Boris is right to want to transform London into a city-state

Allister Heath
BORIS is right: London should keep more of its tax money. Too much of London’s GDP is transferred via the tax system to other parts of the UK, a situation which is bad for both sides. Londoners pay too much tax, and those in receipt of the cash become too dependent on it. The Mayor’s proposal – part of his economic manifesto released yesterday – should be seen in the context of astonishing figures revealed by the Centre for Economics and Business Research.

The taxes paid by Londoners are equivalent to 45.2 per cent of London’s GDP; public spending is just 34.9 per cent of London’s GDP, making a huge surplus of 10.3 per cent of GDP in 2010-11. In the south east, the tax burden is 41.1 per cent of local GDP, against spending of 40.3 per cent, equivalent to a surplus of 0.8 per cent. In both cases, the difference is sent to the rest of the UK. Because, tragically, there is so little high-value private economic activity in these other regions, the north east raises just 29.7 per cent of its GDP in tax yet spends 61.9 per cent of GDP; the north west raises 37.5 per cent and spends 55.9 per cent; Wales raises 30.3 per cent yet spends 66.3 per cent; Northern Ireland raises 27.7 per cent and spends 67 per cent; and Scotland raises 43 per cent (thanks to North Sea oil and gas) and spends 53 per cent. The picture is grim nearly everywhere else in the UK.

Boris is right to want an independent commission to study a revised funding formula for the capital; he also wants funding allocated without ring-fencing, which is sensible. The only flaw in all of this – and unfortunately it is a problem without an answer – is that the economic distinction between what is technically London and a huge swathe of southern England – including the home counties commuter belt – is limited. What ought to be called the London economic region is much larger than the capital’s political borders; and regrettably, while there may be a slim chance of some sort of devolution for London, there is no chance of one for the entire London / south east economic powerhouse.

So what chance has Boris of getting what he wants? Perhaps more than we realise. At some point, the UK’s constitution will have to be torn up, including if Scotland remains part of the union (something which will be determined in the forthcoming referendum). The current system is rife with inequities and problems – for example, Scottish MPs control English matters but English MPs aren’t involved in domestic Scottish affairs. So London may be in a position to extract far more autonomy from Westminster when the shake-up eventually comes – and assuming that the coalition is still in power by then, Boris would almost certainly be more likely than Ken Livingstone to be able to negotiate a good deal. An autonomous, low-tax London, akin to a city-state trading with the world – one can but dream.

FOR once, the perma-bears got it wrong. The OECD, which has been warning that the UK is already in recession, and that the contraction in the final quarter of last year would be followed by another in the first three months of 2012, may soon have egg on its face. It is impossible to predict GDP precisely, of course, but yesterday’s service sector purchasing managers’ index and previous positive stats suggest growth of at least 0.3 per cent. This would still be a poor performance – even if much better than the Eurozone – and is caused in part by the  government failing to push through enough supply-side reforms. But weak growth is better than none at all. Happy Easter.
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