London needs economic autonomy to bridge productivity gap

There are calls for London to be given greater powers to manage its economy as its productivity growth plummeted in comparison to its international competitors.

A new report by Centre for Cities warned the continued slump is costing the UK economy tens of billions of pounds a year, and urgent action needs to be taken to halt the slide.

The  report found the UK Capital’s average annual productivity growth was just 0.2% between 2007 and 2019,  a drop of 2.9 percentage points compared to the previous decade. Meanwhile, global competitors New York, Paris, and Stockholm saw annual growth between 2007 and 2019 at 1.4%, 0.9%, and 0.7%, respectively.

Centre for Cities chief executive Andrew Carter said: “London plays a huge role within the national economy and as such its performance is vital to the future success of the UK. But as this research shows, soaring property prices and a lack of investment in technology innovations and research and development has seen London’s productivity growth trail well behind the standard of its international competitors.

“Attracting more skilled businesses and workers will be key to revitalising growth in the capital and delivering wider benefits across the country. To do this, policy will need to maximise the unique benefits London offers as a big city while minimising its housing and office costs.
“Reforming our outdated planning system, securing TfL’s financial future, and devolving more powers to the Mayor will be essential to ensuring London can attract and accommodate the skilled workers and businesses it needs to thrive.”

The report, Capital losses: The role of London in the UK’s productivity puzzle, outlined how London plays a huge role in the national economy and is solely responsible for 42% of the UK’s overall productivity slowdown between 2007-2019.

It estimated that had London performed in line with its international peers, it would have added £54 billion to the UK economy in 2019 alone. This would have generated around £17 billion extra for the exchequer to spend, which is well above the amount allocated to the Levelling Up Fund (£4.8 billion) and the City Region Sustainable Transport Settlements (£5.7 billion).

A key reason for the slump in London’s productivity growth appears to be the sharp slowdown of the city’s ‘superstar firms’, which have typically been in the financial, information, and professional services sectors.

The report published in partnership with the EC BID, the business improvement district covering the tower cluster of the Square Mile, Centre for Cities highlighted to two key factors that have hampered London’s economic growth in recent years.

The first is that rising office space costs appear to have been eating up business budgets and crowding out investment that would boost London’s productivity. Meanwhile there has been underinvestment in areas such as software, databases, and research and development, which continue to be increasingly important for the growth of London’s economy.

The second is that increasing housing prices and a restrictive migration policy have reduced London’s ability to compete for global talent.

“To help restart productivity growth in London, policymakers will need to bolster its reputation as a great place to do business, especially in comparison to other global cities,” it added.

To do this the Government should:

  • Reform the planning system to ensure London can develop sufficient housing and office space. The current discretionary planning system makes redevelopment in existing urban areas hard at the scale required, hindering London’s ability to adjust to economic change and grow.
  • Extend the graduate visa to five years to widen the pool of higher skilled workers that businesses in London (and other cities) can hire from.
  • Devolve fiscal powers to London to provide greater freedom of policy and strengthen the incentives to tackle economic challenges by allowing London to keep more of the gains from its growth.
  • Work with the Mayor of London to reform the struggling Transport for London funding model and secure the future of the city’s world-class public transport network.

“In addition to taking these actions the Government should also review and amend the UK’s trading arrangements on services with Europe,” Centre for Cities added. “Knowledge-based services continue to be a key part of London’s economy and the EU market represented 37 per cent of their exports in 2019. While Brexit is not the main cause of London’s poor productivity performance, restricting the ability of London’s service sector firms to compete in EU markets is hobbling the city’s ability to grow.”

Nick Carty, chair of the EC BID, said: “This report makes an important contribution to the debate around UK productivity, highlighting some of the structural factors that might be undermining our efforts and limiting productivity growth in London.
“The EC BID, covering one of the most economically productive areas in the whole of Europe, is delighted to be supporting this research. We stand ready to work with our partners including national and London government to create the best possible environment that will support good growth, competitiveness, and employment whether that be by investing in public realm, delivering against our ESG commitments, or helping in other ways to secure a vibrant city offer.”

The  report found the UK Capital’s average annual productivity growth was just 0.2% between 2007 and 2019,  a drop of 2.9 percentage points compared to the previous decade. Meanwhile, global competitors New York, Paris, and Stockholm saw annual growth between 2007 and 2019 at 1.4%, 0.9%, and 0.7%, respectively.

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