Government must help London recover lost productivity growth, says report

Government must help London recover lost productivity growth, says report

“In no way are we saying that London is doomed,” Centre for Cities chief executive Andrew Carter reassured his audience as he launched the think tank’s somewhat downbeat – and to some, surprising – new analysis of the capital’s “plummeting” productivity growth over the past decade and a half.

Nevertheless there were stark figures in the report, entitled Capital Losses: The Role of London in the UK’s Productivity Puzzle. London’s productivity growth, it found, had averaged just 0.2 per cent between 2007 and 2019, down 2.9 percentage points compared to the previous decade.

Not only has the capital’s performance fallen well short of the growth figures for New York and Paris but also, unlike those comparator “global” cities, it is actually now coming in below the UK national average of 0.3 per cent. In the report’s words it has gone from “leader to laggard”.

London, of course, remains big business. The report was launched yesterday in the Leadenhall Building, nicknamed the “cheesegrater”, at the heart of the Square Mile’s landmark skyscraper cluster in what has consistently been the most productive area in the UK, if not in Europe and beyond.

But the very weight of the London economy means that while it had a disproportionate impact on productivity growth before the financial crisis of 2008, its slowdown, the report says, “was the main drag nationally” thereafter. As the Financial Times has put it, “London’s slowdown is the root cause of the UK’s weak productivity”.

That has major implications for government as well as for the country. If London’s productivity had kept pace with other major global cities, the report finds, it would have added £54 billion to the UK economy in 2019 alone, meaning around £17 billion of extra tax income to the Treasury for the exchequer to spend – getting on for four times the £4.8 billion allocated to the Levelling Up Fund.

What is behind this continuing effective stagnation, leaving the country’s economy much smaller than it would otherwise have been? Contrary to some analysis, the report points to a “sharp slowdown” in the performance of the city’s “superstar” firms in finance, information and professional services sectors, rather than in a longer “tail” of less well-performing businesses.

The report identifies two key factors: firstly, soaring office costs eating up budgets while at the same time “crowding” out investment in the intangibles – research and development particularly – which are at the root of longer-term sustainable growth; secondly, high housing costs, a weaker pound and restrictive migration policies combining to reduce the capital’s competitiveness in the global talent market.

While the report notes that the trends it identifies began before Brexit and the Covid pandemic, it suggests that the full impact of both, including restrictions on the ability of London’s service sector to compete in European Union markets, could still be to come. Further research from the centre will be looking particularly at the longer-term effects of the pandemic on working patterns and the wider economy.

It also highlights the potential risks of the government’s recent focus on “levelling up” rather than addressing weak productivity overall. “The levelling up agenda rightly requires focus and investment,” it says, but “this must not come at the cost of also tackling the recent growth challenges that have developed in the capital”.

Recommendations to the government range from reforming planning to making commercial and housing development easier, to easing trading arrangements on services with Europe and extending the graduate visa to five years to “widen the pool” of higher skilled workers.

The report, published in partnership with EC BID, also says more power should be devolved to London government, including tax-raising powers as well as increased control over revenues already raised in the city and the reform of Transport for London’s funding model to give the struggling network a sustainable future.

Is a further “lost decade” on the way, even for the global city? Plenty of questions persist, while, as FT economics editor Chris Giles said at the report launch, the government’s answers remain unclear. “We are not saying London is doomed,” Carter was at pains to repeat, “but we do need to think about what needs to happen.”

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