Recent figures revealed the extent of transfers between the regions in the UK sterling area. It reminds us that the Uk is far from a perfect economic area for a monetary union, and reminds us that monetary unions are in practice expressions of nationhood. If we were only thinking of economic sense, London maybe with the South-east would have its own currency to reflect the very different financial position of that part of the country.
As Alastair Heath of City AM has already pointed out, only London and the South east are in surplus, sending large transfers of tax revenue to the rest of the UK. London is required to raise 45.2% of its GDP in tax but only spends 34.9% on public sector activities. The large surplus is sent elsewehere. Meanwhile the North East runs a deficit of 32.2% of its GDP, Wales 36% and Northern Ireland 40%. This extra public spending is paid for from London’s taxes and from UK wide borrowing. London and the South east pay most of the 50% Income Tax and the high Stamp duties. Scotland is said to be in balance, but still borrows 10% of GDP for extra public sepnding.
It serves to remind us why the Euro is struggling. German taxpayers do not want to send anything like those large sums to Greece and Portugal that London sends to the north and west of the UK, as they do not feel they belong to the same country.
The huge imbalances between London and the western and northern parts of the UK are usually seen as a problem for London. The reaction of many in the political classes is to see how London can be punished more for being so successful. Most of the higher taxes being talked of or imposed are mainly taxes aimed at London, as they aim at financial services and banking, at high incomes and high property prices. Much of this is concentrated in the capital.
The politics point in the direction of being anti London, as the tax base is very concentrated in the richer parts of the capital whilst the recipients of the extra tax revenues are widely spread around much of the rest of the country. For Labour it is a no brainer, as they represent areas in receipts of the transfers but do not represent many of the places making the payments.
These underlying transfers account both for the brutality of rhetoric about public spending in much UK political debate, and for the prevalence of spenders over taxers. The tax base is highly concentrated and therefore vulnerable to political attack. The only question is how far can they push it until it emigrates on a large scale? Greece shows what can happen to the tax base if you push too far. Their income tax revenues are plunging as the rich and successful take their deposits, their assets and their businesses elsewhere. Meanwhile the UK sits back and discusses fairness and banker bonuses, confident in the knowledge that as most parts of the country are in receipt of transfers many electors just want the government to raise more in tax and send the money.
PS: Some have asked about the sources. These figures come from the Centre for Economic and Business Research, and have been picked up by City AM. In the case of Scotland, for example, they do include North Sea tax on one side and Scottish levels of public spending on the other via the Barnett formula.