Leave vote may do more damage to the poorer regions

On the weekend after the EU referendum, the BBC asked a middle-aged Welsh voter whether he was worried about Wales losing its EU money. The man replied that it was “our money anyway”.  Presumably, by this, he meant that the UK contributes more to the EU than it gets back so the money could be said to have come from British taxpayers in the first place.

But will Wales get that money back after the UK leaves the EU? The Welsh government has said that “every penny” of the lost EU money must be replaced by the UK government. David Cameron’s response was not encouraging. Whoever succeeds him as prime minister, he said, would not be able to guarantee that funding.

It is now looking very likely, as the IFS warned before the referendum, that the economy, and therefore the tax take and the public finances, will be severely hit by the Brexit vote. As a result, there will be less money available anyway. Just as worrying for the regions outside London, though, is that the call for devolved powers for London are getting louder. Amidst the silly noise around the idea of London to become a city-state, there are serious proposals for the capital to have more control over its own finances and the newly elected mayor is putting his weight behind them. A majority of Londoners were in favour of more devolution before the referendum. The Brexit vote is likely to harden that opinion.

The trouble is, if London keeps more of its tax revenue, then the rest of the UK will get less. Given that the pot is likely to be depleted anyway, that could have a serious impact on other parts of Britain.

A report by Centre for Cities published today found that the UK is even more dependent on taxes from London than it was a decade ago. London now accounts for 30 percent of the country’s tax revenue. A report in 2014 by the Centre for Economics and Business Research found that, taking account of revenues and public spending across the UK, London and the South-East were subsidising the rest of the country.

Those in Scotland may argue that this does not take account of the oil revenue but that’s an argument for another day. For Wales and the English regions, though, London keeping more of its tax revenue would have severe consequences.

The regional household disposable income figures published by the ONS in May showed the proportion of income coming from social benefits in each region. This figure includes pensions so you would expect it to be higher in areas where people have retired but even so, the difference between London and elsewhere is marked. In London, 12.6 percent of income comes from social benefits. In the North East it is 23 percent, in Wales 24 percent.

The ONS definition includes charities and colleges (the NPISH sector) which most people would not consider to be households. The Family Resources Survey, albeit with a smaller sample size, concentrates on households only. It also breaks out state benefits and private and occupational pensions. The resulting picture looks even worse.

Source: Family Resources Survey, 2014/15 , published 28 June 2016

On top of the reliance on state benefits, around 10 percent of household income in some regions comes from occupational and private pensions. Much of this is the legacy of deindustrialisation. The factories, mines and steelworks may have gone but their ghosts are still there in the form of their pension schemes, still topping up the local economies of the areas where they used to employ people. In some local authorities, pensions account for a quarter of the area’s income. The jobs of people in the shops, pubs and cafes depend on pensioner spending. But many of those generous pension schemes are now being wound up. In an area where a high proportion of income is from state benefits, what happens when those occupational pensions have gone?

The bitter irony of all this is that, on the whole, the areas most dependent on social benefits are those that voted most strongly to leave the EU.

Sources: ONS Regional gross disposable household income, May 2016 and Electoral Commission EU Referendum Results. England & Wales, NUTS3 regions.

This is not really surprising, given that older and poorer voters were most likely to vote Leave. It does mean, though, that those areas where the Leave vote was highest may be among the worst hit by the consequences of leaving, or even just preparing to leave, the EU.

The Guardian reported recently from Ebbw Vale, a town which voted overwhelmingly for Leave but which has few immigrants, high unemployment, severe economic problems and is heavily dependent on EU investment.

It’s a town with almost no immigrants that voted to get the immigrants out. A town that has been showered with EU cash that no longer wants to be part of the EU. A town that holds some of the clues, perhaps, in understanding quite how spectacularly the Remain message failed to land. There’s a sense of injustice that is far greater than the sum of the facts.

And a town which my well have just voted to trash its own economy.

With the local economies of many parts of the country dependent on what the ONS describes as non-productive sources, a worsening of the country’s fiscal position is likely to  hit them hard. If Londoners, a majority of whom voted Remain, decide they want to keep more of their money in London, that will only make things worse. When you start talking about ‘our money’ you raise the question, what do we mean by ‘we’, ‘us’ and ‘our’?

To answer the Welsh voter interviewed by the BBC, what used to happen was that the EU took a lot of money from rich Londoners and gave it to poorer parts of Wales. There is now no guarantee that those rich Londoners will keep on handing that money over. On top of the deep divisions brought out by the referendum, a recession might make us that bit more selfish about what we do with our taxes. Sadly, that means the poorer parts of the country are likely to suffer the most.