London is ‘special’, bigger and richer by far than the country which hosts it. So it would be good if it paid the same tax rate as the rest of us.
London is ‘special’ not just in a British context, but in a global context. There are very few iron laws of economics (trust me on this), but the statistical law about the distribution of towns and cities within a nation is one. The law is that the size of towns and cities follow a ‘Zipfian distribution’ - which is to say that there is a highly predictable relationship between the size of a town/city and the number of towns/cities of that size. (For more on Zipf distributions, take a look here).
It gets proved again and again. But when the UN corralled the data, the distribution of towns/cities was found to be tightly Zipfian in all countries . . . except China and Britain. In China, there was an obvious explanation - its has a system of urban residency permits which cap a city’s population. But in Britain there is no obvious explanation.
London is special. From a economic geography point of view, it looks like the capital of Europe, not Britain. Or perhaps, the capital of a ghost British empire.
When we talk of ‘levelling-up’, we’re really talking about how to fit the great behemoth into the country. How do we stop it draining all the talent and money the rest of the country has? More recently, how do we feel about a differential in property values which erect huge barriers to social, economic and geographical mobility?
But from within the gated city, talk of ‘levelling-up’ will quickly attract resentment that London supplies all the economic value, and pays all the taxes, so the rest of the country should just shut up and be grateful.
The problem is, that view of London’s fiscal position isn’t actually true. In fact, the opposite is true. London pays tax at a lower rate, and soaks up more subsidies proportionately, than the rest of the UK. What is more, that fiscal drag on the rest of the country has become wider and wider over the last 10, 20 years. If London were to pay net taxes at the same rate as the rest of the UK, the public purse would be better off by approximately £20bn a year.
The dataset justifying these assertions and estimate is ‘Regional gross domestic product: all ITL regions’, published in May this year by the ONS, and it can be downloaded here.
To summarize some key findings about the changes during the last 20 years:
London’s gross value added rose 133%; the UK’s rose 98%, and UK ex-London 89%
London’s VAT payments rose 109%, the UK’s rose 116%, and UK ex-London 117%
London Other Taxes on production rose 45%, the UK’s rose 55%, and UK ex-London 57%
London Subsidies rose 145%, the UK’s rose 195% and UK ex-London 204%
London’s Net Taxes rose 77%, the UK rose 82%, UK ex-London 83%
London’s effective tax rate in 2020 was 7.1%, UK’s 10.6%, UK ex-London 11.7%
For those with my rather odious love of data, here’s an extract from the larger data-set.
What can and should be done? First, and most important, recognize that the problem is getting steadily worse, not better. In 2000, London’s effective tax rate was only 2.7pps lower than in the rest of the country; by 2020, the gap had risen to 4.5pps.
Second, recognize that London’s favourable fiscal treatment is . . . Treasury policy, as laid down in the Treasury’s Green Book, which determines where public investment is made (have a guess). The best guide to how the Green Book actively starves the rest of the country whilst feeding London and the Southeast can be found in ‘The Imperial Treasury’ a landmark paper by economists Diane Coyle (former Treasury advisor) and Marianne Sensier.
As a teaser: ‘The disparity between the least and most productive regions in the UK is wide by the standards of many other OECD economies. An important factor is the concentration of public investment around London. The appraisal process for infrastructure investment projects follows the methodology set out in the Treasury’s Green Book. We argue that this methodology has reinforced the regional imbalance; that recent changes are unlikely by themselves to redress the London bias in infrastructure; and that infrastructure investments also need to be based on a strategic view about economic development for the whole of the UK.’
Third, recognize that the practice of paying ‘London weighting’ bonuses is a pernicious confirmation of the underlying injustice at work. This is most obviously demonstrable in the public sector. Think about it for a moment: to pay London weightings, you have to tax all those people who - as the weightings admit - don’t earn enough to live in London, or even visit it for long. The rabble outside the gates pay so that Londoners can stay inside the price-gated community. This is just colonial exploitation by an imperial capital.
Finally for now, remember that these calculations omit the biggest subsidy of the lot: the c£500bn bailout of the City of London’s banking system in 2008 - needed not because British people were defaulting on credit cards or mortgage payments, but because the City had gambled the farm on credit default swaps. To put it in context: in 1837, the Slave Compensation Act made payments (to slave owners) of £20mn, equivalent to around 2.5% of GDP. The £500bn, 2008 bailout of the City of London was the equivalent to 31% of 2008 GDP.
It makes paying off the slave-owners look like good business. The problem is, a lot of that money went . . . straight back into the City.
Plus ca change. . .