The Barnett Formula - Select Committee on the Barnett Formula Contents

Letter from the City of London

  This letter responds to the Committee's call for evidence as part of the inquiry into the Barnett Formula.

The City of London Corporation takes seriously its role in promoting the interests of London as an efficient and attractive place to do business and, while it is not in a position to respond to all areas of the inquiry, welcomes the opportunity to contribute to the Committee's deliberations.

  The Corporation produces an annual publication "London's Place in the UK Economy" which highlights the importance of London to the nation's wellbeing. Central to this is the calculation of the net contribution of the London economy to UK public finances. In the most recent edition, published in October, new analysis for each region in the UK indicated that London continues to make a substantial net contribution to the Exchequer at a time when the national budget remains in large deficit. In 2006-07, the latest period for which figures are available, London provided some 17.5 per cent of public revenue based on residence and 18.5 per cent based on workplace. This places conservative estimates for London's net contribution to the UK economy at between £11.5 billion and £18.4 billion.[11] A high proportion of this comes from the financial services sector, which, according to a further recent study contributed an estimated 13.9 per cent of the total UK tax take in the financial year ending 31 March 2007.[12] Although these figures may appear a little dated and there is no doubt that the economy has changed dramatically since this snapshot was taken, they are the latest in a trend identified in previous editions of the annual report and illustrate a broad consensus among researchers that the capital is acting as a generator of resources for the country as a whole.

  It is true that public spending per capita in London is significantly higher than the UK average but this partly reflects the unique nature of London as an urban environment, seat of government and the prime tourist destination for foreign visitors. On the other hand, when considered in terms of expenditure relative to wealth created, London receives considerably less than the UK average. In the period 2006-07, capital spending in London as a proportion of Gross Value Added was below the UK national average at 3.4 per cent. Redistribution of resources to other regions through the tax system is understandable, but Londoners continue to face a very high tax bill.

  London is now expected, in a way that differs from other parts of the country, to contribute directly towards the funding of major infrastructure projects. Thus, the capital's council-tax payers must make an annual contribution towards the cost of the 2012 Olympic Games. Crossrail is largely to be paid for by London taxes and fares and many of the improvements to the capital's commuter rail system are being funded under an agreement with Whitehall that implies real long-term fare increases.

  The City Corporation does not underestimate the impact of the current economic downturn on London's economy and it acknowledges the knock-on effect that this will have on the capital's contribution to the Government's total tax take. Research, commissioned by the City Corporation and conducted by PricewaterhouseCoopers (PwC), to estimate the cost of the losses made as a result of the downturn in relation to the financial services sector showed that a fall in profit before interest and tax of 20 per cent could reduce Government Corporation Tax receipts by £8.4 billion. Londoner's contribution through employment taxes is also forecast to decrease with job losses of 50,000 (around 5 per cent of the total number employed in the financial services sector) estimated as causing a Government tax take loss of approximately £1.3 billion.[13]

  The importance of London's contribution to UK public finance is clear and, while it is right that London's successes should be to the benefit to the whole of the UK, it is also important that London too should benefit from its own success. London's success underpins and secures investment and jobs throughout the nation. While the City Corporation recognises that regulatory and cultural changes will need to be made to rectify the issues which have contributed to the current economic instability, it is important to remember that when the economy begins to recover it will still be London that will provide the growth necessary to rebuild the UK economy and that the financial services sector, whatever the regulatory architecture then prevailing, is bound to play a significant role.

3 March 2009

11   London's Place in the Economy 2008-09", The London School of Economics and Political Science, published by the City of London Corporation, October 2008. Back

12   Total Tax Contribution; PricewaterhouseCoopers LLP study of the UK Financial Services Sector for the City of London Corporation", PricewaterhouseCoopers LLP, 15 December 2008. Back

13   ibid. Back

previous page contents next page

House of Lords home page Parliament home page House of Commons home page search page enquiries index

© Parliamentary copyright 2009