Does London really subsidise the UK?

Only three regions – all in the south-east
and east of England – recorded a net surplus last year

In Depth

The claim, which is based on evidence from the Office for
National Statistics, has profound implications for Brexit and its
impact on the wider economy.

What’s the evidence?

The data report published yesterday is a simple view of tax
receipts versus government spending that gives the surplus or
deficit figures for each part of the UK.

It shows that only three parts of the country generated a
surplus of any size last year: London, the wider south-east and the
east of England.

The capital was the biggest contributor, with a surplus of
£3,070 per head. Spending is high in London, due to factors such as
high rents boosting the housing benefit bill, but tax revenues are
huge at £15,756 per head.

“The south-east and the east of England also raised more in
taxes than they received in spending in 2015-16 – by £1,667 and
£242 per person respectively,” adds the FT.

Why is this important?

Aside from the implications for Brexit negotiations for the City
of London, there are also important questions for the devolved
administrations – and for Scottish independence in particular.

The largest deficit was recorded in Northern Ireland, of £5,437,
followed by Wales, which also recorded the lowest tax-take per
person, with a shortfall of around £4,500.

“The deficit per head in Scotland was £2,824 last year,” says
Nils Pratley in The Guardian.

“To reduce that figure as a standalone nation, taxes would have
to rise or spending would have to fall, other factors being
equal.”

What’s the counter argument?

On one level, you can’t argue with the data. It’s only the
capital and the south of England that are putting any money into
the pot on a net basis.

Pratley puts one spanner in the works, however – the “brain
drain” that draws people to London, which critics argue reflects
underinvestment elsewhere.

This not only undermines the argument that the capital
subsidises other regions, it also suggests the whole affair could
be a zero-sum game and that the “most important statistic is that
the UK, as a whole, has had a net fiscal deficit every year since
2003”.

For the year in question, the UK spent £72bn more than it took
in tax revenue.

So who’s right?

You can’t look past the numbers: right now “London and the
south-east are the UK’s cash cow”, says Pratley.

It might be politically sensible to invest in other parts of the
country in order to close the gap, but it’s equally clear the UK
cannot afford to put at risk the hefty tax revenues it’s making
from the south of England and London especially.

This will be in ministers’ minds when they begin Brexit
negotiations and could have a major impact on the financial
services sector that is the engine room of London’s economy.