Taxes from London and south-east 'propping up economy'

Britain is becoming increasingly reliant on London and the Home Counties to fill the Government's coffers in the face of an escalating welfare bill in other parts of the country, a study suggests.

Research shows that the south-east will contribute more than a third of the nation’s entire tax income this year and is likely to be the only region making a positive contribution to the exchequer.

The reliance on the capital and surrounding area is likely to grow in coming years as most other regions fall increasingly into deficit.

Economists warned that higher welfare bills were to blame for the deficit faced elsewhere in the UK, with state hand-outs accounting for 30 per cent of the Welsh economy and 29 per cent of that in the north-east.

By comparison, the bill represents just 11.7 per cent in London, it was reported.

The disclosure in a forecast by the consultants Oxford Economics comes amid growing concerns over Britain’s benefits bill.

Data released last week showed that £208 billion in benefit payments will be made during the 2012/13 financial year as almost one pound in every three raised in tax by the Government is spent on handouts.

Ministers are now attempting to rein in the bill by imposing below-inflation annual increases for people of working age for the next three years.

According to research, VAT receipts from London will rise from £16bn last year to £17.2bn in 2012/13 on the back of strong spending during the Olympics and Diamond Jubilee. Property taxes are also on the rise as a result of strong performance in the capital's housing market.

Helen McDermott, senior economist, told The Sunday Times: “As such, London generated over 30 per cent of the overall increase in VAT despite only accounting for 16-17 per cent of the tax base.”

She said that London and the Home Counties would be the only areas making a positive contribution to the economy up to 2025. In total, the south-east is expected to be in surplus to the tune of £50bn while the rest of Britain is in deficit by £40bn.

“On our estimates, most UK regions were in deficit even during the peak years of growth in the early half of the last decade,” she said.