Cities are important to the national exchequer, they generate the majority of economy taxes and they are more productive than elsewhere. But despite cities overall generating more tax than a decade ago, almost a third of cities (20 out of 62) are actually generating less tax than they were 10 years ago and the average level of tax generated per job has gone down in real terms in almost two-thirds (40 out of 62) of British cities.
Reflecting these trends, the variation in tax raising power between different cities has grown with the result that fewer cities are now playing a more important tax generation role for the exchequer than was the case 10 years ago, with a particular turning point around ‘great recession’ which hit cities hard and has changed the long-term trajectory for many cities.
The way the ‘jobs miracle’ has played out across cities over the decade provides an insight into why the fiscal map has changed in the way it has. Cities where wages are lower than they were 10 years ago are almost all (33 out of 43) generating less income tax as well, suggesting that wages are a more important determinant of levels of income tax generated in these cities than employment.
Meanwhile, reforms to the personal allowance that have taken people on the lowest earnings out of paying income tax altogether and reduced the burden for many more, have further reduced the level of tax raised in those cities where real wages have decreased the most over time.
The more polarised ‘fiscal map’ of Britain should raise concerns for the national exchequer. In the face of political and economic uncertainty and potential shocks to the economy, the growing reliance on fewer places – and London in particular – to generate more revenues is a risky situation for the exchequer to be in compared to one where more cities are making a positive contribution to the national tax pot.
Supporting high quality and high paying jobs should be the policy priority in cities. This would not only boost prosperity in those cities but would also produce more tax receipts to the public purse, which could then be used to fund public services and to invest in growth related projects
The changing fiscal picture of Britain also raises questions about shifts towards more devolution of fiscal powers to cities in the future. Current proposals for fiscal devolution are limited to devolving business rates (which are included in economy taxes in this analysis), at the moment there is no discussion and little desire to devolve, for example, income tax. If and when these discussions occur the trends shown in this report highlight the issues around the difference in tax raising power of cities, with significant implications for the creation of a more devolved tax system.