Fiscal transfers within a country

The ONS has calculated an estimate of the fiscal transfers within the UK for the first time. It shows that London and the South East generate more tax revenue than they receive in government spending, whilst other regions are significant net beneficiaries.

What I find important is not the numbers themselves which are entirely unsurprising, it is the fact they were calculated and published at all. Fiscal transfers within a nation state are a key feature of a stable society. If people begin to associate themselves with a region, rather than the overall country, then the cohesion of the country is called into question.

The move towards devolution of power within the UK has been growing, with mayors, local powers and of course the devolved administrations such as the Scottish parliament. The evidence so far is that granting more powers to the regions of the UK will not satisfy the desire for autonomy, In fact, it reinforces the sense of a separate identity. Publication of figures like those above works to further emphasise our differences.


Comparison to the US and the EU

To get a sense for how important fiscal transfers are to the cohesion of a state, this comparison between the US and the EU is striking. Each blue dot is a EU country, each red dot is a US state. I have used the same scale in both charts to make the differences in the dispersion clear.

Y axis Relative income per head of the population (100 is the average for each group)
Shows much greater inequality between EU countries than between US states.

X axis Net fiscal transfer between states (% of GDP)
Shows fiscal transfers between EU states are tiny compared with those between US states.

The US data is characteristic of a country i.e. large fiscal transfers are necessary within a single currency zone, given any lack of flexibility in monetary policy to deal with cyclical or structural differences. The low level of EU transfers helps show why the Eurozone is having such difficulties. One way forward for the Eurozone is to become more integrated, developing into a proper federal state, including large permanent fiscal transfers.

Perhaps the most remarkable difference between the EU and the US, is the level of attention these figures receive. In the US, this issue gets virtually no attention. If I ask Americans, they have generally no idea what the numbers might be and have never given it any thought. They pay federal taxes but do worry about the geographical split of Federal spending. On the other hand, in the EU it is a massive political issue, despite the numbers being an order of magnitude smaller. The EU budget is only 2% of GDP but generates vastly more hostility than national budgets of 20 times the size. This is a major political hurdle for the Eurozone to deal with, perhaps having the most hostile country leave the EU will help them.

My concern is that the UK is moving away from a “US level” of large fiscal transfers without political awareness or opposition. If the United Kingdom cannot regain its sense of being “United”, then the road leads to full separation.

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