Coastal communities like my constituency in North Devon are fantastic places to live, work, and go on holiday. But our economy is not always what it should be. Earnings are a sixth lower than the national average and productivity has been falling further behind the rest for the last few decades. That is why in 2019 I stood on a manifesto that pledged to level up opportunity in every corner of the UK. It is the most important domestic challenge after the virus.
Securing inward investment to our small, market and coastal towns is crucial to levelling up. The much-welcome Towns Fund and the £4 billion Levelling Up Fund announced by the Chancellor at the end of last year will make a huge difference to places like this all across the country. And the Government has reformed the Treasury investment rules to ensure transport schemes in the South West can compete fairly with those in London and elsewhere when bidding for public money.
It is a sad truth that the UK remains one of the most regionally imbalanced countries in the developed world. We can and we must right those imbalances that have been a feature of our economy for far too long. But we must look beyond public spending if we are to be successful. We cannot simply spend more everywhere and, even if we could, spending on infrastructure projects – big or small – will take years to translate into tangible improvements.
There is another tool at our disposal to boost regional growth that should appeal to pro-market conservatives and which can deliver immediate benefits for regional households and businesses: tax reform. We sometimes think of tax as geographically neutral: equal wherever you are in the country. But of course households and businesses differ between regions and in different places, people behave differently and live different lives.
Londoners drive far less than people in the South West, a result of population density and the quality of public transport. People in Northern Ireland drink and smoke more regularly, on average, than people in the South East. This means that different tax rises will burden some regions much more than others.
For example: increasing capital allowances for manufacturing businesses, which allows firms to offset corporation tax against investments like plant and machinery, would tend to benefit the North, the Midlands and Wales most. These are the places where such investment is largest relative to the size of their local economies. The biggest winners would be places like Warwickshire, Teesside, the West Midlands and Cumbria.
There are other taxes which are simply regionally regressive, in that they level down household income and business productivity.
Take council tax. Average council tax per head in London is the lowest in England, at £481, despite surging property prices in recent decades. At £643, average council tax per person in the South West is a third higher than this. As a share of post-tax income, Londoners pay half of what households in Yorkshire and the North East typically pay. In the South West, council tax relative to income is the third-highest in the country, and nearly twice as high as London. Not only this, but the council tax bill for the average household in the South West has increased by £265 in real terms since 1999.
Because of a much higher share of Band A properties in less prosperous parts of the country, cutting Band A council tax would benefit over half of households in the North East, and 18% in the South West, compared to just 4% of households in London. Households living in the South West in a Band A property would see their bill fall by £166 – a third more than London. This would be the highest saving of any region.
We see a similar pattern with VAT. As a share of regional GDP, VAT receipts in the North East are double what they are in London. More importantly, VAT receipts have grown much slower in London than elsewhere over the last two decades, such that the average Londoner now spends just £570 more in VAT than in 1999, while the average person in the North East spends £759 more. Here in the South West, VAT per person is around the national average but has grown faster than most other regions of the UK.
All of this means that we cannot ignore the regional dimension when thinking about tax policy, especially as we make difficult decisions about how to fix the public finances after the pandemic.
This calls, first and foremost, for a more transparent approach. At every Budget, the Treasury publishes distributional analysis for households, to show how much more or less households in different income brackets will pay. This allows us to determine whether tax rises are borne by those most able to pay and whether tax cuts most benefit those on the lowest incomes.
The Chancellor should go one step further and publish a regional distributional analysis, to show how much more or less different regions are paying. And we should go further still and think about how we use the tax system to get private sector growth going in left-behind areas.
The opportunity to level up the country is there. But if we only look at spending and not tax, there is a risk we are trying to level up with one hand tied behind our backs.
Selaine Saxby is MP for North Devon and a Committee Member for the Levelling Up Taskforce in Parliament.
