Greek tragedy: how does weak regional growth affect the wider UK economy?

Beneath the UK’s poor fiscal position sits an even more alarming problem: several regions have a budget deficit larger than Greece did in 2009. Spending cuts alone won’t solve this problem. The big cities also need to grow their tax bases – to reduce both regional deficits and the national deficit.

Here’s a stat that should stop every macroeconomist in their tracks: many parts of the UK run a fiscal deficit larger, relative to its economy, than Greece’s at the height of its 2009 sovereign debt crisis. What’s concerning is not only the size of the deficits, but that they get so little attention.

As a new prime minister prepares to take office on a ticket of greater devolution, those concerned with the UK’s budget deficit should view this as a means to tackling the country’s public finance problems.

How do UK regions compare to Greece at its worst?

A number of UK regions have a poorer fiscal position than Greece at its worst. Figure 1 plots the difference between taxes raised and money spent in each UK region as a share of its economic output.

Outside London and the South East (sometimes called the Greater South East), all run deficits that are higher than the national average. Four regions – the North East, Northern Ireland, Wales and the West Midlands – have deficits that make Greece’s position look modest.

Figure 1: Fiscal surplus/deficit in UK nations and regions, 2024/25

Source: ONS; Our World in Data.
Note: GDP is calendar year; public finances are fiscal year. The most recent regional GDP data for regions are for 2023. Each region’s GDP was multiplied by the 1% growth of UK GDP for 2024 to create an estimate for 2024 regional GDP.

This is getting worse, not better. London’s subsidy to the rest of the country is now larger, relative to its own economy, than at any point on record. In 2024/25, London exported a fiscal surplus worth 8% (£49 billion) of its own output – about £5,400 per Londoner – to the rest of the country. The usual political complaint is that London takes too much. On this measure, the opposite is the case.

This goes largely unnoticed because there’s no mechanism in the UK that would force anyone to notice. Greece’s deficit was financed by foreign investors who could walk away – and did. In the end, Greece was bailed out by the European Union and the International Monetary Fund.

In contrast, UK regions are financed automatically by the rest of the country through a currency union with London and national borrowing – permanently, silently, with no direct market test of sustainability and no audience watching. The Treasury manages one fiscal position, not 12, so a number worse than the one that broke Greece sits in an Office for National Statistics (ONS) data release that seems to be looked at by very few people.

How does the economic performance of UK cities affect these patterns?

It is worth saying that we should expect net fiscal transfers from some parts of the country to others. Different places play different roles in the national economy and so have different tax-raising capabilities. The economy concentrates itself in cities, with implications for where tax is generated. This means that non-urban areas will structurally raise less in tax than they receive in public spending. They require well-functioning cities to cover the shortfall.

London works the way that agglomeration theory says it should. As a dense concentration of high-output economic activity, it generates a fiscal surplus big enough to support its own more residential hinterland in the wider South East and, through the national transfer system, the rest of the country too.

Birmingham, Leeds, Manchester and the rest should also be generating a surplus that can be transferred to their wider regions. But they aren’t.

There are no official data on this. But the Centre for Cities has created estimates in the past. Their figures are from 2013/14. But given that the regional data look very similar between then and now, expecting these city-region patterns to continue to hold is a reasonable assumption (despite the supposed Manchester growth miracle). And so, these estimates are used as the basis for up-to-date estimates used here.

They show big city regions such as Greater Manchester and the West Midlands running deficits before you even get to their wider regions, and often even trail their wider regions (see Figure 2). This is not because they spend too much – London’s per-head spending is the third highest of any large city region – but because they don’t raise enough tax. London’s average tax raised per worker was close to double that of other large cities.

Figure 2: Fiscal surplus/deficit in Greater London and large city regions, 2045/25 (estimated)

Source: ONS; Centre for Cities; author’s calculations.
Note: Not every region has a large city region in it. London, South East and East are summed together to make Greater South East so that London is shown in the context of its wider region.

This is the result of the economic underperformance of the UK’s largest cities outside London. If they functioned as their G7 comparators do, they would lead the national productivity average. (Figure 3 shows the productivity performance of secondary cities across the G7.)

That they don’t function in that way means that they don’t raise as much tax. And so, they don’t generate enough to offset the spending requirements within the conurbation, never mind across their wider region. And this has implications for the national fiscal position.

Figure 3: Output per worker across different geographies by G7 country, 2018

Source: Centre for Cities.
Note: Jobs data for Japan and Canada is 2021 due to data availability, and GDP data is 2019.

This needs to change if the UK’s overall fiscal position is to improve. The UK economy requires its secondary cities to play the same role as their G7 counterparts not just from an economic perspective but from a public spending one too.

How can the national public finances be improved through regional growth?

The conversation on public spending continues to centre on spending cuts. The Conservatives claim that they will cut spending by £23 billion per year, while Reform say that they have identified £40 billion of cuts. Even Andy Burnham, the politician most associated with a growth-not-cuts argument, has found himself talking about bringing down the welfare bill – a sign of how far the spending cuts framing still dominates, even among those who should be best placed to resist it.

But what is clear is that spending cuts alone won’t deal with the challenge. We need growth.

To achieve this, the government should set two measurable goals. The first should be to close the productivity gap between the UK and its two close comparators, France and Germany, which stands at around 13%. There is no inherent reason why we should lag so far behind those two nations.

The second goal should be to reduce the productivity gap between Greater Manchester and London from 35% to 20% – the size of the gap between the two largest cities in France, Lyon and Paris. For the avoidance of doubt, this requires a big jump in Greater Manchester’s performance rather than holding London back. Figure 1 shows just how important a strong London is.

It will also require investment. The good news for Andy Burnham is that the November 2025 Budget increased investment spending. But two things aren’t clear.

The first is how much pressure there is to scale this spending back, particularly given the recent challenges around funding defence and his commitment to existing fiscal rules. The second is how much appetite there is for further increases in investment spending. International evidence would suggest that current investment spending plans won’t be enough.

How can big cities be made more attractive to cutting-edge firms?

For these cities to grow their economies and so achieve both goals, they will need to attract and grow cutting-edge companies. Inherently, they should offer the benefits that many of these activities look for – namely, access to large pools of skilled workers and access to a network of other high-skilled businesses. Figure 4 shows that like productivity, most trail the UK average on this measure.

Figure 4: Number of cutting-edge companies in large city regions, 2026

Source: The Data City.

To make these cities more attractive to such activities, policy should do the following.

National government should give the UK’s biggest city regions (including London) the same fiscal freedoms that other cities have. It is now well understood that the UK is one of the most centralised countries in the world. From a growth perspective, this system gives sub-national government little incentive to grow because it keeps so little of the benefits of growth. From a public finance perspective, it creates no local accountability, which means that the ‘Greek tragedy’ goes largely unnoticed.

This is where the change of prime minister matters more than the usual transition between governments. Andy Burnham’s career case has been that mayors, given real power, can grow their economies faster than Whitehall can manage them from a distance. He now has the chance to test that claim from the inside, with the authority of national office rather than the constraints of a metro mayoralty.

The first and hardest part of that test is fiscal, not rhetorical: building the local accountability that has been missing from the system so far, so that a city region’s economic performance is something local government has both the power and the incentive to answer for.

While the current chancellor, Rachel Reeves, set out a roadmap for fiscal devolution in her Mais lecture, and while Andy Burnham has previously called for mayors to have greater fiscal freedom, neither has set out concrete plans for what this should look like. The incoming prime minister should consider the Centre for Cities’ sensible proposals closely as a way of making this happen.

Next, policy-makers should allocate funding for economic development based how far a place is from its productivity potential (measured by the gap between itself and a comparator set of areas in other G7 countries). This would skew funding towards the places with the greatest current underperformance, and so the greatest economic need.

To attract more frontier companies, policy-makers need to increase the size of the benefits that big cities offer, like access to skilled workers and proximity to other businesses.

On the latter, this principally means making their city centres – where such high-skilled activities tend to cluster – more attractive places to do business. The government has already started to support this through its recently announced City Investment Funds. Local government should use the tax money they get to keep to supplement this.

On the former, there are two ways to do this. The first is to increase the pool of skilled people who live within the existing commuter zone through skills policy. Andy Burnham has talked about bringing parity between university and technical education. While this is a worthy goal, it is likely to be less relevant for the cutting-edge activities that big cities need to attract.

There is some debate as the result of a report by Anna Stansbury, Ed Balls and Dan Turner on whether graduate skills are a problem outside London. But while the authors find that the premium on graduate wages outside the capital has fallen, suggesting an oversupply of graduates, they also show that the premium for STEM (science, technology, engineering and mathematics) graduates has not. This suggests that access to these types of skills, of most relevance for cutting-edge companies, are still in short supply. This will need to change.

The second way to make city centres more attractive places to do business is to expand the pool of workers by increasing the number of people living within commutable distance of jobs. Andy Burnham has been a prominent supporter of improving train connections to do this, especially between cities. But the benefits of such schemes aren’t always as clear cut as is assumed.

For daily commutes, transport connections within city regions are likely to be more important, and focus would be better placed here. The existing Transport for City Regions fund is available to fund this. Gearing housing policy towards this goal by increasing the number of homes around commuter stations would support it.

Finally, tackling this issue needs better measurement of it. Creating tax and spending figures at the regional level was a recent innovation. The government should give the ONS the funding to produce them at the combined authority level too.

How could an urban renaissance end the UK’s Greek tragedy?

While political conversations on public spending tend to gravitate towards tax cuts, it is economic growth, and economic growth in big cities in particular, that is needed if the UK’s fiscal position is to improve. Achieving fiscal balance in the North West, for example, means Greater Manchester and Liverpool City Region making the contribution that they should do to the national exchequer.

Commentaries on economic imbalances in the UK often feel like they’re pitching these imbalances as a distributional problem. Many may feel the same about the incoming prime minister’s pitch on devolution. The analysis here shows that it is actually a national public finances and economic problem. The Burnham premiership creates a unique opportunity to fix it.