, in future, the government should look to re-allocate resources away from London, towards other parts of the country which had been “left behind” by Westminster policymakers for too long.
This line of argument is not new, but it has gained new credence and energy in the aftermath of the EU referendum. A lack of attention from policymakers, or investment from government, has quickly been ascribed as one of the chief reasons why many ex-industrial communities voted so overwhelmingly to leave the EU, while those in Greater London tended to vote to remain.
Seeing growth across the country as a zero sum game – where if one place benefits, another must be losing out – is superficially appealing. But as the recent Centre for Cities report shows, in reality the situation is far more complicated. And there are huge risks for the wellbeing and performance of places all across the country should London’s performance diminish in the years ahead.
The report shows that the national exchequer has become ever more reliant on London over the course of the last ten years to generate a bigger share of the tax revenues, that are then spent on public services or invested in transport and skills all across the country. The capital generated just under 30 per cent of national “economy taxes” in 2014-15 (these include all tax revenue dependent on the growth of the economy, such as income tax, land and property taxes, and VAT).
That’s an increase of 5 per cent on its share of the national “economy tax” intake in 2004-05. Indeed in 2014-15 alone, the capital generated £91bn in income tax and national insurance contributions – more than the next 60 cities combined.
In contrast to London, the other UK cities which contribute most to the national finances have seen little or no growth in their tax intake in the past decade. For example, while the amount of tax generated in London increased by 25 per cent (£28bn) in real terms between 2004-05 and 2014-15, Manchester’s tax intake grew by only 1 per cent, while Birmingham, Glasgow and Leeds all saw significant decreases in their tax intake.
These trends have in large part been driven by London’s ability to recover from the 2008 recession, while three quarters of British cities (47) continue to generate less tax now than in their pre-recession peak. And this doesn’t just reflect a north/south divide – for example, Swindon and Norwich generated 20 per cent and 21 per cent less tax respectively in 2014-15 than immediately before the recession.
Being so reliant on just one city to generate so much tax revenue for the country clearly carries many risks for the national finances. That’s particularly true given the uncertainties facing the country in light of the EU referendum, with many financial services firms openly saying they would consider their position should the UK not secure access to the single market.
But imagining that simply withdrawing investment from London and redirecting it to other places could fix the problem is to ignore the fact that any slowdown in London tax receipts would have a direct impact on how much money is available to spend in other parts of the country – both now and in the future.
It simply isn’t possible to flick a switch, and move the thousands of highly skilled people and fast growing businesses based in London to other parts of the country, overnight. If investment in the capital’s economy were to stop, its economic activity and the tax revenues it generates are unlikely to relocate to other parts of the country: instead, they will be lost to other global cities.
So while Jeremy Corbyn is right to be concerned about the UK economy’s increasing dependence on London, instead of crafting a crude narrative that pitches London against the rest, we need to focus more on the absolute gains that can be made by strengthening the economies and tax bases of other city regions such as Greater Manchester, the West Midlands and the North East.
But let’s be clear. Achieving these gains at the expense of growth in London – even if it could be achieved – would be potentially catastrophic for the national economy. And those areas which currently have weak economies would be likely to suffer most.
Ben Harrison is director of partnerships at the Centre for Cities.
