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Our new report published earlier this week sets out the first attempt to map where taxes are raised and where public money is spent across local authorities in Britain. Until now, although most tax and spending takes place at a local level, there has been very little understanding of where this occurs in different cities and regions.
A clear and important picture of the UK economy and the national finances emerges from the analysis. It illustrates clearly that the majority of taxes are generated in urban areas, but that the most productive and prosperous of those urban areas tend to be in the South.
See the full map here.
Overall, urban areas contributed most in tax with 64 per cent of all taxes raised in cities. The most taxes being generated in central London (City of London, Westminster and Camden together accounted for £56 billion), Birmingham (£7.5 billion) and Leeds (£6 billion). Some authorities in Scotland, coastal areas in the South and major urban areas in the North and Midlands also did well.
A closer look at where taxes are raised across combined authorities and LEPs shows how Greater London and LEPs in the South contribute disproportionately more tax than other major city regions. Generating £126 billion, Greater London alone accounted for a quarter of all ‘economy’ taxes (such as income tax, national insurance and VAT). In the same year, the ‘Northern Powerhouse’ generated £64 billion.
The analysis also highlights a national economy in which big cities are underperforming and small to medium size cities are thriving. Major UK cities are generating taxes well below the national average of £17,127 economy taxes generated per job. If Manchester (£14,376 economy taxes per job), Leeds (£13,829) and Birmingham (£14,738) city regions performed at the national average, they would add an extra £9.4 billion in tax revenue – three quarters of the planned welfare cuts this Parliament. Meanwhile, smaller cities in the South East like Reading (£19,452 economy taxes per job), Cambridge (£17,129) and Milton Keynes (£18,493) punched well above their weight.
Looking at public spend, once again large urban authorities dominate, reflecting the large number of people that live in these authorities. At £11.7 billion, Birmingham had the highest spend, followed by Glasgow (£8.1 billion) and Leeds (£8 billion). In total, urban authorities accounted for 55 per cent of all expenditure. But the analysis also shows that the distribution of public spending is highly skewed, with public spending per head much higher towards the North, Wales, Scotland and London boroughs.
See the full map here.
This new picture of how tax and spend is played out across the country provokes a number of important policy questions at the national and local level, including:
How can policy provide an incentive for growth at the local level that creates benefits for all? Our report sheds new light on the lack of control that cities have over the taxes generated in their area – on average, for every £1 generated locally in taxes, local authorities kept only 9p – meaning places have little direct incentives to grow their economies.
Yet opponents of even modest fiscal devolution fear allowing local authorities to retain more of the tax generated in their area would mean penalising places that currently depend upon the redistribution of pooled tax revenues from across the country, by reducing the size of the national pot.
Our report provides new evidence to help assess which revenue streams could be devolved to give authorities the biggest incentives to grow, boosting tax generation locally, but also potentially increase the tax take nationally and mitigating any impact on those places not equipped with new fiscal powers.
Does the creation of place-based budgets through devolution offer a way to reduce public spending? Devolving budgets to places and allowing them to set how this money is spent – on prevention as well as outcomes – may help public services become more efficient. It would certainly enable more targeted and effective public service delivery but there is currently little evidence available on whether this would save money, rather than achieve more with the same amount.
What geographies should powers be devolved to? The analysis shows that core urban authorities tend to be home to a large share of jobs, particularly higher paid jobs – which is reflected in the higher proportion of labour taxes and business rates generated in those places. But other local authorities in city regions are home to large shares of the workers that generate these taxes – reflected in the greater contribution that council tax makes to their overall tax base. In effect the core urban authority is reliant on its neighbours for housing and the provision of public services to the workers who fill these posts. This reinforces the need for significant devolution to be pursued at the combined authority level, given they are more likely to reflect the geography over which people live and work.
We’ll be working on follow-up papers that tackle these and other questions. In the meantime, stay tuned for more blogs about what the data tells us about tax and spend in city regions, housing benefit, business rates, smaller cities and what role combined authorities and LEPs play in the national surplus-deficit debate.
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