Public expenditure, taxation and productivity are closely related, and they interact not just with households, businesses and nations, but regions’ economies too. London’s economic dominance within the UK has inevitable consequences for taxation and for expenditure on public services. A (broadly) progressive tax system by definition means that people with higher incomes will tend to pay more tax. So because London is more productive, and Londoners are better paid than the rest of the country, an average household in London will tend to contribute more to the national pot than those in other regions.
The UK is clearly somewhat reliant on London to drive national economic growth and contribute proportionally more taxation. However, policy perpetuates and even exacerbates this reliance by awarding London yet more public spending, while other parts of the country, and the north of England in particular, have experienced many years of underinvestment.
Yet this is only part of the story. To give a full illustration of the important relationship between public expenditure, taxation and productivity, this briefing draws comparisons between London, the North and the country as a whole, and demonstrates the following points.
- First, while this tax and spend pattern is a natural consequence of a progressive tax system in an imbalanced economy, the imbalance itself is not entirely natural. Rather, it is in part a result of policy choices. Looking historically at transport infrastructure investment in the capital, for example, shows how policy can underpin ever-higher productivity, but also how it reinforces the economic imbalance and, therefore, gaps in wages and taxation.
- Second, looking at the data in detail reveals that beneath the headline figures there are also big regional differences in the types of taxes paid, and in the different cash benefits and public services that households benefit from.
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