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Last modified: 10 June 2017

The fiscal balance of power

My first thoughts on the ONS’s new regional fiscal balance data. Too long, full of errors, but likely to improve with time.

Where pays for what within the United Kingdom?

I’ve been assured by people the full length of Great Britain that their city, region, or country pays its way within the UK. In a bar in Glasgow, at events in Leeds, with my auntie in Cornwall, in a pub in Worcester, I’ve heard it.

“We’d be fine after Scottish independence, we more than pay our way within the UK”
“We’re a wealthy city, we should just keep a bit more of our money to fund our services”
“I’m sick of all of our money going to London, when will government invest here?”
“It’s okay for the Scots, living off our money instead of paying their own way like we do.”

Almost everyone is wrong.

Most countries and regions of the UK do not pay their own way. The public spending that they enjoy is higher than the taxes that they pay. Or in the words of this blog post, the fiscal balance of their region and city is negative. We’ve known this for a long time, and in May the ONS finally published its first official estimates of regional fiscal balance.

First of all my thanks to pioneers in this area. There are many, but most recently the Centre for Cities and The Scottish Government have most loudly pushed the ONS to calculate and release these estimates.

What they show is simple.

London pays for everything.

London pays the bill for the United Kingdom. It has done so for at least two decades and probably for much much longer. Other regions like the South-East and East of England chip in a bit too, but I suspect that what’s mostly happening here is that Greater London’s commuter belt and satellite cities like Oxford, Reading, Guildford, Cambridge, Woking, Brighton, St. Albans, and many more, are acting as extensions of the city itself.

How people respond

I speak to a lot of people about this fact, here are the responses I get in order of frequency.

  1. Denial. People do not believe that their place doesn’t pay its way within the UK. They’ve worked hard, they pay their taxes, and there’s no way that the taxes raised where they live aren't enough to fund the NHS, schools, roads, and other spending there. Denial is not a good way to understand the world.
  2. Blaming Scotland. "If only we weren’t funding free prescription in Scotland then we could pay our own way within the UK” is wrong and doesn’t make any sense, but it’s a very common response. London alone is paying for Scotland’s extra spending, nowhere else in the UK.
  3. Squirming. From “oh but the figures assign lots of income to bankers and headquarters in London, even though the work gets done here” to “right but the calculations are a conspiracy and they don’t include water or oil or gas or VAT or cigarettes or something”, people find ways to dismiss the calculations. There’s often a grain of truth to these claims, so they’re hard to dispel, but they are rarely useful. So many decent and clever people have calculated regional fiscal balances and they all get similar answers. The calculations are about right and we’d do better to think about them instead of squirm.
  4. Outrage. A lot of people think that fiscal transfers are like sex: a good idea but not something that civilised people discuss in public. It’s good that London sends money to other places to pay for subsidies and services and we shouldn’t really measure it. Any suggestion that anywhere doesn’t pay its way in the UK gets responses of “how dare you call us scroungers” and “how dare you suggest that we shouldn’t enjoy public services”. I find these responses incredibly frustrating. Almost no-one is suggesting that people in less productive parts of the country are lazy or undeserving. Pretending that there are any more than a handful of these people is a distraction.
  5. Superiority. Where this reaction happens outside of Greater London, it is simply wrong. Within London, the superiority goes two ways, from the well-intentioned but often patronising “well it’s good that we help out you needy provincials” to the arrogant and uninformed “get off your arses and build a strong economy like we did by ourselves”. Arrogant superiority, especially when feigned or exaggerated, has its place in provoking a debate about regional fiscal balance. And talk of helping out poor provincials is motivated by a national solidarity and patriotism the left are too often accused of lacking.

So what would we be better than these mostly unhelpful responses? Here are some suggestions.

What should do we do

  1. Talk about why fiscal transfers are good. All countries have fiscal transfers, they are one of the most liberal expressions of solidarity and patriotism. Measuring and reporting them is useful and healthy. We should move from denial and outrage to a debate about how large our fiscal transfers should be, how they impact on the ability of cities and regions to provide for their people, and how we might want to make them smaller or larger in the future.
  2. Compare our fiscal transfers to those in other countries. Federal countries like Germany and the USA have long reported fiscal transfers between their states. In the USA money flows from the East and West coasts to the Centre and the South. In Germany, it flows from West to East. I suspect that countries like France, Spain, The Netherlands, and Italy also collect and publish this data and although it will be difficult, we should try and assemble comparable datasets.
  3. Have a grown-up conversation about Scotland. There’s a very clear pattern in the fiscal balance figures. London pays in, and the further a region is from London, the more it takes out. But there is an exception: Scotland. In the recent past, in large part thanks to its oil industry, Scotland ran a fiscal surplus with the UK. With oil prices much lower now, it runs a considerable fiscal deficit with the UK. But importantly, its deficit is still smaller than any of England’s Northern regions. The English response is to attack Scotland as scroungers living beyond their means. This is daft.
  4. Accept that politics is about choices. HS2 or metros in the UK’s largest cities? The British Library in London or Birmingham? A Leeds tram or The Jubilee Line extension? These are all choices. It’s correct that we could do both, I am often shouted out and told that we must talk about London and the regions, not London or the regions. I respectfully disagree. I would love that to be an option, but it is not what I see. Some level of patriotic disagreement is needed within the UK’s regional politics. Given the British electorate’s inability to raise taxes, its desire to greatly reduce immigration, and our weak expectations of future growth, there is effectively a fixed pot of money. What is spent in London cannot be spent elsewhere, and choosing to spend it elsewhere is no more “deliberately hurting London” than spending it in London for the past two decades has been deliberately hurting Manchester, Birmingham, and Leeds.

What I think about fiscal transfers

Whatever a person’s position on fiscal balance they can do the four things above. And having done so for a decade, here are a selection of the opinions I’ve come to.

  1. Fiscal transfers within the UK are too high. The UK government in London consistently makes poor decisions in Leeds, Birmingham, and Manchester – the cities where I live and work. And yet any demand to take better decisions locally is understandably challenged by those who pay the bill. I do not imagine that Yorkshire will ever run a fiscal surplus with the UK, but Leeds, its largest and richest city, can and should. That is why it was an ambition in the Leeds City Region devolution demand, which included the powers necessary to achieve that balance. I regret that this was rejected by the UK government, but I am hopeful that Birmingham and Manchester, whose devolution asks were less ambitious, will in time gain the powers needed to achieve fiscal balance.
  2. Cuts in poor places will not be enough to achieve fiscal balance; our regions are too weak. At around 15%, the fiscal deficit of North England is similar to Greece’s immediately after the financial crisis. Since then the Greek economy has nearly halved in size as it has enacted the cuts required to balance its budget. I think that North England would handle such a readjustment better – our basic systems of government are more sound. We are more like Portugal, who achieved a similar readjustment at a cost of only 20% of GDP. But in both cases the option of continuing to rely on London is so much more attractive, both to residents of the North and conservatives in Greater London, that it is a non-starter. Thankfully there is another option…
  3. We should learn from Germany and France and invest in growth. German fiscal transfers after reunification were eye-wateringly huge. They spent a huge amount on investment in infrastructure and research & development and moved a considerable portion of the nation’s institutions to the East. Today Germany’s East is wealthier than England’s North, and the once enormous fiscal transfers are smaller, and still decreasing. Germany’s industrial strategy was exactly the opposite of the one that the UK has adopted in the same period. Where we backed existing winners close to power in Greater London, Germany invested in infrastructure and R&D in places with the greatest potential to grow. We should copy much of that, but crucially play to our own strengths not Germany's. I suspect that politically we have even more to learn from France than we do from Germany, and I have written on this subject at length.
  4. The temptation to jam-spread is strong, we must fight it. “what about Grimsby”, “what about Dudley”, “what about Burnley”, “what about rural areas” – I am regularly on the end of robust challenge whenever I talk or write about regional development in the UK. That challenge spans the political spectrum. I probably get the strongest challenge from Labour’s left wing, but I see the most obstruction to action from the Conservative Party and the Lib Dems. In a debate that few have an interest in, and where the benefits of increased investment and economic growth might not be felt for a decade, appealing to Britain’s dislike of postcode lotteries is a great way to be popular. And the result is clear; we move the ONS to Newport not Cardiff or Bristol, we invest in digital catapults and software cities in Bradford and Sunderland, not Leeds and Newcastle. We take what little money we assign to regional development outside of London and spend it in places where we knew it will achieve very little. This has to stop. Britain can have 7 or 8 successful cities, with almost every Briton close to one, or it can have 20-30 weak cities on everyone’s doorstep. Part of why we pick the latter is the inability of British media or academia to understand scale; that Ireland and Scotland focusing investment on Dublin and around Edinburgh is not equivalent to the UK focusing investment on London. Arguments of scale and population distributions are hard to have, especially when they happen in a city out of scale with the rest of the UK. So if Scotland, Ireland, and increasingly Wales, avoid jam-spreading and reap the rewards, why aren’t we doing that in England?
  5. The English should be a bit more humble, celebrate Scotland and Ireland, and ask them, and Germany, France, and the Netherlands, for help. It is trivially true, but often overlooked, that it is the country on the islands of Britain and Ireland that left the United Kingdom a century ago that is today wealthier, more productive, and receives no fiscal transfers from London. And I have already mentioned Scotland’s trend-busting overperformance. In both countries the state invests more in infrastructure and spends more on R&D, and is less tempted to jam-spread than in the UK. We should ask them why, and copy the structures that have led to their better decisions. Metro Mayors are a step in that direction and I welcome them warmly.
  6. We should challenge the powerful groups who want to keep fiscal transfers high. England loves talking about fiscal transfers with Scotland. It occasionally talks about them with the Labour party. But it almost never talks about rural conservatives who have frustrated devolution and investment in cities, or older voters who will always prefer as large and as safe a pension as possible to allowing the young in the regions to take more responsibility for their future. Of course, this is difficult within our fragile UK. Without the support for the UK that large fiscal transfers from London buy among these two groups, Scotland would probably have left the UK in 2014. The role of fiscal transfers in buying stability within the UK is considered a topic far too controversial to discuss. If Scotland were as relatively wealthy as Catalonia it would probably have gone its own way by now. If Yorkshire and Wales were, they would demand far greater powers. In many ways it is fiscal transfers that preserve the UK – and it is in the unspoken interest of many to keep regions dependent on London, and thus loyal to its rule.

What specifically should we do?

I’ve written three posts on this issue in recent months. I outline the problem, explain why we haven’t tried to solve it , and give some specific example of things we could do now .

It’s easy to say that we should have been fixing these problems in the relatively stable period of British politics from 1995 to 2015, but we chose not to. We should admit that, but it doesn't help us now. We did achieve some important things though. Devolution to Scotland has been a success; the resurgence of Ruth Davidson’s Conservatives now makes that safe to say. The success of moving the BBC to Manchester has proved that such interventions can work very well.

So what can we do now, in the middle of leaving the EU and without a strong or stable government? I don’t know. I don’t think that anyone does. It’ll be at least a few months before the current state of the UK becomes clear, and I'll share my thoughts then. In the meantime I'll be happy to share what I’m doing in preparation for when things are clearer; it’s very exciting, but not widely applicable. Just ask me.

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