Breakdown of public finances shows how taxes and public spending are used to narrow north-south divide

London’s thriving economy generates a £26.5bn surplus that is recycled by the government to provide financial help to Britain’s less well-off regions, according to an official breakdown of the public finances.

The first attempt by the Office for National Statistics to break down the UK’s budget deficit by region has demonstrated the importance of the capital and highlighted how taxes and public spending are used to narrow the north-south divide.



Experimental data from the ONS showed that only three regions of the UK – London, the south-east and the east of England – ran a budget surplus in the 2015-16 financial year, the latest year for which figures are available.

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Every Londoner provided £3,070 more in tax revenues than they received in public spending, while people living in the south-east ran a surplus of £1,670 per head. The east of England turned a small deficit in 2014-15 into a surplus of £242 per head in 2015-16.

By contrast, spending exceeded tax revenues by £5,440 per head in Northern Ireland and by £3,820 in the orth-east. Scotland, which has seen its public finances badly affected by the plunge in global oil prices, ran a deficit of £2,830 a head.

The ONS figures show that London has recovered rapidly from the financial crisis of 2007-08, which wiped out the region’s fiscal surplus of close to £25bn a year. The latest figures show London even more strongly in the black than it was before the crash, with a surplus up from £18bn to £26.5bn in the past two years.

Tax receipts per head in London of £15,750 were almost double those in the two regions raising the least revenue – Wales at £7,980 and the north-east at £8,200.

Northern Ireland and Scotland attracted the highest expenditure per head, at £14,020 and £13,050 respectively, with the lowest expenditure per person in the south-east and east of England at £10,580 and £10,590 per head.

Despite the tax revenues generated by London, the south-east and the east of England, the UK ran a deficit of just over £72bn in 2015-16 – or £1,100 per head.

The ONS said the size of the deficit had narrowed to below £50bn in 2016-17, although the consumer-driven slowdown in spending since the start of the year meant the shortfall for the first month of the current financial year was more than £1bn up on April 2016.

Analysts said the weakness of VAT receipts were evidence of the more difficult environment for consumers during a period when prices have been rising and wage growth has been stuck at 2%.

The CBI’s latest health check of the retail sector – its monthly distributive trades survey – found that the boost to spending seen in April was short-lived. Of the 117 retailers questioned, 29% said sales were higher in May than a year earlier, while 27% said they were lower. The balance of +2 percentage points compared with +38 points in April.

Alpesh Paleja, the CBI’s principal economist, said: “Retail sales flattened out this month, as the bounce in April unwound. It’s clear that households are increasingly feeling the pinch, as rising inflation pushes down on real earnings. Taken together with higher import cost pressures from a weaker pound, this is creating a challenging environment for retailers.”

The ONS said the £10.4bn deficit in April was £1.2bn higher than in the same month a year earlier. City analysts had been expecting the deficit to fall to £8.9bn.



Annual spending growth of almost 6% exceeded a rise of nearly 4% in tax receipts, reflecting the slowdown in the economy’s growth rate from 0.7% in the final three months of 2016 to 0.3% in the first quarter of 2017.

Borrowing in 2016-17 was lowered by a number of one-off factors that will not be repeated this year. As a result, the Office for Budget Responsibility has forecast that the deficit will rise to £58bn in 2017-18. The OBR said the ONS estimate for April relied heavily on forecasts and the total was likely to be revised later.

There was better news for the chancellor, Philip Hammond, from the ONS’s revisions to the deficit in 2016-17, which was cut by £3bn to £49bn – the lowest since the economy was close to on the brink of recession in 2007-08.

