Forecasts for London s revenue expenditure and tax export to 2024 by yTx9N4J2

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									London Finance Commission Working Paper

Forecasts for the range of tax and spending in London until 2023/24

The last available estimate of the size of tax receipts and Government expenditure in
London was published by the City in January 20111. This report claimed that
Government expenditure in 2009/10 in London (the last year that this was
estimated for) stood at £94 billion; it also provided two estimates for the tax
revenue generated in London one being calculated on a residence basis2 that
claimed that tax revenue in 2009/10 in London was £91.3 billion whilst the other
was calculated on a workplace basis3 and found that tax revenue in 2009/10 in
London was £99.6 billion. A mid-point estimate of these two revenue estimates was
also given which gave an average tax rate of £95.5 billion and a ‘tax export’4 in
2009/10 of £1.4 billion.


The City paper also provides an estimate for revenue and expenditure up to
2015/16, which is summarised in Table 1 below.




1 Oxford Economics, ‘London’s Competitive Place in the UK and Global Economies’, City of London
Corporation, January 2011.
2 The taxes paid by those resident in London, but not necessarily working in London.
3 The taxes paid by those working in London, but not necessarily resident in London.
4 The difference between revenues generated in London and expenditure in London.
Table 1: Summary of London’s revenue and expenditure estimates by Oxford
Economics in January 2011
              Revenue      Revenue
                                       Average
              (resident   (workplace              Expenditure     Balance6
                                       revenue5
                based)      based)                    £bn          £bn
                                         £bn
                 £bn         £bn
2003/04                 70.9              77.4              74.1             62.6                11.5
2004/05                 79.8              86.8              83.3             68.9                14.3
2005/06                 85.2              91.7              88.4             73.4                15.1
2006/07                 92.6              99.5              96.0             77.2                18.9
2007/08                 100.7            109.1             104.9             81.6                23.3
2008/09                 94.5             103.0              98.8             88.8                10.0
2009/10                 91.3              99.6              95.4             94.0                1.4
2010/11                 90.4              98.5              94.4             97.7                -3.3
2011/12                 98.2             107.1             102.7             98.3                4.4
2012/13                 104.8            114.2             109.5             99.7                9.7
2013/14                 111.1            121.0             116.0             101.3               14.7
2014/15                 119.5            130.1             124.8             103.4               21.4
2015/16          127.1        138.2          132.7        105.6         27.1
Source: London’s Competitive Place in the UK and Global Economies, January 2011


The City report only forecasts to 2015/16 and does not provide a summary of
possible scenarios for revenue and expenditure. New forecasts have therefore been
produced by GLA Economics using the historic data provided in the City report
(thus it should be noted that the years 2010/11 and 2011/12 in the following graphs
and tables are forecasts). Due to limitations on the data currently available to us the
methodology used to estimate these forecasts was relatively simplistic, with a
central, high, low and trend forecast being produced for expenditure and both types
of revenue estimate and therefore also for the size of any ‘tax export’ from London.




5   The mid-point estimate between the residence based and workplace based estimates.
6   This is the ‘tax export’, which is the difference between average revenue and expenditure.
Expenditure forecasts
Provided below in Table 2 and also plotted in Graph 1 is the central, low, high and
trend forecasts for 2010/11 to 2023/24 for government expenditure in London. The
trend forecast assumes that expenditure in the forecast period grows by the trend
growth rate of the expenditure data in the City report. The low, central and high
forecasts assume that London’s Government expenditure growth for the period
2010/11 to 2016/17 matches the actual growth rate in the level of total UK
Government spending in this period or the projected UK growth rate of spending in
this period from the Government. For 2016/17 to 2023/24 it is assumed in the
central scenario that the rate of growth of expenditure increases gradually from the
average level of spending growth over the announced period of austerity to the
historic average growth level of government expenditure in London calculated from
the City’s data. The high forecast assumes that between 2016/17 and 2023/24
Government expenditure in London increases at the average historical rate and the
low forecast assumes that austerity lasts until 2023/24 with expenditure increasing
on an annual rate between 2016/17 and 2023/24 by the average growth rate of
expenditure between 2010/11 to 2016/17.



Table 2: Summary of forecasts for London expenditure over the period
2010/11 to 2023/24 under different assumptions
                  Central           Low            High            Trend
                    £bn             £bn            £bn              £bn
2010/11             96.7             96.7           96.7           100.6
2011/12             96.4             96.4           96.4           107.6
2012/13             99.7             99.7           99.7           115.2
2013/14            100.9            100.9          100.9           123.3
2014/15            102.8            102.8          102.8           131.9
2015/16            104.3            104.3          104.3           141.2
2016/17            106.0            106.0          106.0           151.0
2017/18            107.1            107.8          113.4           161.6
2018/19            109.2            109.7          121.4           173.0
2019/20            112.5            111.6          129.9           185.1
2020/21            117.0            113.6          139.0           198.1
2021/22            122.9            115.5          148.8           212.0
2022/23            130.2            117.5          159.2           226.8
2023/24            139.4            119.6          170.3           242.7
Source: GLA Economics calculations
Graph 1: Historic expenditure data for London and forecasts for expenditure
under different assumptions over 2010/11 to 2023/24

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Source: Historic data: London’s Competitive Place in the UK and Global Economies,
January 2011; Forecasts: GLA Economics calculations


As can be seen these forecasts give a wide range of possible expenditure outcomes by
2023/24 with the low forecast giving expenditure of £119.6 billion, whilst the trend
forecast gives expenditure of £242.7 billion. The trend forecast is so high due to the
historic data the trend is based on showing growth in Government expenditure in
London of 7 per cent per annum. This is due to the general large increase in UK
government expenditure over the period 2003/04-2009/10.


Revenue forecasts
Forecasts for revenue on a residence basis and workplace basis have been undertaken
and a mid-point average of these two forecasts has been calculated. The results of
these forecasts are reported in tables 3-5 and graphs 2-4. As previously four
forecasts were undertaken a trend based forecast, a central forecast, and high and a
low forecast. The trend based forecast assumes that revenue increases by the trend
growth rate of the historic revenue data from the City. With the central forecast
assuming that revenue increases in line with the GVA forecast from Experian
Economics between 2010/11 to 2023/24, with the relationship between revenue and
GVA having been determined by an OLS regression7 on the historic data from the


7The regressions indicated that for both residence based and workplace based that a 1 per cent
change in GVA saw a 2 per cent change in revenue.
City’s report8. The low forecast assumes revenue increases by the average of the
lowest half of all yearly revenue growth rates from the City’s data, whilst the high
forecast assumes that revenue increases by the average of the highest half of all
yearly growth rates9.


Table 3: Summary of forecasts for London revenue (residence based) over the
period 2010/11 to 2023/24 under different assumptions
                  Central                      Low                 High                Trend
                   £bn                         £bn                 £bn                  £bn
2010/11             94.4                       90.5                100.4                95.2
2011/12             97.6                       89.6                110.5                99.3
2012/13            100.5                       88.8                121.5               103.6
2013/14            105.4                       88.0                133.6               108.1
2014/15            111.4                       87.2                147.0               112.7
2015/16            118.0                       86.3                161.7               117.6
2016/17            125.5                       85.5                177.9               122.6
2017/18            133.5                       84.8                195.6               127.9
2018/19            141.6                       84.0                215.2               133.4
2019/20            150.3                       83.2                236.7               139.2
2020/21            159.7                       82.4                260.4               145.1
2021/22            169.7                       81.7                286.4               151.4
2022/23            180.3                       80.9                315.0               157.9
2023/24            191.6                       80.2                346.5               164.7
Source: GLA Economics calculations


Table 4: Summary of forecasts for London revenue (workplace based) over the
period 2010/11 to 2023/24 under different assumptions
                         Central               Low                 High                Trend
                          £bn                  £bn                 £bn                  £bn
2010/11                   102.8                98.5                109.7               103.9
2011/12                   106.2                97.5                120.7               108.3
2012/13                   109.2                96.4                132.9               113.0
2013/14                   114.4                95.4                146.4               117.8
2014/15                   120.6                94.3                161.1               122.9
2015/16                   127.5                93.3                177.4               128.2
2016/17                   135.3                92.3                195.3               133.7
2017/18                   143.6                91.3                215.1               139.4
2018/19                   152.0                90.3                236.8               145.4
2019/20                   160.9                89.3                260.7               151.6
2020/21                   170.6                88.4                287.0               158.1

8 The yearly GVA growth data from Experian has been converted into a tax year basis in order to do
this.
9 The growth rates of UK revenue data was also examined as this would provide a larger sample size

however the variation in the average growth rates from the City’s data was larger and was therefore
used.
2021/22            180.9                     87.4        316.0           164.9
2022/23            191.8                     86.5        347.9           172.0
2023/24            203.3                     85.5        383.1           179.4
Source: GLA Economics calculations


Table 5: Summary of forecasts for London revenue (mid-point average) over
the period 2010/11 to 2023/24 under different assumptions
                  Central                    Low         High            Trend
                   £bn                       £bn         £bn              £bn
2010/11             98.6                     94.5        105.0            99.6
2011/12            101.9                     93.5        115.6           103.8
2012/13            104.9                     92.6        127.2           108.3
2013/14            109.9                     91.7        140.0           112.9
2014/15            116.0                     90.7        154.1           117.8
2015/16            122.8                     89.8        169.6           122.9
2016/17            130.4                     88.9        186.6           128.1
2017/18            138.5                     88.0        205.3           133.7
2018/19            146.8                     87.1        226.0           139.4
2019/20            155.6                     86.3        248.7           145.4
2020/21            165.2                     85.4        273.7           151.6
2021/22            175.3                     84.5        301.2           158.2
2022/23            186.0                     83.7        331.5           165.0
2023/24            197.5                     82.8        364.8           172.1
Source: GLA Economics calculations



Graph 2: Historic revenue (residence based) data for London and forecasts for
revenue (residence based) under different assumptions over 2010/11 to
2023/24

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                   2003/04 2006/07 2009/10 2012/13 2015/16 2018/19 2021/22

                                   Central      Low   High       Trend
Source: Historic data: London’s Competitive Place in the UK and Global Economies,
January 2011; Forecasts: GLA Economics calculations



Graph 3: Historic revenue (workplace based) data for London and forecasts for
revenue (workplace based) under different assumptions over 2010/11 to
2023/24

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                    2003/04 2006/07 2009/10 2012/13 2015/16 2018/19 2021/22

                                    Central   Low     High     Trend


Source: Historic data: London’s Competitive Place in the UK and Global Economies,
January 2011; Forecasts: GLA Economics calculations



Graph 4: Historic revenue (mid-point average) data for London and forecasts
for revenue (mid-point average) under different assumptions over 2010/11 to
2023/24

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                  0
                  2003/04 2006/07 2009/10 2012/13 2015/16 2018/19 2021/22

                                   Central    Low    High    Trend
Source: Historic data: London’s Competitive Place in the UK and Global Economies,
January 2011; Forecasts: GLA Economics calculations


Forecasts of London’s ‘tax export’
Using the mid-point estimates for revenue and the estimates for expenditure it is
possible to provide a range of forecasts for London’s tax export up to 2023/24. The
results of this analysis are provided below in Table 6 and Graph 5.


Table 6: Summary of forecasts for London ‘tax export’ over the period
2010/11 to 2023/24 under different assumptions10
                  Central                        Low                  High                 Trend
                   £bn                           £bn                  £bn                   £bn
2010/11             1.9                           -2.2                  8.3                 -1.0
2011/12             5.5                           -2.8                 19.2                 -3.8
2012/13             5.2                           -7.1                 27.5                 -6.9
2013/14             9.0                           -9.3                 39.1                -10.3
2014/15            13.1                          -12.1                 51.3                -14.1
2015/16            18.5                          -14.5                 65.3                -18.3
2016/17            24.4                          -17.1                 80.6                -22.9
2017/18            31.5                          -19.8                 91.9                -28.0
2018/19            37.6                          -22.6                104.6                -33.6
2019/20            43.1                          -25.4                118.8                -39.7
2020/21            48.2                          -28.2                134.7                -46.4
2021/22            52.4                          -31.0                152.4                -53.8
2022/23            55.8                          -33.8                172.3                -61.8
2023/24            58.1                          -36.7                194.4                -70.7
Source: GLA Economics calculations




10The central ‘tax export’ takes the central estimate of expenditure for a given tax year from the
central mid-point estimate of revenue for a given tax year and so on for the other estimates of the ‘tax
export’.
Graph 5: Historic ‘tax export’ data for London and forecasts for the ‘tax
export’ under different assumptions over 2010/11 to 2023/24
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                   2003/04   2006/07   2009/10   2012/13   2015/16   2018/19   2021/22
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                                       Central     Low       High      Trend


Source: Historic data: London’s Competitive Place in the UK and Global Economies,
January 2011; Forecasts: GLA Economics calculations

Possibly realistic/likely scenarios
It should be noted that the large range in outcomes in the expenditure, revenue, and
‘tax export’ forecasts are due to the variability in the assumptions made to make
these forecasts. Further not all of these assumptions are as likely to occur as other
scenarios.


For expenditure it would appear that the trend scenario will not happen as we
know the government plans for austerity until 2016/17. Therefore the low scenario
(austerity till the end of the forecast) or central and high forecasts (some return to
pre austerity spending growth rates after the period of austerity) seem more
realistic.


For revenue the high forecast scenario is based on the tax receipts of an extreme
boom and although London may experience boom years again in the future it would
appear to be unrealistic to assume that this would be seen throughout the forecast
timeline. However, the low forecast takes account of a couple of poor performing
years and could represent a situation were London experienced a ‘lost decade’, whilst
the trend forecast has both boom and recession tax years represented in its data and
may paint a more realistic picture of the average growth in tax revenues in London.
Finally, the central revenue forecast is based on a relationship between tax revenue
growth and economic growth that could be assumed to be realistic.
Taking account of these caveats it is possible to give a range of potentially realistic
forecasts for expenditure, revenue and the ‘tax export’ (i.e. by excluding the trend
expenditure scenario and the high tax revenue scenario). Table 7 shows the ‘tax
export’ being calculated from the expenditure and revenue forecasts that were
thought to be realistic and gives the worst and best possible estimate for the ‘tax
export’ in a given tax year. Graphs 6-8 shows the realistic ranges of forecasts for
Government expenditure and tax revenue for London and London’s ‘tax export’
taking the extremes from the realistic revenue and expenditure forecasts.




Table 7: Summary of the range of forecasts for London expenditure, revenue
and ‘tax export’ over the period 2010/11 to 2023/24 under realistic
assumptions
                    Expenditure11                        Revenue12              ‘Tax export’13
                          £bn                              £bn                        £bn
2010/11                   96.7                          94.5 to 99.6              -2.2 to 2.9
2011/12                   96.4                         93.5 to 103.8              -2.9 to 7.4
2012/13                   99.7                         92.6 to 108.3              -7.1 to 8.6
2013/14                  100.9                         91.7 to 112.9               -9.2 to 12
2014/15                  102.8                         90.7 to 117.8              -12.1 to 15
2015/16                  104.3                         89.8 to 122.9             -14.5 to 18.6
2016/17                  106.0                         88.9 to 130.4             -17.1 to 24.4
2017/18             107.1 to 113.4                     88.0 to 138.5             -25.4 to 31.4
2018/19             109.2 to 121.4                     87.1 to 146.8             -34.3 to 37.6
2019/20             111.6 to 129.9                     86.3 to 155.6              -43.6 to 44
2020/21             113.6 to 139.0                     85.4 to 165.2             -53.6 to 51.6
2021/22             115.5 to 148.8                     84.5 to 175.3             -64.3 to 59.8
2022/23             117.5 to 159.2                     83.7 to 186.0             -75.5 to 68.5
2023/24             119.6 to 170.3                     82.8 to 197.5             -87.5 to 77.9
Source: GLA Economics calculations




11 Up to 2016/17 it is assumed in this estimate of expenditure that London’s expenditure varies in
proportion with the announced yearly changes in UK government expenditure.
12 The mid-point revenue estimate.
13 Given by lowest revenue – highest expenditure to highest revenue – lowest expenditure.
Graph 6: A realistic range for the forecast for Government expenditure in
London under different assumptions over 2010/11 to 2023/24

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                   2010/11   2012/13       2014/15      2016/17    2018/19       2020/21          2022/23

                                  Realistic Expenditure Lowest    Realistic Expenditure Highest

Source: GLA Economics calculations



Graph 7: A realistic range for the forecast for Government revenue in London
under different assumptions over 2010/11 to 2023/24

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              0
                   2010/11   2012/13       2014/15      2016/17    2018/19       2020/21          2022/23

                                       Realistic Revenue Lowest   Realistic Revenue Highest

Source: GLA Economics calculations
Graph 8: A realistic range for the forecast for London’s ‘tax export’ under
different assumptions over 2010/11 to 2023/24

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  £billion




               0
                    2010/11   2012/13      2014/15       2016/17    2018/19        2020/21          2022/23
              -20

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              -60

              -80

             -100

                                   Realistic 'Tax Export' Lowest   Realistic 'Tax Export' Highest

Source: GLA Economics calculations

								
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