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Much of the post-Brexit analysis has focused on the uneven spread of economic growth across the country in recent years being a catalyst for people wanting to leave the EU. In response to this, the leader of the opposition, among others, has called for public investment to be redirected from London, to those regions that have been “left behind” and continue to struggle economically.
Meanwhile, the government is already taking steps to ensure the economy stays afloat, with the Chancellor proposing to cut rates of corporation tax in order to keep the UK attractive to investors.
Yet as decisions like these about the national economy and the national finances are made, we actually know very little about how and where revenues are generated across the country.
Understanding how and where taxes are generated is important and has implications for the decisions that the next government will take: how public services like health and education are funded; what money is available to invest in transport, infrastructure and housing; and where it would be best spent.
Our latest report, ‘10 years of tax: how cities contribute to the national exchequer’ begins to fill that gap in understanding. It analyses 10 years of data – a timespan which covers two governments and a global recession and reveals that the ‘fiscal map’ of Britain has become more polarised over the last 10 years, which raises concerns for the national exchequer, especially in the face of political and economic uncertainty and potential shocks to the economy.
The report also highlights the importance of cities to the national pot: in 2014/15 they accounted for 64 per cent of economy taxes. But while cities have consistently generated the lion’s share of national taxes over the decade, there is significant variation in the patterns of taxes generated between different cities over time:
…despite the total amount generated in cities growing from £283 billion in 2004/05 to £317 billion in 2014/15.
Workers in cities generated on average £2,682 more economy tax per job than non-city areas over the decade but 40 out of 62 British cities are today generating less tax per job than they did 10 years ago.
London aside, tax revenues generated in small and medium sized cities have increased more than in larger cities. But in total, those ‘fast growth’ small and medium sized cities added only slightly more tax to the national pot over the entire decade than Manchester, where tax receipts grew by only 1 per cent over the decade.
The capital generated just under 30% of the national economy taxes in 2014/15 – an increase of 5 percentage points on its share of the national ‘economy tax’ intake in 2004/5. Looking at labour taxes specifically (i.e. income tax and NICs) the change is even more staggering: the capital generated £91 billion in ‘work taxes’ in 2014/15 – more than the next 60 cities combined.
Part of the explanation for these trends is how the so-called ‘jobs miracle’ of the post-recession period has played out across cities. Most cities have more in jobs in them today than they did 10 years ago but many also generate less income tax than a decade ago, which suggests that wage levels have had a more significant impact on tax revenues than employment levels.
Our analysis also shows that the raising of the personal allowance affected the income tax take in some cities more than others. The income tax take in London today is 16 per cent lower than would have been if the personal allowance was held constant at 2004/05 levels, compared to 40 per cent lower in Wigan.
As the Government prepares for the anticipated economic uncertainty and potential slowdown as a result of Brexit, it is all the more vital for policy to focus on supporting the creation of high quality and high paying jobs in all cities. More of these types of jobs in cities will not only boost the prosperity of those individuals living and working there, but also they will also produce higher tax receipts for the Exchequer.
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