The biggest challenge facing the national economy over the next decade will be the ongoing requirement to simultaneously reduce public spending while improving the UK’s sluggish productivity growth.
There has been a great deal of commentary on both issues since 2010, and a number of policy steps have been taken on the former. But while the vast majority of the UK’s tax revenue is generated in specific places – most notably cities – and while the majority of public spending occurs in specific places, the geography of tax and spend is very poorly understood. The purpose of this piece of research is to present for the first time the geography of tax raised and public monies spent across all local authorities in Britain.
On tax, it finds that Central London, Manchester and Birmingham contribute the most total ‘economy’ taxes, such as income and corporation tax, but that average economy taxes raised per worker is higher in the Greater South East than the rest of the country. On average cities generate the highest levels of economy taxes per worker, but most of the large cities – the highest absolute contributors to the Exchequer – underperform. If Manchester, Birmingham and Leeds increased their economy tax take per worker to the national average, they would generate an extra £9.4 billion a year – over three-quarters of the required cuts to the welfare budget.
On spending, it finds that cities have the highest levels of total spend, while Scottish and Welsh authorities and coastal areas have the highest levels of spend per worker as a result of the Barnett formula and old age and benefits spending. Rising demand and further reductions of spending will put ever increasing pressures on public services. But an ability to pool funding more effectively at a local level would enable places to wrap funding around people, improve services and potentially realise efficiencies – a 2 per cent efficiency saving across the combined authorities and LEPs would deliver a £4.3 billion saving each year.
When thinking about both tax raising and public spending, it is important to think about where people really live and work – about city-regions. Our analysis shows that in Greater Manchester, Greater London and the West Midlands (our three largest city-regions)1 it is the ‘city centre’ local authorities that are the main generators of tax for the city-region. This tax could not be generated without support from their surrounding local authorities, which provide a large share of workers who raise tax in the core but consume public services elsewhere. This requires combined authorities to span the geography over which people live and work.
Understanding more about where different taxes are generated and where different types of public spending happen is a vital first step in informing policymakers, both national and local, in decisions about how best to boost economic growth and productivity, where investment in infrastructure might be most effectively targeted, and what impact devolution of certain taxes might have on the UK as a whole. The evidence base presented in this paper poses a number of questions that will be explored in more detail in a series of follow-up papers. These questions include:
- Should local areas be given powers to raise their own taxes?
- To what extent should tax and spend at the local level be directly linked to one another?
- Does the creation of place-based budgets through devolution offer a way to reduce public spending?