Updated London Finance Commission tables

May 25th, 2023by Mike Hope

In its 2017 report[1], The London Finance Commission (LFC) concluded that a broader tax base for local government, with stronger fiscal controls at the local level, would support growth through the delivery of more integrated and efficient services and increased infrastructure investment. More devolved governance structures might support the development of the strategically important Central Activities Zone[2]. Rebalancing the UK economy cannot be achieved by constraining London's growth, but rather by increasing productivity and competitiveness across all regions[3].

Analysis by the Organisation for Economic Cooperation and Development (OECD) has highlighted the importance of providing adequate funding for devolved powers[4]. 52 of the 81 countries it studied had boosted regional powers and responsibilities over the last five decades. According to the analysis, regional and local government expenditures have risen to reach 40% of total government expenditure across the OECD. Previous analysis had found that devolution across OECD countries had had mixed results in improving economic performance. The latest analysis concludes that unfunded mandates, where additional powers for subnational governments are not accompanied by the resources to deliver, lie behind lower economic growth. These losses may exceed any benefits from devolving powers to lower tiers of government.

The LFC published a set of tables and figures on London's tax and spending, mostly for the 2014/15 fiscal year[5]. This note provides an update of this data (using information mostly for 2021/22), and some general comparisons with the previous set of published tables. This is done in general terms, as the data is not strictly comparable. Some estimates have been revised, and there have also been some methodological changes. Further, 2021/22 figures have been distorted by the extraordinary fiscal support put in place during the pandemic.

Public expenditure

UK Government total managed expenditure after inflation doubled between 1990/91 and 2019/20. It rose by another 17% in 2020/21 when the pandemic struck before falling by 4% in 2021/22 to remain 13% above its level in 2019/20 (Figure A1). As a share of GDP, public expenditure rose from 35% in 1990/91 to 39% in 2019/20, 52% in 2020/21, and dropped to 45% in 2021/22. The path of public sector current expenditure is extremely similar to that of total expenditure, as it made up 90% of expenditure over the period. Public sector net investment fell to 28% of its 1990/91 level in 1996/97, before rising to 466% in 2019/20, 752% in 2020/21 and dropping to 671% in 2021/22. Expenditure has been rising strongly over time, but as with the pandemic, there was a significant increase during the 2008 recession.

Figure A1:

Taxation had been the main source of revenue to pay for additional spending. Public sector net borrowing remained at £50 billion or less in cash terms prior to the financial crisis. The increase in borrowing at that time had been reduced back to previous levels by 2018/19 before an even larger increase as a result of the pandemic. In comparison, local government net borrowing has remained close to zero since 1990/91 (Figure A2).

Figure A2:

The LFC wanted the full range of property taxes to be devolved to London's government. "Property taxes are suitable for local control because of their immobile bases, the fact that they are easy to collect and enforce, and insofar as they relate to land, they are economically efficient. In the international cities we have reviewed, property taxes are largely devolved to sub-national government."[6] Table A1 illustrates the funds that might be raised in London if this proposal were implemented.

Table A1:

Since 2015/16, and in comparison with the corresponding table in the second LFC report, the fastest growth in tax yields amongst the major taxes in Table 1 has been in business rates. The yield has doubled in cash terms for both geographies, although the increase has been greater for the UK as a whole.

One other form of fiscal devolution would be a tourism levy[7]. Other GLA Economics research has considered how some taxes might be reformed, and the costs and benefits of devolving them to London[8].

UK public expenditure totalled £958 billion in 2021/22, £936 billion of which was within the UK - 85% of this (£797 billion) was attributable to the regions of the UK[9]. £121 billion of total expenditure was in London, or a little under 13% of all expenditure, which is slightly lower than the capital's population share. Consequently, expenditure per capita was slightly lower in London than it was nationally. That being said, expenditure per head was higher in London for all functions of expenditure other than social protection (Table A2).

Table A2:

In contrast with the corresponding table in the second LFC report, for 2014/15, expenditure per head was higher in London than nationally.

In relation to economic activity or output, as measured by Gross Value Added (GVA), London receives a much smaller share of public expenditure than the UK. Expenditure represented 20% of the capital's output in 2017/18 (compared to 36% for the UK), rising throughout the pandemic for both geographies. They were at 24% for London in 2021/22, and 41% for the UK (Table A3).

Table A3:

London's economy in 2021 was 24% of the size of the UK economy[10]. The taxes paid by the capital, and its relatively small claim on public expenditure relative to output, have meant that since 2009/10 the capital has been a net contributor to the UK's public finances[11]. There was a fiscal surplus of £40.5 billion in 2019/20, equivalent to £4,500 per person. Only the South East and East of England made an additional positive (albeit smaller) fiscal contribution. During the first year of the pandemic, 2020/21, there was a deficit in London of £7.2 billion, or £800 per person. While this represented the largest year-on-year change in fiscal balance across UK regions, London exerted a smaller burden on UK public finances relative to the other regions.

In terms of the components of fiscal expenditure, social protection is the largest element of expenditure, accounting for 31% of spending both in London and nationally (although it makes up 7.3% of output in London and 12.9% nationally). The next largest element is health, which makes up 28% of spending in London, and 23% nationally (the respective proportions in relation to output are 6.6% in London and 9.3% nationally). Where London receives comparatively more in relation to output is on transport, reflecting the city's disproportionate reliance on the public transport system. This represents 9% of expenditure in London and 5% nationally, and relative to output is 2.1% in London, and 1.9% nationally (Table A4).

Table A4:

Since 2014/15, and due to the pandemic, expenditure has risen in relation to GVA across all these components of expenditure. The exception, perhaps surprisingly, is social protection where it has fallen for each of London, the wider South East, and the UK.

Funding of expenditure

Across the functions of government, there is a division of responsibilities between central government, local government, and the GLA. For some areas of public spending there is little identifiable spending by area - defence being an example. Spending on health and social protection is mainly provided by central government, while in the case of general public services, expenditure is predominantly incurred by local government[12]. Expenditure by the GLA is principally devoted to public order and safety, and economic affairs. This is principally on transport. Over half of the funding for expenditure by the GLA and the boroughs[13] comes from central government grants (including around £3.4 billion in retained business rates) (Tables A5 and A6).

Table A5:

In comparison with 2014/15, central government expenditure is higher, but expenditure by the GLA and London boroughs is lower in cash terms.

Table A6 extends the analysis of the previous table to record the income that might be raised under some of the options to extend London's tax base. Making use of the full range of property taxes could raise significant sums in their own right.

Table A6:

In comparison with 2014/15, lower expenditure by London government is met with lower grants from central government, more borrowing, and greater income from the devolved taxes of council taxes and retained business rates.

Conclusion

A broader tax base for local government, with stronger fiscal controls at the local level, might support growth through the delivery of more integrated and efficient services and increased infrastructure investment. London receives a low share of public expenditure relative to its economic contribution, receives less per person than the rest of the country, and consistently made net financial contributions to the exchequer (pre-pandemic). The capital's spending priorities are different from the rest of the country, and yet it continues to rely significantly on central government to fund its spending choices.

[1] London Finance Commission (2017), Devolution: a capital idea

[2] GLA Economics (2022), Devolution and economic growth - a rapid evidence review

[3] GLA (2019), London and the UK - a declaration of interdependence

[4] Rodriguez-Pose A and Vidal-Bover M (2023), When finance doesn't follow function: unfunded mandates and their impact on economic growth, OECD

[5] London Finance Commission (2017), Devolution: a capital idea, Annex 3

[6] London Finance Commission (2013), Raising the capital

[7] Daley M (2017), Options for a tourism levy for London, GLA Economics

[8] Wingham M (2017), Council tax in London, Christie E (2017), Stamp duty in London, Morrill F (2017), Devolving other national taxes to London, GLA Economics

[9] Including £22 billion outside the UK

[10] ONS (2023), Regional economic activity by gross domestic product, UK: 1998 to 2021

[11] Hope M and Farquharson J (2022), London's Economy Today, GLA Economics

[12] Much of this is central services such as IT, which is not attributed to public facing services

[13] The figures for the boroughs are for the 32 boroughs and the City of London