The desire to reduce public spending while still boosting economic growth was the conundrum that dominated the last Parliament and is likely to remain an issue for the duration of the current one.
Much attention has been given to reducing spending, and policy has pursued a mix of cuts to spending and improvements to efficiency to achieve this goal. But the role that growth can play in reducing the deficit has not had such an explicit policy focus. Given the UK’s poor productivity performance – and the impact that this has had on national tax take2 – it is likely that efforts to improve productivity will take greater precedence in the coming years as the government continues to grapple with the deficit.
The ever louder drum beat for devolution has mirrored debates around austerity. The devolution debate to date has been centred around the handing down of spending powers, rather than tax-raising powers. Much has been said3 – but little agreement has been reached – over what spending powers local government should be given control over. Much less has been said – and no position taken – about fiscal devolution.
Little consensus has been reached on either element because there is very little understanding about where in the country tax is raised and where public money is spent. For example, not understanding the total amount of money spent in a locality on public services, and the proportion of total spend that this accounts for, makes the argument around the devolution of spend in this area more difficult to convey. And without knowing the total amount of tax raised in an area, and the components of it, it is difficult to come to a position as to which, if any, of those components should be devolved.
The purpose of this work is to plug this knowledge gap. It presents for the first time an evidence base on the geography of tax and spend across the country to better inform debates around austerity, devolution, public sector efficiency and investment for growth.4
The relationship between tax and spend across Britain
Before getting into the detail of what tax and spend looks like across Britain, it’s important to set out briefly the structure of tax and spend across the country.
There is virtually no financial relationship between tax raised and public money spent in local authority areas in Britain (unlike in the USA, for example). Local authorities themselves have to balance the books for the income and expenditure they are responsible for, but they account for a small fraction of overall tax and public sector spend in their areas. In Britain:
- Of the £548 billion raised in tax, local authorities get to keep £50.7 billion (9 per cent). For every pound raised, local authorities keep 9p, with the remaining 91p sent back to the Exchequer.
- Of the £681 billion spent, local authorities account notionally for 24 per cent. However, the statutory services that local authorities have to meet mean that they have little discretion over how a large proportion of this is spent.
The myriad other public sector bodies and departments that spend the vast majority of money in local areas have no such requirement to balance the books across a sub-national geography. This means that the amount of money available to spend in an area is not linked to the amount of tax generated. For this reason the following analysis looks at tax and spend separately, rather than looking at notional estimates of whether places are in ‘surplus’ or ‘deficit’.
Box 1: Methodology overview
Data on tax has come from a range of different sources. All tax has been assigned to where it is produced. This is particularly important for income tax, which is assigned to the local authority that a person works in, not where they live. Where there is no local authority data available, regional or national figures have been assigned to local authorities according to their share of jobs, GVA, average wages or other economic indicators.
Spend data has come from regional Public Expenditure Statistical Analyses (PESA) tables. Data has been assigned to local authorities according to either share of regional population, share of regional spend on pensions or share of regional spend on specific benefits.
A fuller explanation of methodology is given in the appendix.