While London’s stuttering presents an additional productivity challenge, it should be possible for policy makers to deal with two separate productivity problems simultaneously.
Our report last week on London revealed something that few economists had realised: over the last 15 years London has been stuttering. This though does not show that domestic policy that is focussed on levelling up is wrong headed. Instead it shows the UK has not one but two big productivity headaches.
The first problem is a one of levels. London is far more productive than most other parts of the UK, which means there are large divides in productivity and prosperity across the country. This is the result of the long-term underperformance of big cities outside of London in particular.
It is in part the underperformance of these big places which explains why productivity in the UK lags other developed economies. According to the OECD, Italy is the only country in Western Europe that is less productive than the UK.
The second problem is a one of rates of change. While London has high levels of productivity, its productivity growth since the financial crisis has been poor. It was the Capital’s strong growth pre financial crisis that helped the UK catch up with other developed economies. Between 1998 and 2008 productivity in London grew at 3.1 per cent on average, above the national growth rate of 1.9 per cent. The result was that the gap between the UK and France, Germany and Belgium narrowed over the decade (see Figure 1). But the shuddering almost to a halt of its productivity growth since has been a major factor in both the UK’s overall slowdown, and the widening once more of the gap between the UK and other nations.
Source: OECD
Going for growth, as both parties are subscribed to, means that they will need a set of policies that address both of these issues. The FT argued this succinctly in a recent editorial.
Some of the reaction to our paper seems to be concerned that attention on London means a switch away from an approach to levelling up. It should though be possible for UK policymakers to hold both of these problem makers in their heads at once. Addressing one doesn’t mean the other cannot also be tackled.
There is of course a potential resource constraint in doing this. Investment in London could mean less investment elsewhere. But none of the policy recommendations put forward in the paper ask for extra money for the Capital. Most argue for a change in policy, such as a reform of the planning system that would allow more high-skilled people to live and work in London, and an improvement in the trading relationship with Europe (changes that would also benefit other parts of the UK).
And suggestions around fiscal devolution propose to give London more control of tax setting, but do not imply that this will mean other places will receive less funding as a result. Having this greater control would better equip the Capital to deal directly with its own challenges, rather than being so reliant on central government decision making (as an aside, any central government intervention stopping the Mayor from expanding the ULEZ would do the opposite).
The report shows the implications to the national economy of not having a successful London – because it accounts for a quarter of the economy it causes a national slowdown. And this means less tax is raised to be spent elsewhere. This doesn’t though mean that levelling up can’t be pursued at the same time. The concern should not be whether one crowds out the other, but that it is currently doing neither. After setting out some broad principles a few weeks ago, the Chancellor now has the chance to put that right in next week’s Budget with policies designed to encourage productivity improvements in London and the UK’s other big cities.
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