Compared to other OECD countries, the UK remains one of the most fiscally centralised countries. Data from the OECD’s Revenue Statistics publications shows that in recent years no more than 6% of the UK’s total tax revenue has been raised locally, compared to just under 11% for the OECD on average.

Studies of the impact of devolution on economic growth generally arrive at mixed conclusions. In 2017, GLA Economics performed a comprehensive review of the literature and found that the effect on growth depends on the type of financial devolution arrangement in place: devolving spending powers, for example, may not necessarily generate growth in and of itself, but devolving revenue-generating powers is more likely to facilitate such growth.

With that in mind, comparing London’s economic growth performance to that of similar cities^[1] in OECD countries that devolve more of their fiscal powers to local government could indicate whether revenue centralisation could have hindered the city’s growth over time. GLA Economics modelled two counterfactuals:

ONE: comparing London’s annual real GDP growth to the average growth for cities in OECD member-states that also enjoy the same political structure as the UK (i.e., a unitary style where central government is the overarching authority), but devolve more revenue-generating powers to local government, and

TWO: comparing London’s annual real GDP growth to the average growth for cities in OECD countries that devolve more revenue-generating powers to local government irrespective of whether they have a unitary, federal, or regional style of government.

The analysis covers the previous decade (i.e., 2010-2019), during which time London’s GDP growth (adjusted for inflation) averaged 2.39% per annum. Over that same period, average annual real GDP growth for ‘comparator cities’ in countries with the same unitary system of government as the UK but that devolved more revenue-generating powers locally was 2.56% per annum. If London had also grown by 2.56% during that decade, the city would have generated at least an additional £38bn over the 10 years. This would translate to about an extra £460 per Londoner per year.

The results are quite similar if we include all cities with greater revenue devolution irrespective of system of government; under this scenario, the city would have generated at least an additional £34bn over the 10 years. This would translate to about an extra £400 per Londoner per year.

It is worth noting that cities in OECD countries that devolved the same or a lower percentage of revenue generation locally as the UK have experienced lower average annual real GDP growth between 2010 and 2019. Moreover, comparing these cities’ real annual growth rates to those of their respective countries shows that higher real national growth cannot explain (in and of itself) the cities’ growth rates. For example, Oslo, Copenhagen, and Berlin grew faster than London in spite of their countries growing more slowly than the UK during the 2010s. However, these cities also enjoy more devolved tax-generating powers than London.

While this analysis serves as a reminder of the potential rewards from devolving revenue-generating powers to local government, economic growth is impacted by more than just fiscal devolution. Nevertheless, the data suggests that the UK’s greater centralisation of such powers coincides with London’s constrained growth over the past decade, at a time when comparable cities that raised more revenue locally enjoyed greater growth.

---

[1] Note: Henceforth, ‘cities’ refers exclusively to the largest economic city in an OECD country (i.e., the city with the largest GDP). Hence, they are similar to London in terms of their economic weight relative to their respective country’s gross domestic product.