London is an asset for Scotland

David Cameron is correct. (I never thought I'd write that sentence!) London is an asset for Scotland. Specifically, Cameron is reported in the Scotsman as saying

"London is an enormous and precious asset for the whole of the UK, and many Scots benefit from London's hub status and from working and investing in London, and from the investment from London into Scotland."

 Well maybe I'm being too generous. Cameron is partially correct: there are downsides to Scotland and other parts of the UK due to London's hub status, as well as upsides.

The benefits of London to Scotland include:

• the net fiscal contribution London makes to the UK public finances;
• a rich, growing and diverse market for Scottish exports;
• a source of private capital and investment; and
• investment and job opportunities for Scottish firms, workers and savers.

Oxford Economics in 2012 published some interesting estimates of the fiscal contribution that each region or country makes to the UK public finances when tax revenue is taken into account as well as public spending - although admittedly the research was for the City of London! The relevant table is

What the table shows is consistently large positive net contributions from London to UK public finances, except in 2009/10 – a year of peak spending on the Olympic preparations. All other regions/countries in the UK have a consistently negative contribution. The study notes that "North Sea taxes themselves have been attributed to Scotland" (page 54) and the resulting net fiscal balances are close to Scotland's fiscal balance including a geographical share of oil revenues in the GERS report 2010-11.

In the light of the above table, you can see why Boris and other London politicians argue that London, rather than being a drain on the rest of the UK, is actually supporting it. They are wrong of course because the other side of the coin is that private resources: workers, firms, savings are drawn in from other parts of the UK to take advantage of the economic opportunities available in London. These resources freely flow to London because their expected and actual returns are greater there than elsewhere in the UK and UK growth overall may be the better for it. Hence the significant net fiscal contribution from London on the back of that growth.

But there are costs to other parts of the UK and even to London itself of such transfers of real resources to the London economy. These include: the harmful externalities of traffic and other forms of congestion, the inflated housing market all of which may be tending to reduce UK output, slow growth and damage wider welfare through promoting a more unequal wealth income distribution? Added to this are the economic efficiency costs of lost output due to the underuse of infrastructure in the rest of UK as real resources flow south.

So it is a complex issue, and raises a couple of questions:

• Is London paying enough to the rest of the UK for drawing in its resources?
• Has the economic concentration in London gone too far?

In my view there is a strong case for regional policy to help re-divert growth from London to the rest of UK and for other decentralisation policies. In addition, there is strong case for the net fiscal contribution of London to be maintained and perhaps increased. One corollary of the current policy of welfare cuts being introduced by the UK Coalition Government is that London's net fiscal contribution will fall. Further policies that seek to improve access of Scottish and North of England firms to the London export market would also be welcomed.

But, on the other hand, I believe this has little to do with Scottish independence.

An independent Scotland will still be a small open economy and resources will flow into and out of it according to the relative opportunities and expected returns. Nobody has demonstrated or argued convincingly that these opportunities/returns would be greater in Scotland under independence. However, what we do know with certainty is that we will lose the pooling of public resources that is exemplified by the data on London's positive net fiscal contribution, and which has consistently operated in Scotland's favour notwithstanding oil revenues. We also lose out on the possibility of regional policy which worked so well in Scotland's favour in the 1960s.

What is required is policies that capitalize on the success of London for the wider UK and mitigates the costs both to London itself and to the rest of the UK. But with Scottish independence we would benefit from none of that and would effectively be "throwing the baby out with the bath water."

Comments

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Hi,
Interesting blog, thank you. I remember reading a report at university some 12 years ago(!) that the use of HMT published data to attribute geographical fiscal contributions is something of a red herring.

This is because many firms across the UK generate tax from several regions- but because accounts are submitted through their Head Office (disproportionately based in London), then their combined tax revenue is mistakenly believed to come from there.

Does HMT data now account for this? Or does the data still suffer from this distortion?

regards
Barry