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REsEaRCh REPORt

Report prepared for the City of London Corporation by Oxford EconomicsDecember 2012

London’s Finances and Revenues

REsEaRCh REPORt

City of London Economic DevelopmentPO Box 270, Guildhall, London, EC2P 2EJwww.cityoflondon.gov.uk/economicresearch

Report prepared for the City of London Corporation by Oxford EconomicsDecember 2012

London’s Finances and Revenues

London’s Finances and Revenues is published by the City of London. The author of

this report is Oxford Economics.

This report is intended as a basis for discussion only. Whilst every effort has been

made to ensure the accuracy and completeness of the material in this report, the

authors, Oxford Economics and the City of London, give no warranty in that regard

and accept no liability for any loss or damage incurred through the use of, or

reliance upon, this report or the information contained herein.

December 2012

© City of London

PO Box 270, Guildhall

London

EC2P 2EJ

http://www.cityoflondon.gov.uk/economicresearch

http://www.cityoflondon.gov.uk/economicresearch

Contents

Executive summary ................................................................................................. 1

Introduction .............................................................................................................. 5

1. London’s public finances in a historical context ........................................ 6

1.1. Data sources and methodology ................................................................. 6

1.2. London‟s fiscal contribution .......................................................................... 7

1.3. Trends in London‟s fiscal revenues ............................................................... 8

1.4. Trends in London‟s public spending .......................................................... 10

1.5. London‟s fiscal contribution in a UK context ............................................ 12

2. Latest projections for London’s public finances ........................................ 17

2.1. Snapshot of 2011/12 ..................................................................................... 17

2.2. Economic outlook for London .................................................................... 20

2.3. London‟s revenues 2012-2025 .................................................................... 25

2.4. London‟s expenditure 2012-2025 ............................................................... 29

2.5. London‟s fiscal balance 2012-2025 ........................................................... 33

3. Scenario analysis ......................................................................................... 35

3.1. Scenario 1 – Boost to UK trend growth ...................................................... 35

3.2. Scenario 2 – Austerity plus scenario .......................................................... 38

3.3. Scenario 3 – Faster inward migration ........................................................ 42

Appendix A: Calculating the contribution to public finances .......................... 46

A.1. Regional distribution of public expenditure ............................................... 46

Sources and approach ......................................................................................... 46

A.2. Relative spending by region ......................................................................... 47

A.3. Spending by function ..................................................................................... 49

A.4. Forecasting expenditure by region ............................................................. 50

A.5. Estimating and forecasting regional contributions to UK tax revenue ... 50

A.6.Overall contributions to UK public finances ................................................ 55

1

Executive summary

This report updates and extends Oxford Economics‟ previous work, London‟s

Competitive Place in the UK and Global Economies, last published January 2011. It

analyses the tax revenues generated within London‟s economy from 1999/00 to

2025/26, as well as the demands for expenditure that the London area makes upon

the public purse. Building on this historical analysis, we set out our projections for the

path of London‟s fiscal balance looking forward, examining also a number of

possible alternative economic scenarios. • Over the long run, we estimate that London is one of only three UK regions to

have dependably made a net contribution towards the overall UK fiscal

balance. In the nine years prior to the economic and financial crisis of

2008/09, London‟s surplus ranged between £10bn and £20bn. During the

worst years of the economic downturn, London‟s fiscal account dipped just

below balance, in 2009/10, before rebounding to around £5bn the following

year. Only the South East of England and the East of England have matched

London in delivering a consistent fiscal surplus, with all other regions of the UK

receiving a greater volume of public spending than the tax they generate.

• London has become an increasingly important revenue generator for the UK

as a whole over this period. London generated around 18% of the total UK tax

take on average from 1999 to 2001, climbing to 18.5% by 2010/11, the last

year for which we have historical data with which to make our calculations.

The key driver of this increase has been a greater share of income tax

generation, in line with London‟s concentration of higher earning jobs.

• However, this growth has been more than matched by London‟s increasing

share of public spending. We estimate that London now accounts for around

14.4% of total UK public spending, compared to 13.6% a decade earlier.

Much of this can be accounted for by an ever-rising share of public order

and safety expenditure, commensurate with London‟s role as the seat of

Government, and the world‟s leading financial centre. London‟s share of

other areas of public spending - including health and education, and

enterprise and social welfare spending - has been much more stable.

• Moving into the 2011/12 financial year, for which the detailed data necessary

to calculate regional fiscal balances is not yet available, we estimate that

London‟s economy has generated a fiscal surplus of approaching £10bn. Key

to this has been the rebound in the capital‟s financial and business services

sector, which has seen surprisingly strong employment growth over the past

year or two.

• Looking ahead, the makeup of London‟s longer-term economic recovery

suggests that the trends in London‟s fiscal accounts in the years prior to the

crisis are likely to re-emerge. Almost 80% of the new jobs generated in London

over the years to 2025 are likely to be in the business and financial services

sector, compared to just less than 60% in the 2000-2012 period. Given higher

average salaries in these sectors than those accounting for a higher

2

proportion of employment in other regions, this implies that London‟s share of

income tax generation will rise further over the long run. We also expect

London‟s share of taxes levied upon UK businesses to rise. However, given a

trend towards outward migration from London, the capital‟s share of taxes

levied upon households (particularly stamp duties) is expected to fall.

• These trends overall mean that London‟s share of total UK fiscal revenue

generation is set to rise from 18.8% in 2011/12 to 19.9% by 2025/26. However,

just as over the past decade, this is likely to be matched by rising public

spending demands. Projections of London‟s spending needs are inherently

subjective and reliant upon a number of assumptions, but based on some

simple rules of thumb our projections suggest London‟s share of UK spending

will rise from 14.6% to 15.4% over the same time period.

• As a result, we expect London‟s fiscal surplus to recover to pre-crisis levels by

2013/14, and grow to just over £50bn in financial year 2025/26. For

comparison, the overall UK budget is expected to be in surplus to the tune of

just £10bn by this point, with the rest of the UK combined running a deficit of

£40bn.

• However, given the events of the past five years or so, and the uncertainty

surrounding the outlook in the UK and European economies in particular,

baseline forecasts such as these need to be set in the context of the range of

alternative possible outcomes. As such, we consider the impact on London‟s

public finances of three economic scenarios – a boost to potential output

growth, an economic shock that triggers a second wave of austerity

measures, and a faster rate of inward migration than in our baseline.

• Our first scenario assumes that the underlying rate of growth in the UK

economy is boosted by 0.25 percentage points, from its baseline of 2.7%. This

is felt in broadly equal parts through improved labour productivity and slightly

faster growth in the employment rate. This generates faster growth in taxes on

labour income and consumer spending, driving revenues around £6bn higher

over the long run.

• In this scenario there is little change in spending relative to our baseline, since

our spending projections are based on the desired level of spending per

head of population, as well as the state of the economic cycle (in particular

the labour market), and these are not affected much by higher productivity.

Spending increases by just over £1bn relative to baseline, yielding an overall

improvement in London‟s fiscal surplus of around £5bn.

• Secondly we simulate the impact of a further economic downturn, which

triggers a second round of public spending cuts. Specifically we simulate the

UK moving back into a recession in 2014-16, with a relatively sharp rebound

from 2017 onwards. Nevertheless, the extended period of high unemployment

becomes entrenched in the labour market, meaning that the lost output is

not made back up.

3

• The negative impact of this scenario is far greater than the upside simulated

in scenario 1. London‟s annual tax generation is £15-20bn lower in the

medium term than in the baseline, and the shortfall grows to £30bn by the

end of the projection period (2025/26). Around half of the shortfall is felt in

labour taxes, with the remainder spread across taxes upon firms and

household spending.

• A second round of cuts is expected to reduce spending in London by around

£25bn relative to baseline (15%), but London‟s overall fiscal balance ends up

around £5bn weaker by 2025/26. Other parts of the UK fare even worse in this

scenario though, with the “rest of UK” still in deficit to the tune of £100bn by

2016/17.

• Finally we simulate the impact of stronger inward migration than in our

baseline. We currently assume net inward migration of 130,000 per year into

the UK. However, the ONS projections are substantially stronger than this, at

around 200,000 per year. We simulate the impact of immigration in line with

the official projection, with around 25,000 of the annual 70,000 extra migrants

settling in London.

• This scenario impacts on both the revenue and expenditure side of London‟s

fiscal accounts. On the revenue side, taxes on labour are £4bn higher by

2025/26, with a comparable impact on the other main revenue sources

combined. The growth of population also demands extra public spending

though, with our estimates being based on a “per head” spend by the

Government. However, at £4bn the impact on spending is not enough to

counter the £8bn uplift in revenues and London‟s balance is around £4bn

stronger in the long run.

Executive summary Figure 1 - London's revenues and expenditure

4

Executive summary Figure 2 - London's fiscal balance

Executive summary Figure 3 - Fiscal balance in London and rest of UK

5

Introduction

This report updates and extends Oxford Economics‟ previous work on London‟s

Competitive Place in the UK and Global Economies, last published January 2011.

Specifically, the report:

Extends our analysis of the historical trends in London‟s revenues and expenditures

back to the financial year 1999/00, compared to our previous work, which went

back to 2003/04;

Updates our estimates of London‟s public finances into the current financial year. In

addition to this we extend our projections by ten years, setting out London‟s fiscal

prospects to 2025/26, compared to our previous forecasts which ran until 2015/16;

and

Considers how a range of different economic scenarios might impact upon

London‟s public finances.

In compiling our estimates and forecasts we used a comparable methodology to our

previous work, in particular London‟s Competitive Place in the UK and Global Economies.

We set out more detail on our methodology at the start of the next section, and in

Appendix A.

6

1. London’s public finances in a historical context

1.1. Data sources and methodology

The methodology applied in this analysis remains the same as it has been in previous years

when this work has been carried out. We start by taking published data by HM Treasury

(HMT) which sets out total revenues generated in the UK from the UK Budget Report, and

total expenditure each year across the UK from the Public Expenditure Statistical Analyses.

The latest period for which this information is available is 2010/11. Note that the HMT

publishes „planned‟ revenues and spending levels over the next number of years, however

we do not interpret this as data until it is published as an actual „outturn‟. As such, the

2011/12 figures published throughout this report should be considered as a forecast.

Official data analysing the bulk of public spending in regional terms are available – these

are compiled by HMT and published in the Public Expenditure Statistical Analyses. Data

are compiled primarily on the basis of spending „for‟ each region on the basis of which

region benefits from the spending, rather than on the basis of spending „in‟ each region.

So, for example, where a government agency is based in one region but acts on behalf of

everyone, then the spending is not all attributable to the region where the agency is

based. We follow the same approach in our analysis, since looking at spending in terms of

who benefits seems appropriate for comparing with who pays.

A significant proportion of public spending is not allocated across regions in the HMT

analysis – termed „non-identifiable‟ spending. Although there is less clear information on

how this spending should be regarded as attributable to each region, we nevertheless

feel it would be misleading to present public finance estimates excluding this significant

element of spending, and therefore use a variety of alternative approaches to attributing

this non-identifiable spending to regions. More detailed information on our approach is

available in the Appendix.

Unlike for public spending, there is relatively little official information on taxes paid by

region – income tax, council tax and non-domestic rates are the main taxes where

regional information is available. However, there are reasonably robust indicators on

which to base estimates of the breakdown of other taxes. For example we can use data

on the level of consumer spending around different regions to estimate VAT generation,

vehicle registrations data for car tax, and data on employment and wage levels to

estimate PAYE and National Insurance receipts.

A more thorough account of the methodology used in this analysis is set out in the

Appendix to this report.

7

1.2. London’s fiscal contribution

Before examining London‟s public finances, one important distinction needs to be made.

Official data on a number of economic indicators is often available on either a workplace

or residence basis. For example, a worker who commutes from Brighton to London would

count as generating gross value (GVA) added in London on a workplace basis, and the

South East of England on a residence basis. Given that the aim of this report is to discuss

the contribution of London‟s economy to UK public finances, presenting residence based

figures would understate this contribution.

At the same time there are arguments against using only a workplace based measure,

since workers who commute in rely upon the availability of housing and public services in

the regions where they live. As a result, where applicable in this report we use an average

of the two measures. For illustration, London‟s share of total UK fiscal revenues on the two

bases is set out in Figure 1.1. As would be expected London‟s share is higher on a

workplace basis than a residence basis, given the volume of inward commuters into the

capital.

Figure 1.1 - London's fiscal revenues as a share of UK on residence or workplace basis

Using this weighted measure of workplace and residence based taxation and spending,

we estimate London to have generated a fiscal surplus over most of the past decade.

From the turn of the millennium up to the start of the economic crisis, London contributed

a surplus of between £10bn and £20bn towards the overall UK budget balance. During the

crisis of 2008/09 this narrowed substantially, although on our estimates even during the

worst financial year of the current economic downturn London‟s fiscal account only just

went into deficit (£0.1bn), despite the loss of 26,000 jobs in the crucial financial services

sector, and 42,000 jobs in other industries.

8

Figure 1.2 - London's fiscal balance, 1999/2000 to 2010/11

1.3. Trends in London’s fiscal revenues

Figure 1.3 demonstrates the impact of the economic downturn on London‟s tax revenue

generation. Total revenues fell by just short of £6bn from 2008/09 to 2010/11, with

Corporation Tax and “other” taxes, such as stamp duty and Business Rates falling fastest.

“Other” revenues have since recovered substantially, reflecting the sharp rebound in

London‟s housing market, while two years of weak economic growth have depressed

business profits and corporation tax. Net VAT revenues fell in 2009/10 thanks to a

combination of weaker consumer spending and the temporary cut in the VAT rate from

17.5% to 15%, but have since risen above their 2007/08 peak. This is partly due to the

increase in the VAT rate to 20%, and partly thanks to relatively robust consumer spending

in London (including that of tourists). Taxes on labour income have held up reasonably

well, with total PAYE receipts now above their pre-crisis peak.

Figure 1.3 (a) - Revenues raised by London's economy

9

Figure 1.3 (b) - Revenues raised by London's economy

Income tax

(£bn) NICs (£bn)

VAT (£bn)

Corporation tax (£bn)

Other (£bn)

Total (£bn)

1999/00 18.4 9.4 9.6 7.9 18.8 64.1

2000/01 22.6 10.5 10.1 6.5 20.3 70.1

2001/02 22.8 11.2 10.4 6.4 19.2 69.9

2002/03 21.9 10.9 10.7 6.2 19.7 69.3

2003/04 22.5 12.2 11.2 6.3 21.4 73.5

2004/05 25.2 14.8 11.7 7.6 22.9 82.1

2005/06 27.5 14.6 11.7 9.0 25.3 88.1

2006/07 30.9 14.7 12.5 9.9 28.2 96.3

2007/08 33.4 17.1 13.4 10.6 29.6 104.1

2008/09 34.1 16.2 13.0 8.3 27.0 98.6

2009/10 32.7 16.2 12.4 7.5 26.6 95.3

2010/11 34.3 15.6 14.1 8.8 29.3 102.2

London‟s share of total UK tax revenues has increased modestly over the past decade,

from around 18% of total on average from 1999-2001, to 18.5% over the past five years or

so (Figure 1.4). A rising share of income tax has been the main driver of an increased

London share, in line with faster wage and employment growth in the capital than in other

regions.

However during the same period, the capital‟s share of national insurance contributions

(NIC) has fallen. This seems counter-intuitive - since both are levied upon labour income,

one might expect the fact that London‟s economy has performed more strongly than

other parts of the country, to lead to higher NIC. However, unlike PAYE, where the

marginal rate does not fall moving up the income spectrum, the rate of NIC falls from 12%

to 2% from the Upper Earnings Limit (UEL) of £817 per week.

Figure 1.4 - London's contribution to UK fiscal revenues

Income tax

(% of UK) NICs

(% of UK) VAT

(% of UK)

Corporation tax (% of

UK) Other

(% of UK) Total

(% of UK)

1999/00 19.9% 16.7% 17.1% 24.3% 15.6% 17.9% 2000/01 21.5% 17.4% 17.3% 22.2% 15.7% 18.3% 2001/02 21.0% 17.7% 17.0% 23.0% 14.9% 18.0% 2002/03 20.0% 16.9% 16.8% 24.5% 14.8% 17.5% 2003/04 19.8% 16.8% 16.2% 25.0% 15.5% 17.6% 2004/05 20.5% 19.0% 16.0% 25.5% 15.5% 18.2% 2005/06 21.1% 17.1% 16.1% 26.2% 15.6% 18.1% 2006/07 21.6% 16.8% 16.1% 26.4% 16.2% 18.5% 2007/08 22.7% 17.1% 16.6% 26.4% 16.3% 18.9% 2008/09 23.0% 16.7% 16.6% 25.4% 15.1% 18.5% 2009/10 23.0% 16.8% 16.8% 24.7% 15.5% 18.6% 2010/11 23.2% 16.0% 16.4% 25.4% 15.9% 18.5%

10

With more earners in the top income bands in London than in other regions of the UK, it is

therefore unsurprising that NI revenues in other parts of the country might grow faster than

in London. To put it another way, an earner above the UEL who receives a pay rise of

£5,000 will pay an extra £100 in national insurance, while an earner having a £5,000 pay

rise below the UEL would pay an extra £600 in NI. Of course, the earner above the UEL is

also likely to be paying a greater portion of the pay rise in PAYE, hence London‟s share of

PAYE rises.

London‟s share of total net VAT payments has edged down over the decade as a whole,

but broadly stabilised over the more recent past. Finally, we estimate that London‟s share

of corporation tax has declined over the course of the economic downturn, although has

remained relatively constant in absolute terms.

1.4. Trends in London’s public spending

In this section we analyse how the composition of public spending has changed in

London over the past decade or so. In nominal terms the volume of spending on public

services more than doubled between 1999/00 and 2010/11. Transport and public order

saw the greatest proportional increases but remain relatively small shares of overall

spending, less than 10% in each case. Health and education also outpaced overall

expenditure, rising from 35% of the total in 1999/00 to just short of 40% in 2010/11.

Figure 1.5 – Public spending in London

11

Figure 1.6 - Public spending in London

Public order & safety (£bn)

Enterprise, employment

& social protection

(£bn)

Health & education

(£bn) Transport

(£bn) Other (£bn)

Total expenditure on services

(£bn)

1999/00 2.4 16.0 12.8 1.9 3.6 36.6 2000/01 2.6 16.5 14.0 1.6 3.9 38.7 2001/02 3.2 17.3 15.7 2.8 4.5 43.5 2002/03 3.5 18.5 17.4 4.1 3.9 47.3 2003/04 5.1 20.3 19.3 4.7 4.4 53.9 2004/05 5.6 21.0 21.2 3.9 5.1 56.7 2005/06 5.7 22.3 22.6 4.4 5.6 60.6 2006/07 5.9 23.1 23.2 4.8 6.2 63.3 2007/08 6.1 24.2 25.5 4.9 6.4 67.2 2008/09 6.7 26.0 27.4 4.8 7.2 72.1 2009/10 6.7 28.1 30.0 6.2 7.9 79.0

2010/11 6.6 29.0 30.8 6.1 7.3 79.8

London has increased its share of UK expenditure in some areas of public services. Most

obviously public order and safety spending increased in London much faster than the rest

of the UK in light of the elevation of the threat of terrorist attacks post 9/11. Since 2005

London‟s share of spending in this area has been sustained at around 20-21% of the UK

total, thanks not only to the increased security efforts to prevent future terrorist strikes, but

also the increased degree of protest activity taking place in London. Other one-off events

such as the riots of summer 2011 and the Olympic and Paralympic games in summer 2012

are likely to have caused a renewed upturn in London‟s share of total public order

spending in the 2011/12 and 2012/13 financial years.

London‟s share of transport spending has been highly volatile over the past decade. This is

to be expected given the substantial capital costs associated with investment in transport

infrastructure. London‟s share peaked around 30% in 2002/03 and 2003/04, before falling

back in the following years. More recently the share has climbed back up again, as

London‟s infrastructure projects such as CrossRail, the Thameslink upgrade and the London

Overground network got underway, while a number of projects to upgrade the UK road

network were put on hold.

12

Figure 1.7 – London’s share of UK public expenditure

Public order & safety

(% of UK)

Enterprise, employment

& social protection (% of UK)

Health & education (% of UK)

Transport (% of UK)

Other (% of UK)

Total expenditure on services (% of UK)

1999/00 15.5% 12.5% 14.0% 21.2% 14.7% 13.7%

2000/01 15.9% 12.3% 14.1% 18.4% 14.8% 13.6%

2001/02 16.9% 12.1% 14.2% 25.6% 13.3% 13.7%

2002/03 17.3% 12.2% 14.4% 30.9% 11.9% 14.0%

2003/04 20.9% 12.5% 14.3% 29.5% 13.4% 14.5%

2004/05 21.1% 12.3% 14.4% 25.2% 14.1% 14.3%

2005/06 21.0% 12.5% 14.2% 26.4% 13.4% 14.3%

2006/07 20.7% 12.5% 13.9% 24.8% 14.4% 14.3%

2007/08 20.8% 12.5% 14.2% 24.3% 14.0% 14.3%

2008/09 21.2% 12.4% 14.3% 23.5% 14.4% 14.3%

2009/10 20.6% 12.3% 14.6% 27.7% 15.0% 14.6%

2010/11 20.6% 12.2% 14.6% 26.8% 14.4% 14.4%

1.5. London’s fiscal contribution in a UK context

Comparing London‟s fiscal balance with the rest of the UK reveals a striking pattern of

relative contributions to overall UK public finances. With the exception of 2009/10 there is a

fiscal surplus every year since 1999/00 in London, the South East and the East of England.

By contrast no other region has generated more tax than it has received in public

spending since the two Midlands regions and the South West achieved this in 2000/01. On

our estimates most UK regions were in deficit even during the peak years of economic

growth in the early half of the last decade.

13

Figure 1.8 - London's net fiscal contribution in a UK context

Much of the differential in performance can be attributed to higher welfare bills in regions

outside of the greater South East (comprising the three surplus regions). When excluding

welfare payments from the calculations most regions are in surplus, but the proportionate

boost is far greater for regions other than London, the East and South East. For example,

London and the North West‟s fiscal balance both improve by around £20bn excluding

welfare, but London‟s GVA is more than twice as large as the North West.

Figure 1.9 - London's net fiscal contribution ex welfare payments in a UK context

1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11

Balance

(£bn)

Balance

(£bn)

Balance

(£bn)

Balance

(£bn)

Balance

(£bn)

Balance

(£bn)

Balance

(£bn)

Balance

(£bn)

Balance

(£bn)

Balance

(£bn)

Balance

(£bn)

Balance

(£bn)

North East -4.6 -4.9 -6.7 -7.3 -6.7 -7.5 -7.6 -6.7 -7.3 -10.3 -12.5 -12.2

North West -4.0 -5.4 -8.3 -10.1 -9.6 -10.5 -10.3 -12.1 -12.6 -18.6 -24.4 -22.9

Yorkshire & the Humber -1.7 -2.7 -4.9 -6.7 -6.6 -7.4 -7.3 -7.4 -8.1 -13.3 -17.6 -16.2

East Midlands 1.9 1.4 -0.5 -0.7 -1.9 -2.7 -2.8 -2.3 -2.2 -6.8 -10.1 -9.4

West Midlands 0.8 0.2 -2.1 -3.4 -4.6 -5.5 -6.3 -5.5 -6.3 -12.1 -17.1 -15.5

Eastern 8.3 8.6 8.1 6.7 5.5 5.7 4.1 5.9 6.6 0.0 -4.3 -3.7

Greater London 16.3 19.0 14.8 9.2 9.1 13.1 14.6 18.9 22.3 9.7 -0.1 5.1

South East 17.6 19.4 17.9 14.7 11.7 11.0 13.4 15.4 15.8 5.9 1.2 5.3

South West 1.2 0.2 -0.8 -1.4 -3.1 -4.3 -4.8 -3.7 -4.5 -10.6 -14.3 -12.8

Wales -5.4 -5.9 -6.4 -8.0 -8.5 -9.2 -9.6 -9.4 -9.9 -13.0 -15.2 -15.0

Scotland -2.8 -1.5 -1.8 -4.4 -6.1 -5.4 -2.6 -3.5 -4.7 -4.6 -14.2 -11.1

Northern Ireland -4.4 -5.2 -5.7 -6.3 -6.6 -7.0 -7.3 -6.9 -7.3 -9.5 -10.7 -10.4

UK 23.2 23.2 3.6 -17.5 -27.6 -29.7 -26.4 -17.3 -18.1 -83.1 -139.5 -118.9

1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11Balance

(£bn)

Balance

(£bn)

Balance

(£bn)

Balance

(£bn)

Balance

(£bn)

Balance

(£bn)

Balance

(£bn)

Balance

(£bn)

Balance

(£bn)

Balance

(£bn)

Balance

(£bn)

Balance

(£bn)

North East 1.5 1.5 0.2 0 0.7 0.5 0.3 1.5 1.3 -1 -2.2 -1.5

North West 11.6 10.8 9 8.4 9.2 9.3 10.3 9.1 9.7 5.6 2 4.6

Yorkshire & the Humber 8.6 8 6.5 5.4 6.2 6.1 6.8 7.2 7.2 3.4 0.7 2.9

East Midlands 9.7 9.7 8.2 8.7 8.2 8 8.5 9.5 10.2 6.8 4.7 6.3

West Midlands 11.4 11.5 10 9.5 9 8.9 9 10.2 10.4 6 2.8 5.1

Eastern 17.7 18.4 18.5 17.9 17.9 18.8 18 20.3 21.8 16.8 14.2 15.7

Greater London 31.5 34.8 31.4 27 28.5 33.2 35.8 40.9 45.5 34.6 26.8 33

South East 31.5 33.7 33.1 30.5 29.5 29.9 33 36 37.6 29.8 27.4 32.6

South West 10.8 10.2 9.8 9.6 9.5 9 8.9 10.5 10.7 6 3.7 6

Wales 1.9 1.7 1.5 0.4 0 0 -0.1 0.3 0.5 -1.8 -3.1 -2.4

Scotland 8.3 9.9 10.9 8.9 8.3 9.7 13.2 12.4 12.3 13.8 5.7 9.6

Northern Ireland -0.5 -1.1 -1.3 -1.6 -1.4 -1.5 -1.7 -0.9 -0.8 -2.8 -3.8 -3.2UK 143.8 149.1 137.9 124.7 125.5 131.9 141.9 157.1 166.4 117.1 78.8 108.9

14

The regional importance of welfare payments is illustrated more clearly in Figure 1.10 and

Figure 1.11, where we set out our estimated fiscal balances as a percentage of regional

GVA, including and excluding welfare. The difference between the two tables for a

region in any given year can be read as the sum received by that region in welfare

payments as a proportion of regional GVA. For example, in 2010/11 London received

welfare payments worth around 10% of its GVA, rising to 15% in the South East, 20-25% in

the Midlands and North, and 30% or more in Wales.

Figure 1.10 - Deficits as % of regional GVA, including welfare

Figure 1.11 - Deficits as % of regional GVA, excluding welfare

While London receives a far lower share of welfare payments relative to its economy than

other regions, this is not the case with all fiscal matters. For example, when compared to its

share of gross value added the capital underperforms in terms of its net VAT contribution

and National Insurance. Section 1.3 noted that London‟s increasing share of top earners is

likely to explain why its share of National Insurance contributions might be falling relative to

the UK, and the same explanation illustrates why its share of UK NI contributions is lower

than its share of UK GVA. At the same time, such an explanation is consistent with a higher

share of total PAYE revenue generated in London than London‟s share of GVA.

London‟s share of UK corporation tax in 2010/11 is also substantially higher than its share of

gross value added. With firms in the professional services sectors more likely to find

profitable opportunities outside Europe, as well as London‟s robust tourist market, and

desirability as a location for residential investment, it makes sense that firms in these sectors

in particular have been more able to generate profits and corporation tax revenues than

firms elsewhere in the UK.

1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11

Greater London 8.4% 9.4% 7.2% 4.4% 4.2% 5.8% 6.2% 7.7% 8.9% 4.0% 0.0% 2.1%

South East 12.5% 13.3% 12.0% 9.6% 7.4% 6.8% 8.1% 9.0% 9.2% 3.6% 0.7% 3.1%

Eastern 10.1% 10.1% 9.3% 7.5% 5.9% 5.9% 4.1% 5.7% 6.3% 0.0% -4.3% -3.6%

South West 1.6% 0.3% -1.0% -1.7% -3.7% -5.0% -5.4% -4.1% -4.9% -11.9% -16.2% -14.3%

West Midlands 1.0% 0.3% -2.6% -4.1% -5.5% -6.5% -7.3% -6.2% -7.1% -14.1% -20.0% -17.9%

East Midlands 3.1% 2.2% -0.8% -1.0% -2.8% -3.8% -3.8% -3.1% -2.9% -9.4% -13.9% -12.6%

Yorkshire & the Humber -2.4% -3.7% -6.5% -8.7% -8.4% -9.2% -8.9% -8.8% -9.6% -16.3% -21.5% -19.5%

North West -4.1% -5.4% -8.2% -9.7% -9.0% -9.7% -9.3% -10.7% -11.0% -16.7% -22.0% -20.4%

North East -14.1% -14.6% -19.6% -20.8% -18.6% -20.3% -20.1% -17.4% -18.8% -27.3% -33.1% -32.0%

Wales -14.6% -15.5% -16.5% -20.2% -21.0% -22.3% -22.8% -21.9% -23.0% -31.1% -36.5% -35.7%

Scotland -3.5% -1.9% -2.2% -5.2% -7.0% -6.0% -2.8% -3.6% -4.8% -4.8% -15.0% -11.6%

Northern Ireland -19.7% -22.8% -24.5% -26.3% -26.7% -27.4% -27.7% -25.4% -26.8% -35.9% -40.5% -39.0%

1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11

Greater London 16.2% 17.3% 15.3% 12.8% 13.1% 14.7% 15.2% 16.6% 18.1% 14.3% 11.2% 13.6%

South East 22.4% 23.1% 22.1% 19.9% 18.7% 18.5% 19.8% 21.1% 21.9% 18.0% 16.5% 19.2%

Eastern 21.5% 21.7% 21.3% 19.9% 19.2% 19.4% 17.9% 19.5% 20.8% 16.7% 14.2% 15.4%

South West 14.4% 13.2% 12.4% 11.8% 11.3% 10.4% 10.0% 11.5% 11.7% 6.8% 4.2% 6.7%

West Midlands 14.7% 14.5% 12.4% 11.5% 10.7% 10.4% 10.4% 11.5% 11.7% 7.0% 3.3% 5.9%

East Midlands 16.0% 15.5% 12.7% 13.0% 11.9% 11.3% 11.7% 12.7% 13.6% 9.4% 6.5% 8.4%

Yorkshire & the Humber 12.1% 11.0% 8.7% 7.0% 7.9% 7.6% 8.3% 8.6% 8.5% 4.2% 0.9% 3.5%

North West 11.8% 10.8% 8.8% 8.1% 8.6% 8.6% 9.3% 8.0% 8.5% 5.0% 1.8% 4.1%

North East 4.6% 4.5% 0.6% 0.0% 1.9% 1.4% 0.8% 3.9% 3.4% -2.7% -5.8% -3.9%

Wales 5.1% 4.5% 3.9% 1.0% 0.0% 0.0% -0.2% 0.7% 1.2% -4.3% -7.4% -5.7%

Scotland 10.5% 12.2% 13.2% 10.5% 9.5% 10.8% 14.3% 12.9% 12.6% 14.5% 6.0% 10.0%

Northern Ireland -2.2% -4.8% -5.6% -6.7% -5.7% -5.9% -6.5% -3.3% -2.9% -10.6% -14.4% -12.0%

15

Figure 1.12 - London's share of tax revenues and population/GDP, 2010/11

London also demands a greater volume of expenditure per head in a number of areas

than the rest of the UK. As might be expected of one of the world‟s most important (and

visited) cities, public order and safety spending and spending on transport infrastructure

are substantially greater than the UK average. This should in some measure be viewed as

an investment though, given the importance of a safe and accessible capital city to the

UK‟s international reputation, and the ease for businesses and tourists to visit.

Figure 1.13 – Spending on public services per head, 2010/11

16

As illustrated in Figure 1.10 and Figure 1.11, London‟s economy receives less by way of

welfare payments relative to its gross value added than other parts of the UK. However, at

7.5% in 2011, the proportion of London residents claiming housing benefit is greater than

any other UK region (the second highest is the North East, at 6.5%). When combined with

the fact that average rents in London are roughly double the UK average, this implies the

capital‟s share of housing benefit payments is likely to be substantially greater than its

share of gross value added - although we do not estimate this in detail here.

17

2. Latest projections for London’s public finances

2.1. Snapshot of 2011/12

We estimate that London‟s surplus of £5bn in 2010/11 increased to around £10bn in

2011/12, with the improvement entirely due to further growth in revenues, which were

£5bn higher than in 2010/11. Within this, net VAT generated in London increased by £2bn,

with an additional £0.7bn in NIC and £1.5bn in “other” taxes, such as business rates and

stamp duties. Corporation tax and income tax are estimated to have grown by around

£300m each.

Figure 2.1 – London’s revenue and expenditure

By contrast, London‟s expenditure level was broadly stable from 2010/11 into 2011/12 –

spending on enterprise, employment and social protection increased by £0.5bn, to

£29.5bn, but spending in most other areas was almost unchanged.

18

Figure 2.2 - London's revenue and expenditure in 2011/12

As a result, the composition of London‟s spending across different categories remained

stable, while the composition of revenues adjusted modestly towards taxes on income

and “other” taxes.

Figure 2.3 - London's revenue generation in 2011/12

19

Figure 2.4 - London's expenditure in 2011/12

Again, London is one of only two UK regions to generate a fiscal surplus in 2011/12, along

with the South East of England. London‟s surplus is equivalent to around 3% of GVA, with

the South East‟s surplus just over 5% of output. However, the surpluses generated in these

two regions are not sufficient to offset deficits in the rest of the UK, with the overall UK

deficit in the 2011/12 financial year equivalent to 8% of GVA.

Figure 2.5 - London's 2011/12 balance in a UK context

20

2.2. Economic outlook for London

Looking ahead, economic prospects in London and at the UK level are central to

understanding how the capital‟s fiscal contribution might be expected to change. In line

with the wider UK economy we expect London‟s economy to see only very limited growth

in output in 2013, as uncertainty around the Eurozone crisis undermines firms‟ willingness to

invest and households‟ appetite to spend. In turn this will weaken demand for London‟s

professional services sector, as well as consumer facing firms, and slow the pace of job

creation compared to 2010-2012.

Figure 2.6 – GVA growth, 2012-2025

Once the Eurozone crisis is resolved (and assuming in particular a resolution that keeps the

single currency group intact, with no debt restructuring in Spain or Italy), the medium term

outlook is more robust for London. Given the level of fiscal correction required in many

Eurozone countries, and the burden this will place on households through higher taxes and

lower transfer payments, as well as the moves towards economic reform and greater

competitiveness, the Eurozone recovery will have to be driven by trade and investment.

This should play to London‟s sectoral strengths, given the concentration of professional

and business services sector (broadly speaking) in the capital (Figure 2.7), and the links

between these firms and global trade and investment1. Combined with London‟s greater

exposure to the world economy generally and the recovery in the wider global outlook,

including through tourism and other outward facing sectors, this should support relatively

solid growth over the medium term. However, the pace of growth will be weaker than

during the pre-crisis period thanks to the impact of fiscal consolidation in the UK, as well as

tighter financing conditions for business investment and housing than during the pre-crisis

era.

1 For an econometric analysis of the impact of global economic trends on London‟s economy, see London‟s

Competitive Place in the UK and Global Economies.

21

Figure 2.7 - London’s sectoral makeup, 2011

The shape of the economic recovery is reflected in the pace of labour market

improvement, with a weak 2013/14 in store, followed by more rapid improvement in the

medium term. As the degree of spare capacity in London‟s labour market narrows, with

the unemployment rate settling at just above 3.5% by 2020, total employment should grow

in line with the size of the labour force - by around 0.5% per annum.

Figure 2.8 – Total employment

22

Figure 2.9 - London’s labour market outlook, 2012-2025

Between now and 2025, London‟s economy and workforce will become even more

focused on the professional and business services sector (broadly defined).

Figure 2.10 - Sectoral employment growth in London

2002-12

000s 2012-25

000s

Agriculture -1.3 -0.2 Mining & quarrying -2.1 -1.4 Manufacturing -68.7 -26.3 Electricity & gas -1.6 -1.2 Water 4.8 -3.0 Construction 54.8 43.7 Wholesale & retail -50.3 12.7 Transport & storage -2.8 23.4 Accommodation 65.8 22.3 Information & comms 45.4 46.6 Financial services 18.8 1.4 Real estate 25.9 25.9 Professional services 153.2 184.7 Administrative services 38.2 134.2 Public admin & defence -12.9 -27.4 Education 61.4 -2.1 Health 75.4 18.2 Arts & entertainment 24.0 34.2 Other 18.6 20.4 Total 446.7 506.0

23

With job cuts underway in public administration, and substantially slower funding growth

for health and education over the coming decade, public sector employment seems

likely to fall by around 10,000 between now and 2025. Employment growth in construction

is likely to be weaker in light of tighter access to finance, as well as ever-tighter availability

of land. Jobs growth in distribution will be curtailed both by the relatively weak rebound in

consumer spending as well as the growing importance of the internet and high volume

physical retailing, compared to traditional stores.

By contrast, London‟s professional services and information and communications sectors

should continue to see robust growth over the coming decade. Combined with a

substantial pick up in recruitment in the administrative services sector, and stable growth in

real estate employment, we estimate that these four sectors combined will generate 78%

of the total employment growth expected in London between now and 2025, up from

58% in the decade to 2012.

We compare the key economic indicators for London and the rest of the UK (ROUK) in

Figure 2.11 and Figure 2.12. London‟s growth rate of 3% over the 2012-2025 is around 0.4pp

higher than the ROUK – a lower differential than witnessed prior to the economic

downturn, but nevertheless substantial.

Figure 2.11 - Key indicators change in London

2002-08 change

2008-12 change

2012-25 change

Demography

Population (000s) 467.2 446.7 1083.4 Working age population (000s) 366.2 350.5 882.2 Migration (000s, average) 15.9 24.4 -7.7

Labour market

Employment (000s) 323.6 123.1 506.0 Resident employment (000s) 280.3 147.9 411.4 Resident employment rate (pp) 0.6% -1.7% -2.8% Unemployment (000s) -28.4 89.9 -18.5 Unemployment rate (pp) -0.8% 1.6% -0.7%

Economy

GVA (%pa) 4.0% 0.2% 3.0% Productivity (%pa) 2.8% -0.4% 2.3% Consumer expenditure (%pa) 2.1% 0.2% 2.9% Disposable income (%pa) 2.5% 1.6% 2.8%

24

Figure 2.12 - Key indicators change in ROUK

Since London‟s specialisms lie in sectors with a historically faster productivity growth than

the ROUK, we also expect faster growth in output per head and wages than at the UK

level. As a result (and also thanks to London‟s growing role as a national and international

tourism and retail centre), we expect consumer spending in London to outpace the rest of

the UK, by half a percentage point per year.

One key change in the outlook relative to the recent past is on the rate of migration into

London. We expect net migration into London to slow sharply. Over the past decade,

strong inflows from overseas have more than offset the migration of UK natives out of

London to surrounding regions, resulting in net inward migration of 20,000-50,000 per year.

With tighter controls on inward migration from overseas, as well as the impact of a slowing

economy on the attractiveness of the UK as a destination to emigrate to, foreign inflows

into London are likely to slow substantially over the coming years. That said, migration flows

are notoriously difficult to measure, let alone project, with any real degree of certainty. As

a result, we simulate what an alternative outlook for migration might mean for London‟s

public finances in the final chapter of this report.

By contrast, the longer-term trend of outward migration by native born Londoners is likely

to continue, resulting in modest net outward migration over the coming decade.

Nevertheless, since London‟s population has a higher proportion of younger population

cohorts (partly as a result of substantial inward migration over recent decades, and a

higher birth rate amongst recently arrived Londoners than UK natives) the pace of growth

in working age population in the capital is still likely to outstrip the rest of the UK.

2002-08 change

2008-12 change

2012-25 change

Demography

Population (000s) 1899.3 1503.3 4039.5 Working age population (000s) 1241.4 952.9 1982.8 Migration (000s, average) 221.4 216.7 140.6

Labour market

Employment (000s) 1440.2 -267.1 1984.2 Resident employment (000s) 999.9 -388.8 1722.3 Resident employment rate (pp) 0.3% -3.2% 0.9% Unemployment (000s) -12.2 612.5 -288.8 Unemployment rate (pp) -0.2% 2.1% -1.2%

Economy

GVA (%pa) 2.3% -0.4% 2.6% Productivity (%pa) 1.4% -0.2% 2.1% Consumer expenditure (%pa) 2.2% -0.6% 2.4% Disposable income (%pa) 1.4% -0.1% 2.3%

25

Figure 2.13 - Net inward migration to London

2.3. London’s revenues 2012-2025

Taking these underlying drivers into account, we expect London‟s labour taxes to recover

quite robustly in the medium term. Total receipts from PAYE income tax and NICs will grow

by just 2% or so in 2012/13 as the labour market continues to suffer from the uncertainty in

the Eurozone, but this should pick up to 5% in the following financial year, as confidence

starts to return in the second half of calendar year 2013. Further out this should pick up to

7% from 2016/17 to 2018/19, before settling into a longer term trend of 5.5% per annum.

Total PAYE and NICs generated in London should surpass £100bn in 2024/25.

This trend is somewhat slower than the pre-crisis average of just short of 6.5% per annum,

but the pre-crisis figure is boosted somewhat by the pace of inward migration into London,

which as we have noted we expect to ease substantially. Nevertheless, given the faster

rate of wage growth in London than in other regions the capital‟s share of total UK labour

taxes will continue to rise, reaching 21.3% by 2025/26, around 0.6pp higher than the

current financial year.

26

Figure 2.14 – London’s labour tax contribution, 2012-2025

Figure 2.15 – London’s business tax contribution, 2012-2025

London‟s share of taxes levied upon business (including corporation tax and business

rates) is also set to rise over the coming decade, by just short of 1 percentage point. As we

have noted, London‟s sectoral specialisms will allow it to tap into global recovery sooner

than the rest of the UK, while its role as a destination for UK and overseas tourists and

shoppers will also boost demand for firms in the capital. As a result, demand for

commercial property (and the pace of development of new property) should be stronger

than the rest of the UK, boosting business rates income. At the same time, stronger

demand growth in London than other regions will boost firms‟ profits, and by extension

corporation tax receipts from the capital.

27

Figure 2.16 – London’s household tax contribution, 2012-2025

We estimate that London‟s share of taxes paid by UK households (including VAT, stamp

duty on house purchases and inheritance tax) spiked in 2012/13, as consumer spending in

London benefitted firstly from the Royal Jubilee weekend and secondly from the Olympic

and Paralympic games. On our calculations net VAT generated in London‟s economy

rose from £16bn to £17.2bn from 2011/12 to 2012/13. As such, London generated over 30%

of the overall increase in UK VAT, despite only accounting for 16-17% of the VAT base.

Of course, this reflects in large part tourist inflows for both events from around the rest of

the UK and the world, so caution needs to be taken in interpreting this spike. It would be

misleading to say that London residents and workers themselves generated this boost in

VAT receipts, but it is fair to say that the facilities London offers to make these kinds of

events possible (transport infrastructure and the hospitality sector in particular) are crucial

to realising the economic benefits.

Looking ahead, London‟s share of taxes borne by households is set to rise over the coming

decade. As we noted earlier, faster growth in disposable income and London‟s role as a

tourist and retail destination will drive faster consumer spending than in the rest of the UK.

In addition, London is set for faster house price growth than other regions - around 4.5%

per year compared to 2% in the North and 3% in the Midlands – this will mean stamp duties

and inheritance tax receipts, already higher thanks to base effects of higher house prices,

will rise faster. Overall, London‟s share of taxes borne by households will rise from 17% of

the total to 18.2% by 2025/26.

Finally, we consider the contribution of “other” taxes. This incorporates quite a wide range

of taxes, including excise duties, environmental taxes such as the Climate Change Levy,

Capital Gains Tax, stamp duty on shares, Airport Passenger Duties and a range of others.

Given the range of taxes in this category we do not offer any narrative of the drivers of

growth in these revenues, other than to note that as in the case of taxes on labour,

households and business, London‟s share is expected to grow steadily over the coming

decade.

28

Figure 2.17 – London’s contribution via other taxes, 2012-2025

Overall therefore we expect London‟s tax contribution relative to the rest of the UK to

have spiked upwards in 2012/13, despite slower growth in actual revenues raised (up 3%

on 2011/12, compared to 4.7% in 2011/12 versus 2010/11). London‟s share is likely to

stabilise in 2013/14 as the temporary impact of the Olympics and Jubilee is reversed, but

the longer term trend is very much towards an increased London share of total UK tax

generation. London‟s revenues are set to grow in nominal terms by 5.5% over the long run,

compared with 5.2% in the rest of the UK, leading its share of total tax revenues to rise by

1pp, to 19.9%, by 2025/26.

29

Figure 2.18 – London’s total tax contribution, 2012-2025

2.4. London’s expenditure 2012-2025

As noted earlier, London has increased its share of UK expenditure in a number of policy

areas. Most obviously public order and safety spending has increased in London much

faster than the rest of the UK, while in the past couple of years the capital‟s share of UK

transport spending has rebounded. However, projections in these areas are difficult, and

reliant upon a number of assumptions.

Our starting point is the level of spending on public services per head, job, output, or non-

employed person in the historic data depending on whichever indicator is most relevant

to that category. For example, when talking about public spending on health or

education, then estimating this on a per head basis is most reasonable since it is the

general population that benefit most from this type of spending. For social protection

which includes welfare payments and pensions, we take this as a ratio of the non-

employed population since this largely captures the recipients of said payments. We then

project forward using the growth rates of these ratios as implied by the Comprehensive

Spending Review (CSR) projections in the medium term, as well as the relative pace of

growth in spending per head at the UK and London levels in the recent historic data.

To put this another way, the baseline projection for spending on a person‟s access to

health/education services is that given by the projection for the UK in the CSR projections,

but if London has experienced faster spending growth per head in the recent past than

the rest of the UK, we assume a portion of this outperformance will persist into the future. It

is worth noting that the CSR was published in October 2010 and data has been published

since then showing how actual spending has evolved in contrast with the CSR. As such our

forecasts consider both the latest published data (up until early 2012) at a UK level, and

the CSR thereafter.

Beyond the CSR period we use forecasts from our macro model to provide the overall

envelope for the sum of spending on different public services across regions. From here we

assume the relative growth rates of different parts of public services are sustained (e.g. if

30

health grows more quickly than public order during the CSR period, this is also true post-

CSR), as well as the relativities between regions (e.g. if London has enjoyed faster growth

than ROUK in transport spending per head over the recent past, this is sustained

throughout our projection).

We set out our baseline forecasts for spending on different areas of public service in Figure

2.19 to Figure 2.22. In all areas of public services, we expect London‟s share of total UK

spend to rise, although London‟s share is expected to grow fastest in transport spending.

This is because London has enjoyed much faster growth than the rest of the UK over the

past few years in transport spending even on a per head basis, and this is assumed to

continue. By comparison, on a per head basis, growth in spending on health and

education has been almost identical in London and the ROUK. As such, growth in

London‟s share of UK health and education expenditure is entirely driven by growth in

London‟s share of total UK population.

31

Figure 2.19 – London’s spending on public order and safety, 2012-2025

Figure 2.20 – London’s spending on enterprise, employment and social protection, 2012-

2025

32

Figure 2.21 – London’s spending on health and education, 2012-2025

Figure 2.22 – London’s spending on transport, 2012-2025

Aggregating these components up to total spending produces the projection set out in

Figure 2.23. Between now and 2025/26 we expect London‟s share of total UK spending to

rise from 14.6% to 15.4%. This is comparable with the trend over the past decade, when

London‟s share rose from 13.6% in 2000/01 to 14.4% in 2010/11 (Figure 1.7).

33

Figure 2.23 – London’s total spending, 2012-2025

2.5. London’s fiscal balance 2012-2025

Combining our projections for spending and revenues gives us our assessment of overall

fiscal balance for London over the coming decade. A year of expenditure restraint, plus

an unexpectedly robust jobs market in the capital, and the revenue impact of one-off

events during the summer of 2012, all combine to boost the surplus from £5bn in 2011/12 to

over £10bn in 2012/13.

Revenues grow more quickly than expenditure in the medium term too - revenues are

expected to grow by £20bn between 2012/13 and 2015/16, compared to half as much for

expenditures. This will boost London‟s surplus to £23bn by 2015/16. The pace of

improvement in London‟s surplus eases from 2016/17 though, as expenditure starts to grow

in earnest again. Nevertheless, we expect London‟s surplus to increase to £50bn by

2025/26, approximately 14% of GVA.

34

Figure 2.24 – London’s total spending and total revenues, 2012-2025

The picture around other parts of the UK is likely to be broadly consistent with historical

trends. Using the same methodology to project fiscal balances around other regions

suggests that the South East will generate a comparable surplus to London over this

period, while the East of England (a much smaller region in terms of GVA) will also

contribute a modest surplus.

All other UK regions are likely to be in deficit over our forecast period though. In addition,

while the fiscal contribution of regions outside the Greater South East will improve over the

coming years, from 2018/19 we expect it to start to deteriorate again, as demographic

trends in these parts of the UK undermine income tax revenues and push up the cost of

health services and welfare payments.

Figure 2.25 – London’s fiscal balance, 2012-2025

35

3. Scenario analysis

This final section of our report discusses a range of possible scenarios around our central

forecast for London‟s public finances. This is of crucial importance given the degree of

uncertainty around prospects in the European and global economies at the moment, as

well as the range of factors closer to home that could drive faster or slower economic

growth over the coming decade.

We set out three economic scenarios and their impact on London‟s contribution to UK

public finances in this chapter. Firstly we consider the impact of faster trend output growth

across the UK economy. Second, we look at how a further economic crisis that

demanded a second round of austerity measures in the UK would impact on London‟s

fiscal contribution. Finally we consider an alternative projection for migration, and how this

would impact London‟s revenue generation and expenditure demands.

3.1. Scenario 1 – Boost to UK trend growth

This scenario assumes that the UK outperforms our baseline forecast for GVA growth by

0.25pp, thanks to a combination of higher employment growth and faster productivity

increase. London benefits from both the direct impacts in terms of employment and

productivity growth, but also from additional demand for its output from the rest of the UK

economy.

In this scenario the number of people in employment is around 100,000 higher over the

long term, while output per worker is £1,000 or so higher by 2025/26 compared to the

baseline. By extension, output in 2025/26 is around £20bn higher than in the baseline.

Figure 3.1 – Baseline and scenario forecasts for employment growth in London

36

Figure 3.2 - Baseline and scenario forecasts for output per worker in London

Figure 3.3 – Baseline and scenario forecasts for GVA level in London

Around a third of this extra output finds its way into tax revenues generated by London. A

third of this is via taxes on labour income (£2.6bn) and a further £1.2bn from extra VAT.

“Other” taxes, including council tax, inheritance tax, excise duties, capital gains taxes,

stamp duties and a range of other environmental levies contribute an extra £1.9bn.

Figure 3.4 – Baseline and scenario forecasts for major revenues (£bn)

40

45

50

55

60

65

70

75

80

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

£000

s per

job

Baseline

Scenario 1

Base Scenario Diff Base Scenario Diff Base Scenario Diff

Income tax 41.1 41.6 0.5 56.2 57.3 1.2 74.7 76.7 2.0

NICs 19.7 19.8 0.1 26.7 27.1 0.3 34.1 34.8 0.6

VAT 20.1 20.3 0.2 27.1 27.7 0.6 34.9 36.2 1.2

Corporation tax 9.9 9.9 0.1 10.9 11.1 0.2 14.8 15.3 0.5

Other 38.7 39.0 0.3 52.8 53.7 0.9 69.6 71.5 1.9

Total 129.5 130.7 1.2 173.7 176.9 3.2 228.2 234.4 6.2

20252015 2020

37

By contrast, spending rises only marginally in this scenario. We assume that as GVA grows

more strongly the Government responds by increasing the growth rate at which it

increases spending per head on public services, driving modest growth in total spending

on public services. However, thanks to higher employment, social security payments are

lower. Overall, spending is just £1.3bn higher in the long run than in the baseline.

Figure 3.5 – Baseline and scenario forecasts for spending

As a result London‟s fiscal surplus is around £5bn stronger by 2025/26 in the trend growth

scenario than in the baseline.

Figure 3.6 – Fiscal balance in Scenario 1 and baseline

Since the boost to trend growth in this scenario is felt not only in London but around the

whole UK, the fiscal balances of other regions also improve in this scenario. The balance in

the rest of the UK improves by around £10bn over the long term, but the structural trend in

the long-term towards a widening deficit remains a problem.


Public order & safety 7.3 7.4 0.1 9.1 9.4 0.3 11.8 12.6 0.8

Enterprise, employment & SP 31.6 31.5 -0.1 38.7 38.5 -0.2 50.2 49.9 -0.3

Health & education 34.2 34.3 0.1 42.9 43.6 0.6 56.6 58.1 1.5

Transport 7.6 7.7 0.1 10.5 11.0 0.4 15.1 16.2 1.1

Other 7.8 7.8 0.0 9.4 9.5 0.1 11.8 12.1 0.3

Non-identifiable expenditure 18.2 18.0 -0.2 22.1 21.2 -0.9 28.4 26.5 -2.0

Total 106.7 106.6 -0.1 132.8 133.1 0.3 174.0 175.3 1.3

2015 2020 2025

38

Figure 3.7 – Contributions to overall UK fiscal balance by London and ROUK in Scenario 1

and baseline

3.2. Scenario 2 – Austerity plus scenario

Having considered a positive economic shock in the previous section, we now turn

attention to a downside scenario. Specifically we consider a scenario where the UK is

forced into further deep recession, starting in 2014/15. In our scenario the UK economy

contracts by 1% in 2014 and 2% in 2015, before rebounding in 2016/17 with growth of 2%

and almost 4% respectively.

Growth is higher in the medium term thanks to a greater degree of spare capacity, but

there is a permanent loss of output relative to the baseline scenario, as investment

spending and capital accumulation is cancelled, and hysteresis effects set into the labour

market (i.e. some workers who become unemployed are unable to re-engage with the

labour market after a spell out of work).

39

Figure 3.8 - Baseline and scenario 2 forecasts for UK GDP growth

Figure 3.9 – Baseline and scenario 2 forecasts for GVA growth in London

40

Figure 3.10 – UK unemployment in baseline and scenario 2

Figure 3.1 – Unemployment in London in the baseline and scenario 2

In this scenario there is an immediate loss of revenues, amounting to almost £14bn in 2015.

PAYE and NIC account for £6bn of this, with VAT almost £3bn lower. Over the longer term

the impact on revenues is around twice as great – total taxes raised in London‟s economy

are around £30bn lower, or around 13% down relative to the baseline.

41

Figure 3.12 – Baseline and scenario forecasts for major revenues raised by London’s

economy

The analysis of spending will need to take into account two conflicting drivers – firstly that

automatic stabilisers, such as social security payments, will be higher thanks to rising

unemployment. Secondly, discretionary public spending (on areas like transport and

health) will be lower as the Government tries to get the deficit back on track. We assume

that the Government does not implement the fiscal adjustment immediately, but allows

the deficit to rise in the short term in order not to deepen the downturn with pro-cyclical

policy. Discretionary spending cuts take place from the second half of the decade

onwards.




Income tax 41.1 37.1 -3.9 56.2 49.2 -7.0 74.7 66.4 -8.4

NICs 19.7 17.6 -2.1 26.7 23.2 -3.5 34.1 30.1 -4.1

VAT 20.1 17.4 -2.7 27.1 22.6 -4.5 34.9 29.5 -5.5

Corporation tax 9.9 8.9 -0.9 10.9 9.3 -1.6 14.8 12.7 -2.1

Other 38.7 34.5 -4.2 52.8 44.9 -7.9 69.6 59.7 -9.9

Total 129.5 115.6 -13.9 173.7 149.1 -24.5 228.2 198.3 -29.9

2015 2020 2025


Public order & safety 7.3 7.4 0.1 9.1 8.2 -0.9 11.8 10.3 -1.4

Enterprise, employment & SP 31.6 31.5 -0.1 38.7 34.1 -4.6 50.2 42.5 -7.6

Health & education 34.2 34.3 0.1 42.9 38.2 -4.7 56.6 48.8 -7.8

Transport 7.6 7.6 0.0 10.5 9.4 -1.1 15.1 13.2 -1.9

Other 7.8 7.5 -0.2 9.4 8.0 -1.4 11.8 9.9 -2.0


Total 106.7 106.1 -0.6 132.8 117.1 -15.7 174.0 148.6 -25.4

2015 2020 2025

42

The double dip recession doesn‟t push London‟s fiscal account into deficit, but it does

cause the surplus to stick at around £10bn over the next 4-5 years, rather than growing to

£30bn by 2016/17. In the longer term, as the economy enjoys a cyclical rebound the

surplus increases back towards the baseline path. However, since unemployment remains

higher than in the baseline, and output being lower in level terms, London‟s fiscal surplus

never quite closes the gap with the baseline entirely. The surplus is around £5bn lower on a

permanent basis, and the lost surpluses in total amount to £120bn over between 2012/13

and 2025/26.


and baseline

In Figure 3.15 we compare London‟s surplus with the deficit run by the “rest of the UK” (i.e.

the UK excluding the greater South East). The double dip causes the ROUK deficit to swell

back towards £120bn in 2015/16, rather than falling below £100bn as in the baseline. The

deficit is around £30bn greater per year between 2015/16 and 2017/18, before recovering

towards the end of the decade, and outperforming the baseline in the first half of the

next.

3.3. Scenario 3 – Faster inward migration

The final scenario considers the impact of a boost to inward migration relative to our

baseline. Specifically we currently expect inward migration to the UK to be around 130,000

per annum in the medium term. This is substantially lower than the ONS‟ official projection.

As such, our scenario for faster inward migration simply assumes migration in line with the

official projection, rather than our own less steep path. Of the additional 70,000 or so

migrants per year, around 25,000 locate in London.

43

Figure 3.16 – Baseline and scenario forecasts for inward migration to London and UK

We assume the employment rate of the extra migrants is in line with the average. As a

result the level of employment in London is around 200,000 (5% or so) higher by the end of

our forecast period.

Figure 3.17 – Baseline and scenario 3 forecasts for employment in London

44

Figure 3.18 – Baseline and scenario forecasts for major revenues

The principle revenue impacts in this scenario are felt through higher taxes on income,

with over half of the extra £8bn in tax generated coming from PAYE and national

insurance contributions. Taxes on spending by households, including VAT and a number of

taxes included in “other” in Figure 3.18 rise in line with the greater number of consumers. In

contrast there is relatively little change in corporation tax.


Spending rises by around half as much as revenue in our migration scenario, with health

and education the main areas where expenditure has to increase to meet the demands

of extra London residents.

Overall, this leaves London‟s budget around £4bn per year better off in the long term.

Since migration in this scenario is also assumed to be stronger around the rest of the UK,

fiscal balances in these regions also improve relative to the baseline, although again not

enough to reverse the longer run trend towards widening deficit outside of the Greater

South East.


Income tax 41.1 41.8 0.7 56.2 57.9 1.7 74.7 77.9 3.2

NICs 19.7 19.9 0.2 26.7 27.3 0.6 34.1 35.3 1.2

VAT 20.1 20.2 0.2 27.1 27.6 0.5 34.9 36.0 1.1

Corporation tax 9.9 9.9 0.1 10.9 11.1 0.2 14.8 15.2 0.4

Other 38.7 39.0 0.3 52.8 53.8 1.0 69.6 71.7 2.2

Total 129.5 130.9 1.4 173.7 177.8 4.1 228.2 236.2 8.0

2015 2020 2025


Public order & safety 7.3 7.4 0.1 9.1 9.5 0.5 11.8 12.9 1.1

Enterprise, employment & SP 31.6 31.6 0.0 38.7 39.0 0.3 50.2 50.9 0.7

Health & education 34.2 34.5 0.3 42.9 44.2 1.3 56.6 59.3 2.7

Transport 7.6 7.7 0.1 10.5 11.1 0.6 15.1 16.6 1.4

Other 7.8 7.8 0.1 9.4 9.6 0.2 11.8 12.2 0.4


Total 106.7 107.0 0.3 132.8 134.7 1.9 174.0 178.4 4.4

2015 2020 2025

45



and baseline

46

Appendix A: Calculating the contribution to public finances

A.1. Regional distribution of public expenditure

Sources and approach

Calculation of public expenditure by region is based on Public Expenditure Statistical

Analysis (PESA) 2012 which identifies expenditure on services where possible according to

the region that benefits from spending, i.e. spending on a “for” basis. Around 83.1% of

Total Managed Expenditure (TME) is allocated in this way, shown in Table A.1.

Figure A-1: Total identifiable expenditure on services by region (2010/11)

Source: PESA 2012

Some of the expenditure on services that is not allocated to regions in this source is best

regarded as not affecting regions in any way, such as that identified as being “outside the

UK” and specifically of benefit to non-UK residents.

The remainder of non-identifiable spending on services, totalling some £92.7 billion (13.4%

of TME), refers to services provided by the Government that are of benefit to the UK as a

whole, including in particular services such as defence, and central exchequer functions

such as tax collection and economic policy. Such services are clearly of some benefit to

all UK residents and we regard it as preferable to estimate a distribution across regions.

The PESA 2007 publication included analysis which allocated some of this other non-

identifiable spending to regions, but only for that proportion of non-identifiable spending

that is accounted for by pay. This is allocated across regions according to where staff are

Identifiable

spending

(£ billion)

Identifiable

spending

(% of UK)

Total

spending

(% of UK)

North East 24.8 4.3 3.6

North West 65.1 11.4 9.4

Yorkshire & the Humber 45.1 7.9 6.5

East Midlands 36.3 6.3 5.3

West Midlands 47.3 8.3 6.9

Eastern 45.7 8.0 6.6

Greater London 79.8 13.9 11.6

South East 64.2 11.2 9.3

South West 42.7 7.5 6.2

Wales 30.1 5.3 4.4

Scotland 53.1 9.3 7.7

Northern Ireland 19.2 3.4 2.8

UK identifiable expenditure 553.4 96.6 80.2

Outside UK 19.4 3.4 2.8

Total identifiable expenditure 572.7 100.0 83.1

Non-identifiable expenditure 92.7 13.4

Total expenditure on services 665.5 96.5

Accounting adjustments 24.1 3.5

Total managed expenditure 689.6 100.0

47

located. This technique gets around the problem of determining who benefits from such

central government functions by looking at direct regional impacts in terms of pay costs.

Since then, HMT has not reproduced this „pay cost‟ analysis and therefore this data is not

included in the PESA 2012 tables.

In PESA 2007, the pay cost components that were distributed on this basis across regions

only account for around a fifth of total non-identifiable expenditure. However, the

remainder also benefits regions in the same way and the figures would be more

meaningful if this were allocated across regions. This additional spending, along with £24.1

billion of accounting adjustments, is allocated to regions using three different techniques.

No single estimate is definitive and instead we present a range of possible expenditure

values for each region in Table A-2.

First, aiming for consistency with identified spending on services in the previous table, we

distribute the entire £116.9 billion according to the shares of identified spending on a “for”

basis. As already noted, PESA 2012 did not include detail of the „pay-cost‟ component of

total non-identifiable spend, thus we have used the information provided in PESA 2007 on

non-identifiable spending to allocate shares of total spending on a pay basis. Finally, we

share the £116.9 billion according to the regional population distribution, based upon the

assumption that each member of society benefits equally from this spending on services.

Table A-2: Non-identifiable expenditure apportioned to regions (2010/11)

Source: PESA 2012, Oxford Economics calculations

A.2. Relative spending by region

Overall spending per head in London is higher than every other region of the UK not

considering Northern Ireland (Table A-3), but London is very different from other regions in

terms of the difference between its daytime and resident populations, for example, with

high levels of inward commuting, as well as tourism. Public spending in London per person

in employment is lower than in most regions (Table A-4), and relative to GVA the level of

spending is the lowest of all UK regions.

As identifiable

'for' basis

(£ billion)

Pay costs on

'in' basis

(£ billion)

Population

shares

(£ billion)

Expenditure

range

(£ billion)

North East 5.2 3.4 4.8 3.4 - 5.2

North West 13.8 5.5 13.1 5.5 - 13.8

Yorkshire & the Humber 9.5 6.4 9.8 6.4 - 9.8

East Midlands 7.7 5.0 8.4 5 - 8.4

West Midlands 10.0 4.8 10.4 4.8 - 10.4

Eastern 9.7 10.3 10.8 9.7 - 10.8

Greater London 16.9 20.0 15.1 15.1 - 20

South East 13.6 23.1 16.0 13.6 - 23.1

South West 9.0 22.5 9.8 9 - 22.5

Wales 6.4 3.0 5.7 3 - 6.4

Scotland 11.2 9.2 9.7 9.2 - 11.2

Northern Ireland 4.1 3.6 3.4 3.4 - 4.1

UK 116.9 116.9 116.9

48

Table A-3: Total government expenditure by region (2010/11)


Table A-4: Total government expenditure & wealth generated (2010/11)


Minimum Maximum Minimum Maximum

North East 28.2 30.0 10,900 11,600

North West 70.6 78.9 10,100 11,200

Yorkshire & the Humber 51.5 54.9 9,800 10,500

East Midlands 41.3 44.7 9,200 9,900

West Midlands 52.2 57.7 9,400 10,400

Eastern 55.3 56.5 9,500 9,700

Greater London 94.9 99.8 11,700 12,300

South East 77.7 87.3 9,100 10,200

South West 51.7 65.2 9,800 12,400

Wales 33.1 36.5 10,900 12,000

Scotland 62.3 64.3 11,900 12,300

Northern Ireland 22.6 23.3 12,500 12,900

Memo: London, East & S. East 227.9 243.6 10,200 10,900

UK 689.6 689.6 10,306 10,306

£ billion £ per capita

Employment

(£ per GVA (UK=100)

Income

(UK=100)

North East 29.3 26,100 132 121

North West 75.9 22,700 116 114

Yorkshire & the Humber 53.7 21,400 110 109

East Midlands 43.3 20,000 99 98

West Midlands 55.7 21,400 111 107

Eastern 55.9 19,900 86 86

Greater London 97.1 20,200 71 88

South East 81.7 18,400 76 78

South West 56.5 20,900 107 101

Wales 35.1 25,900 143 124

Scotland 63.1 24,200 111 118

Northern Ireland 22.9 27,300 151 136

UK 689.6 21,400 100 100

Total

expenditure

(£ billion)

Expediture relative to…

49

Table A-5: Public spending as a % of regional or UK GVA

A.3. Spending by function

PESA 2012 breaks regional expenditure down into several categories, including by COFOG

function (Classification of the Functions of Government) which includes categories such as

general public services, defence, health, education & training and social protection. It is

also broken down by local authority spending and central government spending with a

further capital and current spend derivation. Table A-6 shows the breakdown in total

spending per capita by selected COFOG function.

Table A-6: Identifiable expenditure by function (2010/11)


North East

North

West

Yorkshire

& the

Humber

East

Midlands

West

Midlands Eastern

Greater

London

South

East

South

West Wales Scotland

Northern

Ireland UK

1999/00 58.6% 49.6% 45.3% 40.2% 43.4% 37.1% 30.5% 35.0% 43.5% 59.0% 49.1% 63.4% 41.8%

2000/01 59.7% 51.0% 47.1% 41.8% 44.6% 38.4% 30.7% 35.5% 45.3% 61.0% 50.5% 68.0% 42.9%

2001/02 64.2% 52.3% 49.0% 43.5% 46.4% 38.8% 31.3% 35.6% 45.6% 62.2% 52.0% 67.6% 43.9%

2002/03 64.6% 53.5% 49.7% 43.3% 47.4% 39.9% 32.6% 36.3% 45.2% 64.4% 52.4% 68.9% 44.7%

2003/04 61.3% 52.9% 49.7% 44.7% 48.3% 41.0% 32.6% 38.4% 47.7% 64.8% 53.0% 69.9% 45.3%

2004/05 62.8% 53.8% 50.9% 45.9% 49.9% 41.7% 32.8% 39.7% 49.5% 65.6% 52.7% 70.4% 46.2%

2005/06 62.5% 54.1% 51.6% 46.6% 51.2% 42.4% 32.6% 39.9% 50.5% 66.6% 54.9% 70.8% 46.7%

2006/07 62.3% 54.5% 51.5% 46.2% 51.3% 42.1% 31.9% 39.4% 50.0% 67.0% 54.5% 69.9% 46.3%

2007/08 62.8% 55.0% 51.7% 46.4% 51.9% 42.1% 31.2% 39.0% 50.3% 66.9% 54.1% 71.3% 46.1%

2008/09 67.2% 58.1% 55.1% 49.2% 55.2% 45.5% 32.5% 41.8% 53.9% 70.9% 55.8% 75.7% 48.8%

2009/10 72.3% 63.2% 60.3% 53.6% 60.4% 50.2% 35.3% 44.5% 57.3% 76.7% 59.5% 81.7% 52.7%

2010/11 71.1% 62.5% 59.4% 53.0% 59.6% 50.4% 35.0% 43.6% 57.4% 77.0% 59.5% 81.0% 52.3%

2011/12 70.0% 60.9% 57.6% 51.4% 57.8% 48.7% 33.7% 42.6% 55.8% 74.4% 57.7% 78.9% 50.7%

2012/13 68.4% 59.6% 56.7% 50.0% 56.0% 47.6% 32.6% 40.4% 53.3% 72.8% 56.0% 77.7% 49.1%

2013/14 69.3% 60.3% 57.9% 51.0% 56.7% 48.8% 33.4% 41.4% 55.6% 73.6% 57.0% 79.1% 50.1%

2014/15 67.9% 58.8% 56.6% 49.9% 55.3% 47.7% 32.5% 40.1% 54.3% 71.9% 55.7% 77.1% 48.8%

2015/16 66.1% 57.0% 55.1% 48.5% 53.7% 46.3% 31.5% 38.9% 52.7% 69.9% 54.2% 74.7% 47.4%

2016/17 64.4% 55.3% 53.7% 47.3% 52.2% 45.1% 30.6% 37.7% 51.2% 68.1% 52.7% 72.5% 46.0%

2017/18 63.5% 54.1% 52.8% 46.6% 51.3% 44.3% 30.0% 37.0% 50.2% 67.0% 51.9% 71.0% 45.1%

2018/19 63.4% 53.9% 52.7% 46.6% 51.1% 44.3% 29.9% 36.9% 50.0% 66.9% 51.8% 70.6% 45.0%

2019/20 63.5% 53.7% 52.7% 46.7% 51.1% 44.4% 29.8% 36.8% 49.9% 66.8% 51.8% 70.4% 45.0%

2020/21 63.5% 53.4% 52.7% 46.7% 51.0% 44.4% 29.8% 36.7% 49.7% 66.7% 51.8% 70.0% 44.9%

2021/22 63.4% 53.1% 52.5% 46.6% 50.8% 44.4% 29.8% 36.6% 49.5% 66.4% 51.6% 69.4% 44.7%

2022/23 63.5% 52.9% 52.5% 46.6% 50.7% 44.5% 29.8% 36.6% 49.4% 66.3% 51.6% 69.0% 44.7%

2023/24 63.5% 52.7% 52.5% 46.7% 50.6% 44.5% 29.8% 36.6% 49.3% 66.2% 51.6% 68.7% 44.6%

2024/25 63.6% 52.5% 52.4% 46.7% 50.5% 44.6% 29.8% 36.6% 49.2% 66.0% 51.6% 68.3% 44.6%

2025/26 63.6% 52.3% 52.4% 46.8% 50.4% 44.7% 29.9% 36.5% 49.1% 65.9% 51.6% 67.9% 44.5%

Public order &

safety

Enterprise &

employment

policies Transport Health

Education &

training

Social

protection

North East 524 214 257 2107 1534 4133

North West 534 161 333 2033 1486 3928

Yorkshire & the Humber 480 154 278 1935 1429 3638

East Midlands 407 126 235 1742 1392 3479

West Midlands 467 150 237 1867 1454 3695

Eastern 375 95 329 1730 1318 3336

Greater London 816 132 750 2140 1676 3455

South East 399 81 238 1701 1288 3198

South West 393 108 213 1757 1341 3584

Wales 490 285 394 1990 1465 4159

Scotland 491 243 537 2072 1541 3972

Northern Ireland 875 308 360 2107 1508 4008

UK 510 151 361 1913 1448 3632

£ per capita

50

A.4. Forecasting expenditure by region

PESA only provides an allocation of spending by region up to 2010/11 based on outturns,

and for 2011/12 based on plans. We have made projections of the future split of spending

by region, consistent with overall spending plans set out in the 2010 Comprehensive

Spending Review (CSR). We have not made a comprehensive review of the regional

implications of those plans, but we have taken account of differences between broad

spending categories.

So for the purposes of this report we have split spending into 6 broad groups: health, social

security, transport, education, enterprise & employment policies and other. Health and

social security are amongst the biggest categories of spending, and also areas where the

CSR has important implications, with health spending being broadly protected from

spending cuts and reforms to social security being a key factor enabling the Government

to impose lower departmental spending cuts than originally envisaged. For each of these

categories of spending, we have assumed changes over time consistent with the relevant

spending limits set in the CSR, and assumed that each region sees the same proportionate

change in its spending on that function.

At the same time, since the 2010 CSR, actual data has been published by the Treasury

which allows us to see how total UK government expenditure has performed in line with

the planned cuts set out in the CSR. Therefore our final estimates of expenditure by

COFOG function are both consistent with CSR planned cuts, and recent movements in

overall UK spending.

A.5. Estimating and forecasting regional contributions to UK tax revenue

The Treasury publishes UK tax revenues by type in its budget report, and we have used the

totals published in June 2012 as a starting point. For the regional forecasts, we have

assumed UK revenues for each tax grow in line with Oxford forecasts taken from our UK

Macroeconomic Model, and used forecasts of appropriate economic indicators to

project how much of the total for each tax will be contributed by London. The estimates

for 2010/11 are summarised below, with more detailed figures for smaller individual taxes

shown at the end of the Appendix in Table A-10.

Table A-7: Receipts summary - residence based (2010/11)

Source: Budget 2012, Oxford Economics calculations

£bn % UK £bn % UK £bn % UK £bn % UK £bn % UK

North East 4.2 2.8 3.2 3.2 2.8 3.3 6.7 3.1 16.9 3.1

North West 12.7 8.6 10.1 10.4 8.9 10.4 20.9 9.5 52.6 9.5

Yorkshire & the Humber 9.1 6.2 6.9 7.1 6.2 7.2 15.1 6.9 37.3 6.8

East Midlands 8.5 5.8 6.7 6.9 5.9 6.8 13.6 6.2 34.7 6.3

West Midlands 9.5 6.5 7.9 8.1 7.0 8.1 16.5 7.5 40.9 7.4

Eastern 15.4 10.4 9.7 9.9 8.4 9.7 19.9 9.0 53.4 9.7

Greater London 32.6 22.1 14.8 15.1 12.8 14.8 37.6 17.1 97.8 17.7

South East 26.9 18.2 15.5 15.9 13.3 15.5 32.2 14.7 88.0 16.0

South West 10.8 7.3 7.9 8.1 8.0 9.2 17.7 8.1 44.3 8.0

Wales 4.6 3.1 3.8 3.9 3.4 4.0 8.1 3.7 20.0 3.6

Scotland 10.7 7.3 9.0 9.2 7.3 8.5 26.1 11.9 53.1 9.6

Northern Ireland 2.6 1.8 2.3 2.3 2.3 2.7 5.3 2.4 12.5 2.3

UK 147.7 100.0 97.7 100.0 86.3 100.0 219.7 100.0 551.4 100.0

TotalIncome tax NICs VAT Other

51

Table A-8: Receipts summary – workplace based (2010/11)

Source: Budget 2012, Oxford Economics calculations

We have set out below for each type of revenue how we allocated the Treasury data

across regions and how we forecast each one.

Income tax

Income tax data on a residence basis are derived from the HM Revenue and Customs

(HMRC) Survey of Personal Incomes (SPI). In 2009/10 (the latest year for which data are

available), London had the highest contribution to total UK income tax revenue at 21.9%

with the South East having the second highest contribution of 18.2%. This ratio can be

applied to the UK total income tax for 2010/11 from the budget report to give total

residence-based income tax payments in London and the South East of £32.6 billion and

£26.9 billion respectively. Under the same methodology, the North East and Northern

Ireland had the lowest residence based income tax contributions of £4.2 billion and £2.6

billion respectively.

The Oxford Economics UK Regional Model estimates employment numbers on both a

workforce and residential basis. Using this, ratios of resident employees and workplace

employees were constructed and applied to the residence income tax estimates

therefore accounting for commuters in each region. From this we estimate that London

and the South East again have the highest contributions to UK total income tax with £35.9

billion and £26.3 billion respectively.

For the forecasts, we have assumed that income tax will grow in line with employment

growth. Resident employment comes from the APS and is forecast in our Regional Model

where commuting patterns between regions are accounted for using Census 2001

commuting ratios. Resident based income tax per head ratios in each region are forecast

in line with UK income tax per head growth from the OE UK Macro Model and then

applied back to projected resident employment levels from the OE Regional Model.

Based on this, we estimate that by 2025/26, both London and the South East resident

based income tax contributions will have had the fastest growth with £71.3 billion and

£56.4 billion respectively.

Workplace based income tax contributions are forecast using workplace based

employment growth from the Regional Model. Similar to resident based income tax, our

forecast suggests that London and the South East workplace based income tax will

remain the largest contributors with £78.2 billion and £55.1 billion respectively.

£bn % UK £bn % UK £bn % UK £bn % UK £bn % UK

North East 4.2 2.8 3.2 3.3 3.1 3.6 6.8 3.1 17.2 3.1

North West 12.6 8.5 10.1 10.3 9.6 11.2 21.0 9.5 53.3 9.7

Yorkshire & the Humber 9.1 6.2 7.0 7.2 6.5 7.5 15.2 6.9 37.8 6.8

East Midlands 8.3 5.6 6.6 6.8 4.9 5.7 13.4 6.1 33.2 6.0

West Midlands 9.2 6.2 7.6 7.8 6.4 7.4 16.4 7.5 39.7 7.2

Eastern 14.3 9.7 9.1 9.3 8.2 9.5 19.6 8.9 51.2 9.3

Greater London 35.9 24.3 16.5 16.8 15.5 17.9 38.7 17.6 106.6 19.3

South East 26.3 17.8 15.3 15.6 12.6 14.7 31.7 14.4 86.0 15.6

South West 10.8 7.3 8.0 8.2 6.6 7.6 17.5 8.0 42.9 7.8

Wales 4.5 3.0 3.8 3.9 3.8 4.4 8.2 3.7 20.2 3.7

Scotland 9.9 6.7 8.3 8.5 6.6 7.7 26.0 11.8 50.9 9.2

Northern Ireland 2.6 1.7 2.2 2.3 2.4 2.8 5.3 2.4 12.5 2.3

UK 147.7 100.0 97.7 100.0 86.3 100.0 219.7 100.0 551.4 100.0

Income tax NICs VAT Other Total

52

National Insurance contributions

We use reported UK budget data and split this using shares of the UK total calculated from

average weekly expenditure data taken from the Family Expenditure Survey (FES). This

only looks at the household contribution share, but the employers‟ contribution is

expected to be symmetric. Using this, we estimate London‟s NICs payments on a

residence basis in 2010/11 to have been the second highest amongst the regions at £14.8

billion with only the South East reporting higher NICs revenues of £15.5 billion. Northern

Ireland had the lowest contribution of NICs with £2.3 billion and the North East was second

lowest with £3.2 billion.

A similar adjustment to that for income tax using OE Regional Model commuting ratios can

be performed to give national insurance contributions based on commuting in the

regions. This suggests that London and the South East remain the highest contributors with

their shares of the UK NICs rising from 15.1% on a residential basis to 16.8% on a workforce

basis for London. The South East falls from 15.9% on a residential basis to 15.6% on a

workforce basis due to those who commute to London for work.

To forecast NICs in each region we have assumed that NICs revenues are proportionate

to income tax revenues. In other words, we take a ratio of NICs to income tax in each

region and forecast this according to the UK trend on both a workplace and residence

basis. The projected ratios are then applied back to the income tax projections discussed

above. On both measures, both London and the South East are expected to make the

largest contributions in terms of overall NICs. On a residence basis London‟s contribution is

forecast at £32.3 billion by 2025/26, whilst the South East‟s contribution is £32.4 billion. On a

workplace basis London‟s NICs contribution is forecast to increase to £35.9 billion by

2025/26, and the South East is expected to increase to £32.1 billion.

VAT

VAT represented around 14.8% of total tax receipts in 2010/11 and needs to be carefully

split across regions to reflect different regional spending patterns.

On a residence basis we use data on consumer spending by region from the Regional

Accounts produced by ONS. However, this data on regional spending is only available up

to 1999 and Oxford Economics regional consumer spending forecasts are used for later

periods.

Consumer spending data by region reported by ONS and used as the basis for this

calculation are derived from surveys of household spending. This share relates to the

share of consumer spending and therefore the share of VAT on a residence basis. London

and the South East have shares of 14.8% and 15.5% of total UK VAT, around £12.8 billion

and £13.3 billion respectively in 2010/11.

Further calculation is undertaken based on shares of retail turnover in each region

reported by the Annual Business Inquiry (ABI). This share relates to the amount of

consumer spending that takes place by region, incurring VAT, regardless of where the

person spending is resident. This business-based estimate of VAT is larger than the

residence-based calculation for London at 17.9% of the total or £15.5 billion. In the South

East, similar to income tax and NICs, the workforce or „business-based‟ estimate is lower

53

than the residence estimate at 14.7% of the UK total equating to £12.6 billion. This reflects

the strength of the London economy in terms of attracting business and workers.

To forecast residence based levels of VAT, we have projected ratios of VAT revenues to

consumer spending in line with the UK growth, and applied these ratios to projected

consumer spending from the Oxford Economics Regional Model. By 2025/26, resident

based VAT in London is forecast to rise to 15.9% of total UK VAT at £31.7 billion. Similarly,

VAT in the South East is also forecast to rise to 16.1% of total UK VAT standing at £32.0 billion

in 2025/26.

Council tax

Actual figures are available for London‟s council tax revenues from Local Government

Financial Statistics. In 2010/11 the South East had the highest contribution of £4.3 billion

(16.8% of the UK total) with London having the second highest contribution of £3.2 billion

(12.4% of the UK total). The North East and Wales had the lowest shares of the UK total

(3.6% and 4.2% respectively). Figures for Northern Ireland, where domestic rates are still

paid rather than council tax, are not directly comparable here. District rates are included

here under this heading, but regional domestic rates are treated in the government

accounts as negative public spending rather than tax receipts.

Council tax contributions are forecast in each region based on ratios of council tax

revenues to dwelling stock which are forecast in line with the UK trend and applied back

to projected dwelling stock from the Regional Model.

Vehicle excise duty

Vehicle Excise (VED) paid in London is only a small part of total taxes paid, but is

calculated separately since London has a very different pattern of car usage from other

regions. Driver and Vehicle Licensing Agency (DVLA) and Department for Transport (DfT)

data are used to derive vehicle taxes based on average rates and the number of

registered vehicles. The number of registered cars and other vehicles are available for all

regions from DfT. Rates for different types of vehicles are available from the DVLA.

Applying these rates gives total revenue from this stream. As before, this is calculated as a

share of the UK total, and applied to UK total revenue as reported in the Budget.

London stands out since it actually pays less per capita on this form of tax than the UK

average. The share of total UK VED paid is only 8.6% in 2010/11, compared with a

population share of 12.9%, as car ownership is relatively low and public transport is used

more widely. The largest level of VED paid in any region is estimated to be in the South

East accounting for 16.1% of total UK VED in 2010/11.

To forecast the VED paid in each region we have projected ratios of VED to total

population in each region. These ratios have been projected in line with the UK trend and

applied back to projected population in the OE Regional Model. By 2025/26, London‟s

VED is expected to account for 9.2% of total UK VED although this remains the 6th highest

amongst all regions, whilst the South East is forecast to remain the top contributor in terms

of overall VED at £2.2 billion, or 16.2% of total UK VED.

54

Corporation tax

Corporation tax is another large component of total UK tax receipts. Corporation tax data

for the UK is published on a sectoral basis. Since financial services is one of the largest

contributors to overall corporation tax in London, we have split UK corporation tax

revenues into financial and non-financial corporation tax. This is then allocated to regions

according to shares of financial and non-financial services gross operating surplus shares

published in the ONS Regional Accounts. We use gross operating surplus as this excludes

the wages which are typically higher in London and irrelevant in the context of

corporation tax. Before allocating the UK total, however, we have subtracted an estimate

of the corporation tax due to North Sea operations, derived from comparing HMT figures

on the overall North Sea tax take with the amount being paid in petroleum revenue tax.

North Sea taxes themselves have been attributed to Scotland, although this does not

necessarily represent the fiscal position for Scotland that could be expected in the event

of greater independence from the rest of the UK.

In 2010/11 London businesses contributed 25.4% of total UK corporation tax, almost 60%

more than the South East, and more than twice as much as any other region.

Corporation tax levels have been projected based ratios of financial and non-financial

services gross operating surplus. These ratios have been projected in line with the UK trend

and applied back to projected financial and non-financial services gross operating surplus

from the OE Regional Model. By 2025/26, London‟s corporation tax is forecast to remain

the top contributor accounting for 26.8% of total corporation tax, or £14.8 billion. The South

East remains the second highest contributor at £8.3 billion accounting for 15.1% of total UK

corporation tax.

Stamp duty

Stamp duty paid is reported for regions by HMRC. Data for 2010/11 from HMRC showed

that stamp duty revenues have been steadily rising following on from a substantial fall in

2008/09 reflecting the slowdown in the housing market and the increase in the stamp duty

threshold. The UK stamp duty figures published in the budget report suggests a fall in

stamp duty levels of 66% in 2008/09, and have steadily increased through to 2010/11

although they have not returned to the 2007/08 peak when housing market activity had

reach its peak.

In London, the share of UK stamp duty is estimated at 33.3% in 2010/11. Stamp duty is

forecast using ratios of stamp duty to dwelling stock for each region which are forecast in

line with UK growth. These projected ratios are then applied back to projected dwelling

stock in the OE Regional Model. By 2025/26, London‟s stamp duty is projected to grow to

35.2% of total UK stamp duty, or £5.8 billion.

Excise duties

The number of vehicle registrations is used to estimate each region‟s contributions to fuel

duty revenue, with growth rates in the number of vehicles per region used to forecast fuel

duty revenue.

The ONS‟ Family Expenditure Survey (FES) gives implied shares of UK spending on different

types of goods accounted for by consumers living in each region which is then applied to

55

relevant tax receipts to estimate the share contributed by the region. Growth patterns in

regional dwelling stock are used to forecast each of these revenues.

Business rates

Business rates data, like council tax figures, are taken from Local Government Financial

Statistics, and in 2010/11 London had the highest share with 23.4% of total business rates

paid in the UK. We have applied projected ratios of business rates to GVA to projected

GVA in the OE Regional Model to obtain a forecast of this revenue.

Other taxes and duties

There are a variety of other taxes and duties that are individually generally less important

than the above, but nevertheless provide a significant sum in total to the UK exchequer.

Estimated regional shares in each case are based on a simple rule of thumb related to the

region‟s share of the UK‟s population, GVA, household income or similar aggregate.

Similarly, these are projected using the forecast from the Regional Model for each relevant

variable.

A.6.Overall contributions to UK public finances

The regional calculations for spending and receipts are combined in table A-8, showing

that London and the South East were the only regions in 2010/11 making a positive

contribution to the UK Exchequer.

The time series in Table A-9 shows that London only just slipped into a negative balance

during the recession but thereafter London is forecast to continue to make substantial net

contributions to UK public finances.

Table A-9: Regional contributions to UK public finances (2010/11)

Source: PESA 2012, Budget 2012, Oxford Economics calculations

Expenditure

Residence

(£bn)

Workplace

(£bn) (£ billion)

Residence (£

billion)

Workplace (£

billion)

Mid-point (£

billion)

North East 16.9 17.2 29.3 -12.3 -12.0 -12.2

North West 52.6 53.3 75.9 -23.3 -22.6 -22.9

Yorkshire & the Humber 37.3 37.8 53.7 -16.4 -15.9 -16.2

East Midlands 34.7 33.2 43.3 -8.6 -10.1 -9.4

West Midlands 40.9 39.7 55.7 -14.8 -16.1 -15.5

Eastern 53.4 51.2 55.9 -2.6 -4.8 -3.7

Greater London 97.8 106.6 97.1 0.7 9.5 5.1

South East 88.0 86.0 81.7 6.3 4.2 5.3

South West 44.3 42.9 56.5 -12.1 -13.5 -12.8

Wales 20.0 20.2 35.1 -15.2 -14.9 -15.0

Scotland 53.1 50.9 63.1 -10.0 -12.3 -11.1

Northern Ireland 12.5 12.5 22.9 -10.4 -10.4 -10.4

UK 551.4 551.4 670.3 -118.9 -118.9 -118.9

UK + exp outside UK 689.6 -138.2 -138.2 -138.2

Revenue Balance

56

Table A-10: Summary of London contributions to public finances

Source: Oxford Economics calculations

Revenue

(resident

based)

£bn

Revenue

(workplace

based)

£bn

Average

revenue

£bn

Expenditure

£bn

Balance

£bn

1999/00 60.6 67.7 64.1 47.8 16.3

2000/01 66.0 74.2 70.1 51.1 19.0

2001/02 66.0 73.9 69.9 55.1 14.8

2002/03 65.8 72.8 69.3 60.1 9.2

2003/04 69.9 77.2 73.5 64.5 9.1

2004/05 78.5 85.7 82.1 69.0 13.1

2005/06 84.1 92.2 88.1 73.5 14.6

2006/07 91.8 100.7 96.3 77.3 18.9

2007/08 99.2 109.0 104.1 81.8 22.3

2008/09 93.5 103.6 98.6 88.8 9.7

2009/10 91.1 99.6 95.3 95.5 -0.1

2010/11 97.8 106.6 102.2 97.1 5.1

2011/12 102.0 112.1 107.0 97.4 9.7

2012/13 104.9 115.0 110.0 96.9 13.1

2013/14 110.9 121.5 116.2 102.6 13.6

2014/15 116.8 127.9 122.4 104.7 17.6

2015/16 123.6 135.3 129.5 106.7 22.8

2016/17 131.4 143.7 137.5 109.0 28.5

2017/18 140.1 153.2 146.6 112.8 33.8

2018/19 148.4 162.4 155.4 118.9 36.5

2019/20 157.0 171.6 164.3 125.7 38.6

2020/21 165.9 181.4 173.7 132.8 40.9

2021/22 175.6 192.0 183.8 140.0 43.7

2022/23 185.6 202.8 194.2 148.0 46.2

2023/24 196.0 214.1 205.1 156.3 48.7

2024/25 206.9 226.0 216.5 165.0 51.4

2025/26 218.1 238.2 228.2 174.0 54.2

57

Table A-11: Other taxes and duties, £ billion (2010/11)

Source: Oxford Economics calculations

North East North West

Yorkshire &

Humber

East

Midlands

West

Midlands Eastern London South East South West Wales Scotland

Northern

Ireland

United

Kingdom

Council Tax 0.93 2.66 1.90 1.82 2.07 2.73 3.18 4.33 2.53 1.07 1.94 0.53 25.70

Vehicle Excise Duty 0.20 0.61 0.46 0.45 0.58 0.60 0.50 0.93 0.57 0.28 0.45 0.17 5.80

Corporation Tax 0.86 3.02 2.31 1.97 2.34 3.21 8.85 5.21 2.59 1.00 2.70 0.75 34.80

Stamp duty 0.07 0.26 0.19 0.20 0.26 0.64 2.00 1.42 0.59 0.10 0.25 0.03 6.00

Stamp taxes on shares 0.10 0.28 0.21 0.19 0.22 0.28 0.59 0.47 0.23 0.11 0.25 0.07 3.00

Fuel duty 0.97 2.89 2.14 2.10 2.66 2.80 2.36 4.34 2.71 1.38 2.13 0.82 27.30

Tobacco duty 0.35 1.19 0.79 0.61 0.88 0.69 1.03 1.02 0.64 0.45 0.97 0.48 9.10

Alcohol duties 0.38 1.17 0.73 0.70 0.74 0.85 1.09 1.38 0.88 0.44 0.90 0.24 9.50

Business rates 0.74 2.29 1.65 1.33 1.77 2.00 5.52 3.13 1.63 0.85 2.11 0.58 23.60

Inheritance tax 0.11 0.30 0.23 0.19 0.24 0.25 0.35 0.37 0.23 0.13 0.22 0.08 2.70

Air passenger duty 0.07 0.22 0.16 0.12 0.14 0.17 0.40 0.31 0.17 0.08 0.27 0.09 2.20

Temporary bank payroll 0.08 0.33 0.27 0.12 0.25 0.23 1.09 0.40 0.27 0.10 0.29 0.07 3.50

Bank levy 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Environmental levy 0.02 0.06 0.04 0.04 0.05 0.05 0.04 0.07 0.05 0.03 0.04 0.02 0.50

Other HMRC 0.23 0.70 0.48 0.45 0.51 0.61 1.05 0.99 0.58 0.26 0.57 0.16 6.60

VAT refunds 13.3

residence 0.44 1.38 0.95 0.91 1.07 1.29 1.97 2.05 1.23 0.53 1.13 0.36

workplace 0.47 1.48 1.00 0.76 0.99 1.27 2.39 1.95 1.02 0.59 1.02 0.37

Capital gains taxes 3.60

residence 0.12 0.34 0.25 0.23 0.26 0.34 0.71 0.56 0.28 0.13 0.30 0.08

workplace 0.12 0.34 0.25 0.23 0.26 0.31 0.78 0.53 0.28 0.13 0.30 0.08

Insurance premium 2.50

residence 0.08 0.24 0.18 0.16 0.18 0.24 0.49 0.39 0.19 0.09 0.21 0.06

workplace 0.08 0.24 0.18 0.16 0.18 0.22 0.54 0.37 0.19 0.09 0.21 0.06

Licence fee receipts 3.10

residence 0.10 0.29 0.22 0.20 0.23 0.29 0.61 0.49 0.24 0.11 0.26 0.07

workplace 0.10 0.29 0.22 0.20 0.23 0.27 0.67 0.45 0.24 0.11 0.26 0.07

EU ETS Auction receipts 0.00

residence 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

workplace 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Other taxes and royalties 5.90

residence 0.19 0.56 0.42 0.38 0.43 0.56 1.17 0.92 0.45 0.21 0.49 0.13

workplace 0.19 0.56 0.42 0.38 0.43 0.51 1.28 0.86 0.45 0.21 0.49 0.13

Other receipts 21.90

residence 0.70 2.07 1.54 1.40 1.60 2.06 4.33 3.43 1.68 0.78 1.81 0.48

workplace 0.70 2.07 1.54 1.40 1.60 1.90 4.73 3.20 1.68 0.78 1.81 0.48

North Sea Revenues (incl. PRT) 8.80 8.80

Congestion charge 0.29 0.29

City of London Economic DevelopmentPO Box 270, Guildhall, London, EC2P 2EJwww.cityoflondon.gov.uk/economicresearch

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