1. Governance
July 16, 2015

London still generates more than twice the tax revenue than the entire Northern Powerhouse region

By Brian Semple

London’s relentless growth is often viewed in vaguely apocalyptic terms. The British capital has been described as a “dark star of the economy, inexorably sucking in resources, people and energy”. Or, if you prefer, a “giant suction machine, draining the life out of the rest of the country.”

But while received wisdom tends to see London’s growth as A Bad Thing for the rest of Britain, our new report,  Mapping Britain’s public finances, makes it clear that other parts of the country are also benefitting from the vast tax revenues generated by the capital.

The report maps for the first time where taxes are generated, and where public money is spent in local authorities across the UK. While most tax and spending takes place at a local level, until now there’s been very little understanding of where this occurs in different cities and regions – or how this affects the UK’s economy and finances.

Our research shows that £126bn in “economy taxes” (such as income tax or VAT) was generated in Greater London in 2013-14. That’s a quarter of the total national tax-intake that year, and more than twice the amount generated in all the Northern Powerhouse cities combined.

No great surprise, you might think – and potentially more grist to the mill for those who say London is too big and powerful. But more surprising are the report’s findings about public spending. When it comes to spending per population, London ranks only 7th in Britain – behind cities like Glasgow, Liverpool and Cardiff.

What this means is that the capital receives a much lower proportion of public money than it contributes to the national economy though tax revenues: a big chunk of those taxes are instead redistributed to other parts of the country. It’s not just Londoners who are benefitting from the capital’s success – the whole country does too.

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However, the report also shows that the capital’s success wouldn’t be possible without other cities and regions. For a start, a large portion of the tax revenue raised in London is generated by workers who commute to the capital from other places. These workers alone generated £12.9 billion of income tax in 2013-14 – more than the total raised in Glasgow City Region that year.

Many travel long distances to work in London: for those coming from outside the city boundary, the average round-commute is 122 km each day. The map below shows the vast geographical area from which London draws workers – illustrating the vital role many other places play in London’s success.

Another important factor is the 80,000 young people who move to the capital from other places each year – perhaps one way in which London can reasonably be described as a drain on the rest of the country.

But rather than blame the capital, it’s more useful to ask why so many young people are leaving other large cities. The reality is that too many major UK cities are punching below their weight economically. Our report shows that Manchester, Birmingham and Leeds city regions are all performing below the national average in terms of how much tax is generated in relation to their working population.

One way to help improve their performance would be to equip these cities with more tools to grow their economies, such as the ability to invest in local transport and housing. We’ve seen progress in recent years, particularly with the government’s Cities & Local Government Devolution Bill, and George Osborne announced in the budget a raft of new devolved powers for Manchester (going even further than those granted to London). There are potentially deals on the table for the Leeds, Liverpool and Sheffield city-regions, too.

But more can be done, especially in terms of allowing cities greater control over the taxes they generate. Our report shows that local authorities currently only keep 9p for every £1 generated locally in taxes, with the rest going to the Treasury. That makes it harder for cities to invest in the skills, transport, housing and so on that would help their particular city grow.

Giving cities all across the country greater fiscal autonomy will create the incentives to boost their local economies – enabling the likes of Manchester and Birmingham to do better, and supporting London (and other smaller, successful cities like Cambridge and Milton Keynes) to continue growing. By helping to boost the national tax take, fiscal devolution will also help the government to tackle the deficit.

London’s growth brings big benefits for the whole country. Now the government must push on with the devolution agenda, to ensure that we get the most out of both the capital, and other cities, in the years ahead.

Brian Semple is press manager at the Centre for Cities think tank.

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