London’s Case for Fiscal Autonomy

londonview_2500920bDiscourse on political and economic decentralisation in Britain has focused mainly around its relationship with the European Union (EU) in recent months. However, there is another matter at hand, raising the following question, as asked in the Financial Times this week:

Does London’s contribution to the national coffer justify a bid for financial freedom?

The debates around both Britain and the EU, and Britain and London, are of course intertwined. However, political and economic priorities naturally differ between the capital and, in general, the rest of the country. It is these differences that drive London’s desire for more local power vis-à-vis the rest of Britain. Mayor Boris Johnson is a big believer in London as the centre of the British economy, although his focus lies on government investment into the capital’s infrastructure and local economy rather than political decentralisation. There is, however, premise to argue that figures alone prove that London should be granted more fiscal autonomy than it currently holds. The argument stems from those that consider London to not receive full recognition for its contribution to the British economy – in both financial and political terms.

The Difficulties of Differentiation

A distinct problem with drawing an economic ring around the capital is where and how to place the boundaries. It is not so simple to draw a line between what belongs to London and what does not. The capital shares so many connections with the rest of the country, as well as Europe and the international sphere, that some serious categorisation would have to be performed in order to define ‘London’. On a more local note, how would one classify the commuting culture – i.e. those that contribute professionally to London’s economy, but do not reside within the M25? Is the M25 even a logical or useful guide to the geographical extremities of London? There are many political and socio-economic questions that need to be considered before anyone can begin to define exactly what London is. A way to go about the matter might be to ring-fence particular areas of ‘London’, such as the City, the West End and Canary Wharf, for special fiscal or monetary policy.

In Favour of Decentralisation

The figures on which the desire for an ‘economic bubble’ around London is based are reasonably convincing in most departments. Whilst national employment struggled in recent years, London created over 250,000 new jobs between the beginning of the global financial crisis in 2007 and 2012 – only the Southeast and Wales managed to create work in the same period, whereas every other geographical region saw a decline in the total number of jobs. Similarly, London’s share of national output rose 1.2 percentage points in the period 2007-2012, to 21.9. Finally, London’s productivity is second to none in Britain. Measured as gross value added per hours worked, London was 44% above the UK average for productivity in the period discussed above. All in all, it seems some are bitter about the spread of the fruits of London’s efforts to other parts of the UK, although the case for autonomy is based on control and not the sucking of funds into the capital from regions more in need of development.

Comparative Perspective

NYSkylineBy comparing London to other major financial centres, proponents of increased fiscal autonomy for the capital find even more premise for their argument. This is mainly because of the nature of fund allocation to London from central government. 73.9% of local government income in London is received through a grant from the Treasury, and not from the tax – there is only one for residents, the council tax – paid by those who live in the London boroughs. This is compared to New York, where 30.9% of income is received from central government, and Paris, where the figure is just 17.5%. These statistics show a distinct lack of direct access to locally raised funds for local London authorities, something that some believe should be changed. Hence, it is argued that London authorities should be granted increased autonomy in fiscal policy, in order to ensure that the capital receives its fair share of funds. Boris Johnson believes that this is critical to the rest of the UK too, as a strong London ensures an equally competitive British economy.

Conclusion

How the debates surrounding London and its financial status tie in with the European referendum, due in 2017, will be interesting to keep tabs on. Gerard Lyons, Johnson’s economic advisor at the Greater London Authority, considers that what London does best – financial services, the arts, scientific research etc. – would be successful with or without the EU, but that to maintain as much power in the world’s largest free-market would, for now, be beneficial to both the UK and its capital city. Whether or not the British people decide to leave the EU, London has proven itself capable of weathering even the most vicious of storms, having emerged from the global financial crisis reasonably strong. The city’s relative power will come to the forefront of British political economy, should the socio-economic divide between London and the rest of the country continue to widen.

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