The London deficit

The London economy is the largest and most successful regional economy in the UK. It has often been suggested that its success has been to the detriment of other UK regions, drawing highly skilled people away from other areas. The reality is more complex. The UK's progressive taxation structure ensures that London contributes a greater proportion of total income raised from taxation in the UK than any other region. In short, London subsidises the rest of the UK, enabling the nation as a whole to benefit from the capital's success.

The gap between government revenue raised in London and the level of public spending within the capital amounts to what is commonly termed the 'London deficit'. The current balance of revenue against expenditure means that the capital pays more in tax than it receives in public spending.

Estimates as to the full extent of the London deficit vary according to whether measurement is based on a residency or employment basis, but it is generally accepted to fall between £15 and £20 billion. If employment is used as the basis for measurement, the reality is almost certainly the higher figure. Latest figures from the London School of Economics (LSE) estimate London's contribution to be up to £17.45 billion. Between 2001 and 2002 London paid between 16.5% and 17.4% of total taxation in the UK, while receiving 14% of public expenditure (LSE, London's Place in the UK Economy 2003, Corporation of London October 2003).

It is true that London does receive more government expenditure than any other English region, amounting to £42.2 billion or £5,874 per head of the (residency) population, 17% above the English average (LSE, London's Place in the UK Economy 2003, Corporation of London October 2003).

Nonetheless as the latest figures reveal, London still contributes more than it receives in government expenditure. The 'City' alone is estimated to contribute as much as £8 billion (net) to the UK economy. Moreover, and significantly, this does not tell the whole story. For example this expenditure includes the provision of services such as the Civil Service, based in London yet benefiting the UK as a whole. (LCCI London Economy Research Programme, London's contribution to the UK economy, December 2002). Additionally, regional funding is determined according to population size, which fails to account for the large number of people who live outside London but commute into it on a daily basis. London's idiosyncratic work patterns are being overlooked in the funding formulae.

Understanding London

There is great disparity within the capital, where the wealthiest 20% have incomes more than seven times higher than those of the bottom 20%. In comparison, the average differential elsewhere in the UK is less than five times, suggesting greater earnings in London but also greater deprivation. While 43% of London's households have a gross weekly income of over £600 compared to the UK average of 30%, 23% of households in inner London are claiming Income Support or Working Families Tax credit to sustain their household (ONS, Focus on London, 2003).

Within the context of ever-increasing economic pressure, disparity in wealth affects both individuals and business alike. Statistics reveal a worrying downturn in new business creation, with registration rates for new business the lowest for 20 years, standing at just 12.6% of registered businesses in 2001. In 2002, 255,000 businesses registered for Value-Added-Tax in London compared with an estimated 674,280 businesses operating in London at the beginning of the previous year (ONS, Focus on London, 2003).

Despite (mis)perceptions of London's wealth compared to the rest of the UK, the capital currently has the highest unemployment rate in the UK. There is a serious housing shortage in the capital. Residential property prices are higher, and have risen at a faster rate over the past ten years, in London than in any other region in the UK, with many young people priced out of the market completely. Importantly without affordable housing, London's public provision will suffer, with those workers delivering essential services such as health, education, transport and teaching unable to afford a home in the capital. Similarly renting commercial property in the capital is an expensive business with absolute occupancy costs, according to the GLA, 'the highest in the world'.

Public service provision in London requires urgent attention. For example in 2001, a massive 42% of London's 1,691 surgeries had only one GP, compared to an England average of just 29%. GP list size in London stood at 1,985, again above the average of 1,841 for England in general (ONS, Focus on London, 2003). This provides clear evidence of the exhausted state of London's public service structure, unable to meet current demands let alone those of a rapidly expanding population. This is also the case in relation to London's exhausted transport infrastructure.

Why does London need more money?

Without the required investment, housing, transport and public services such as education and skills, health and social care and policing, will be unable to meet the demand. For example, the Greater London Authority (GLA) predicts that London will need an additional 130 schools by 2016 to meet the demand on education provision in the capital. Moreover with the number of jobs in financial and business services alone predicted to rise by more than 400,000 by 2016, London is set to contribute still further to the coffers of the UK economy as a whole.

The UK relies heavily on the wealth generated by the London economy. Yet in order to continue generating such wealth, the capital needs more resources and a genuine increase in the level of investment. Due to a serious and sustained under-investment in London's infrastructure and public service provision, it can no longer continue to support the UK economy to the extent that it currently does. A critical point has been reached. If the situation is not reversed, London's international status as a leading world city will be seriously undermined. Without major investment, London's infrastructure is seriously at risk of collapsing within the next decade. London must receive a more equitable proportion of the £17 billion, which it contributes over and above the investment it receives in return.