By Charles Davis, Director, Cebr
Understanding the budget deficit across the UK
It’s the burning question as we hit the six months to the UK general election: how will the budget deficit be reduced? While we don’t have the answers to this – that’s up to the politicians – we have assessed which parts of the UK contribute what to the public finances. The team I have led at the Centre for Economics and Business Research (Cebr) have crunched the numbers to understand how the changing shape of the economy affects the contribution of London, its boroughs and the rest of the regions and countries of the UK to generating taxes for the government as well as how much is spent in each respective area.
London leads UK economic bounce back
The results are fascinating: despite the financial crisis hitting the City hard, London has shown a remarkable ability to reinvent itself and a resilience to bounce back from a challenging economic environment and lead the UK economic recovery. Our research shows that London will be the fastest growing regional economy across the UK in 2014, driven by a fast-growing IT & communications sector and the UK capital’s strength in professional and business services, with a depth of expertise that few other cities around the world can come close to rivalling. The dynamic boroughs of Westminster and City of London generate almost £100 billion in economic output between them while the fastest growing boroughs over the last ten years have been Tower Hamlets, Islington and Southwark. While London is the fastest growing regional economy, the rest of the UK has also returned to economic health in 2014 and this has seen unemployment drop to its lowest level since before the financial crisis. What does this mean for the UK public finances across the UK?
Introducing a new approach to understanding public finances across the regions
Working this out is no easy task; while we (mostly!) have relatively clear information from HM Treasury on where public money is spent and on what around the country, for many elements of government revenue – which is mainly taxation – it is much harder to understand where the money comes from. Attacking this problem, the analysis we have produced is unique in that it allocates tax revenues according to our best estimate of where the respective economic activity takes place. Many previous studies have tended to look separately at approaches that are so-called ‘workplace-based’ i.e. allocating tax to where people work and ‘residence-based’ i.e. where they live. Neither of these is completely satisfactory. Our analysis attempts to allocate, line by line for each tax revenue, where the economic activity that generates the tax takes place.
London economy makes a £34 billion net positive contribution to UK public finances
The results are fascinating – especially in the context of further promises of devolution in Scotland and indeed around the rest of the UK – London is found to be making a major £34 billion positive net contribution to the UK public finances. The South East also makes a positive contribution – a £22 billion surplus – and the East of England is very slightly in positive territory at £181 million, but the rest of the UK’s 12 constituent countries and regions are in deficit. The largest estimated deficits are in the North West, Yorkshire and the Humber and Scotland. However, this is distorted by the size of the population; in relative terms the largest deficits are in Northern Ireland, Wales and the North East.
Looking forward, we expect London is expected to continue growing at a faster rate than the rest of the UK due to its dynamism and status as major global trading hub and financial centre. This is expected to see it make a major contribution to reducing the UK’s budget deficit over the coming years as it continues to generate tax revenues that support public spending right across the UK. You can explore in more detail by reading the report, London's Finances and Revenues.