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Hamish McRae

Hamish McRae: The Five Ring circus is good for us all

Economic view

The Olympics are about to begin, as even the least observant among us will have noticed, and against an economic background that is very different from the self-confident swagger when, in Singapore in 2005, London's bid edged ahead of that of Paris to win the final ballot. Tony Blair, at Gleneagles for the G8 economic summit, told reporters he had punched the air and danced a jig when he heard the result. It was, he said, a "momentous day" for London.

Momentous maybe, but will it give a lasting boost not just to London but to the British economy as a whole at a much-needed time? Or will it just be a party, let's hope a really good one, that will not leave us with too much of a financial hangover?

It is fascinating from an economic perspective because what we are seeing is the highest-profile sporting and entertainment event in the world taking place in the most visited city in the world, indeed on most measures the most international place on earth. However, my instinct is that the narrow financial aspects of the story will prove less important than the wider socio-economic implications for branded cities in a global economy.

The money first: thanks to the wall of publicity there is a temptation to see the Olympics as a huge economic event. Well, it is big in absolute terms of course, but it is a one-off and, relative to the size of the continuing economy, it is not that big. Take the headline cost, estimated by the House of Commons public accounts committee to be about £11bn. That is roughly equivalent to 0.75 per cent of GDP. The government borrows that every four weeks.

It is not even that big in relation to the London economy. It depends a bit on how you measure it, but if you take the London metropolitan area, the city and the commuter region with a population of 12 million to 14 million, the GDP is around £500bn. That is every year. So £11bn spread over three or four years is not that huge.

Then there is all this discussion about how much visitors will spend, but if you look at the total size of the retail market in London, again the additional amount does not look very big. Visa, the credit card company, reckons visitors will spend an additional £750m. Retailers, the largest beneficiaries, will get an extra £185m, with hotels next with £123m and supermarkets getting £80m. Travel, restaurants, entertainment and so on account for the rest.

If that is right, this will be the most profitable Games ever in terms of the additional spend. But look at this in relation to what we spend already. The chart above, from the Centre for Retail Research, shows spending on non-food items in 2010 in various cities around the world, using EU definitions of conurbations. Actually I would put Tokyo, New York, and Los Angeles much higher, with Tokyo at more than 30 million, New York more than 20 million and Los Angeles about 17 million. I suppose, though, if you are looking at retailing, if you are on one side of the Kanto plain in Japan, you are not going to travel across 70 miles of endless buildings to do your shopping, or indeed drive for two hours in Los Angeles to do so.

But you see the point about London. Even an additional £200m of non-food retail spending, if it happens, is not big in relation to a £64bn market. Even an additional £750m of total spending is not big in relation to an annual GDP of £500bn.

So the Olympics don't matter in economic terms? Well, no, I think they do matter but for wider reasons. Stand back a moment. London has grown swiftly for the past decade. Last week we had the results of the 2011 census showing that population had risen by 12 per cent to 8.17 million. That is still down on the 1939 peak of 8.6 million, but given the growth of the outer suburbs the urban agglomeration may now be above its pre-war level. The main economic engine behind that growth has been the financial services industry. That has become somewhat smaller since 2008 and may well continue to shrink. So other industries will have to drive the economy, taking up the slack. That is already happening. The City, the core financial district, is now attracting other activities, particularly communications.

But the one absolutely key driver of recent growth is London's "safe haven" status. Wherever and whenever there is a bout of political uncertainty, be it in the Middle East, Russia, Greece or even France, savings flow to London. This is not just rich people wanting a bolthole in Kensington. Last week, some figures from estate agent Jones Lang showed London had moved ahead of New York and Paris, with $8.67bn (£5.6bn) of inward investment in commercial property in the three months to the end of June. Part of the reason, according to Jones Lang, was that London was the most liquid property market in the world.

This positive overseas perception of London as a place to do business, evidenced by what people do with their money rather than what they say, is going to be enormously important in the months ahead. There have been a string of serious blows to London's reputation in recent months, not least over the Libor scandal. But if a general confidence is maintained, the jobs will keep coming. The five new office blocks within a mile of the Bank of England, which, including the Shard, will add 3.8 million square feet of space, will be filled with people working and spending money.

And that, surely, is why the Olympics do matter in economic terms. They put London on display at a time when we need to have it on display. The world needs safe havens and perhaps more by accident than design we find we are one. We have learnt some harsh lessons in the seven years since that vote in Singapore. We need now to justify that faith that others seem to put in us.

Are rising deficits caused by income tax hike bringing in less cash?

The deficit reduction programme this financial year is not looking at all good. In fact it has gone into reverse, with deficits turning out higher than last year instead of lower. In June, the deficit was £14.4bn, up from £13.9bn the year before.

The knee-jerk reaction to this is to blame slower-than-expected growth, or if you believe the figures, no growth at all. Yet the detail of the running monthly national accounts tells a slightly more nuanced story.

On the spending side, current spending was down a little on the month but is still up overall on the first three months of the year. The stories of the "cuts" have to be seen in that context.

On the revenue side, most tax categories were up. VAT was up from £9.3bn to £9.7bn. So people are spending more money. National insurance contributions were up from £8.6bn to £8.9bn, as you would expect given the rise in employment. But there was one big chunk of taxation, the biggest of the lot, income tax and capital gains tax, where receipts were marginally down at £10.8bn. That confirms a trend.

For the past three months income and capital gains tax have been down on the previous year. Now it would be silly to draw too much out of three months' figures but it does look on the surface, at least, that the rise in income tax rates, including the 50 per cent top marginal rate, is cutting revenues rather than increasing them.

If this is right, the peak of the Laffer Curve, the rate of income tax at which you start to lose revenue rather than increase it, may not be the 48 per cent estimated by the Treasury but nearer the 40 per cent assumed to be the case by Labour in 1997.