John Mills: London’s economy is more precarious than many think

John Mills: London’s economy is more precarious than many think

London is unquestionably doing considerably better than the rest of the UK, at least on average. The value added per employee per year in 2016 for London was £44,000 whereas in Wales it was only £18,000 and in the North East just £19,000. London is right at the top of the richest regions in the European Union, whereas some of its poorest regions are elsewhere in the UK. These raw figures, however, mask a more complicated and much more troubling picture.

For a start, averages cover a wide range, from the hugely wealthy to large numbers of people struggling to make ends meet. London contains some of the richest areas in the country, but it also some of its poorest. There are huge discrepancies between boroughs. In 2016, people living in Kensington and Chelsea had average incomes of £116,000 compared to £29,000 in both Newham and Barking & Dagenham.

Although earnings in London are generally a lot higher than elsewhere, so is the cost of living, especially for housing. This means that the difference in living standards is lower than it would otherwise be and large transfer payments – via social security, local government finance, infrastructure projects and in other ways – reduce the discrepancy still further. At the same time, however, the fact that London is the capital of a country which is mostly much poorer than its surroundings causes major problems. These would not be there if the inequalities between London and the regions were less marked.

The problems thrown up by these discrepancies are partly financial. London subsidises the rest of the UK to a massive extent – reflecting the fact that deindustrialisation has caused large swathes of the country to lose their capacity to pay their way. The UK has a total balance of payments deficit of around £100 billion a year. If London has a surplus of around £50 billion, this means that the rest of the country has a total deficit of around £150 billion – about 10 per cent of its total £1.5 trillion GDP. Take out a few prosperous cities such as Oxford, Cambridge and Bristol, and the rest must be running on deficits even greater than 10 per cent. This shortfall is largely made good by London, thus reducing incomes in the capital, net of tax and transfers.

There are also precarious elements to London’s prosperity. Much of it is concentrated on the City and on the financial services on which so much of the City’s profitability depends. The City has certainly done remarkably well in recent decades, but largely because it has been relatively deregulated, with a relatively strong domestic economy to back it. This is why the Euro-dollar market, for example, which has generated billions of pounds worth of revenues for the City, found its way to London. The big long-term question is whether the City is going to be able to retain its pre-eminence over its major international competitors – in Shanghai, Hong Kong, Singapore and New York – if the UK economy as a whole continues to grow at a fraction of the rate supporting these rival financial centres.

There is another troubling development too. As late as abut the 1960s, the North of England was more prosperous than the South, including London. As London has pulled away more and more strongly over the past four or five decades, so it has become an increasingly different place from the rest of the country – more cosmopolitan and internationalist, ever more service-sector orientated and a stronger and stronger magnet for talent. Despite attempts to reverse this trend – varying from the Northern Powerhouse initiative to moving many of the BBC’s activities to Salford – the UK remains one of the most centralised countries in the world. 

The result has been mounting resentment in the regions at London’s pre-eminence and a feeling that London does not really care that much about the rest of the country, lacks sympathy with the problems faced by our former industrial heartlands, and regards anywhere outside the South East as a regional backwater. This almost certainly influenced the result of the 2016 EU referendum, with massive Remain majorities in almost all of London compared with correspondingly high Leave votes in Wales the Midlands and the North of England.

So where does this leave London? Probably in a considerably better place than most of the rest of the country but still threatened by trends which could undermine is success. Not so long ago Bradford was ranked as one of the richest cities in the UK. Now it is one of the poorest. Over the span of a few decades huge changes for better or worse can take pace. London needs to be on its guard.

John Mills is a leading British entrepreneur and economist and a backer of the Institute for Public Policy Research Economics Prize for individuals or groups with ideas for radically improving the quality and quantity of economic growth in the UK. Follow John on Twitter.

Categories: Comment

1 Comment

  1. Paul Convery says:

    I think this is a very fair article. Since the mid 1980s, London has been on quite a roll, pretty much powering through economic downturns. But apologies for stating the obvious: doesn’t John acknowledge that departing the EU is very likely to exacerbate these trends especially the risk of a decline in financial services and ancillary business sectors especially legal and accountancy? And one of the dynamics of London’s growth has been derived from massive in-migration especially from the EU. The cultural industries, Higher education, personal services, hospitality have all flourished on the back of a very mobile labour force (and consumers). Much of that has been enabled by EU free movement. I mention these because John is one of few people in the left-of-centre world who has vociferously advocated the UK departing the EU.

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