IT was good to see David Cameron announcing a 5 per cent pay cut for all government ministers. The savings will be relatively trivial when compared with the £163bn budget deficit but that wasn’t really the point: any organisation that wishes to usher in a new culture where belt-tightening is the norm must be ruthless in its cost-cutting. Symbolic changes are as necessary as real, multi-billion reductions; leading from the front, as Cameron has done, is essential if he wants to take the country with him.
Over the past few days, developments in the Eurozone have reminded us that there are two ways to tackle an out-of-control budget deficit: the Spanish model, which is about taking an axe to spending, and the Portuguese model, which emphasises tax hikes. Spain is cutting 5 per cent from all public sector wages (which unlike Cameron’s eerily similar but obviously narrower move will save billions) and axing a payment to couples that have just had a child. Both approaches are almost unbearably painful; but the Spanish route is preferable to the Portuguese one. Taxes are already far too high in the UK and even large hikes to rates won’t yield much, if any, extra revenue and will merely kill off investment and chase capital away; Cameron’s plan to hike capital gains tax is a bad mistake.
Pursuing a Spanish strategy focused on spending cuts would benefit London and the home counties, where virtually all readers of this newspaper live. A little while ago, Oxford Economics produced a brilliant analysis demonstrating just how much London and the commuter belt contribute to the rest of the UK. London and the South East provide the largest tax contributions, accounting for a combined £178bn and together contributing 34 per cent of total UK revenues. Northern Ireland and the North East of England between them contributed less than 6 per cent of total tax receipts, reflecting their relative poverty. Taking just income tax, London and the South East contributed £31.9bn and £25.1bn respectively (measured on where people work, rather than where they live, to account for commuters); in stark contrast, the North East and Northern Ireland had the lowest income tax contributions of £4.2bn and £2.8bn respectively.
Looking at the balance of both public spending in a region and its tax contribution, three – London, the South East and the Eastern region – made a net positive contribution to the UK exchequer. All the other regions sucked in more in spending than they paid in tax to the rest of the country: London and its sphere of economic influence are subsidising both the non-English parts of the UK and the rest of England – the Northern regions, the Midlands and the South West joining Northern Ireland, Wales and Scotland as a net drain on the exchequer. The Oxford figures are a couple of years old but the overall conclusions have not changed, especially now that the recession is over.
So the economy of London and its surroundings has the most to lose from higher taxes and the least to lose from a squeeze in expenditure. It is vitally important to boost the UK’s poorer regions but the best way to achieve that is to wean them from their dependency on government spending and push through measures to kick-start a new entrepreneurial culture and private sector job creation. We will soon find out what route the coalition is planning to take.