Capital losses: The role of London in the UK’s productivity puzzle

London's productivity growth has stalled since 2007, explaining a large part of the UK's 'productivity puzzle' and leaving it trailing behind its global peers.

Report published on 2 March 2023 by Guilherme Rodrigues and Stuart Bridgett

Centre for Cities’ report, Capital losses: The role of London in the UK’s productivity puzzle, published in partnership with EC BID, shows that over the last 15 years London’s productivity growth has both trailed its international competitors and has been the main cause of the UK’s productivity struggles, costing the national economy tens of billions of pounds per year. 

The report finds that: 

London sits at the heart of the UK’s productivity puzzle 

National productivity has flatlined since the 2008 financial crisis and while this productivity slowdown occurred right across the country, it was predominantly led by London. Between 2007 and 2019, the Capital grew by just 0.2 per cent per year, accounting for 42 per cent of the overall slowdown nationally. 

London alone is responsible for almost half of the UK’s post-2007 productivity gap

London has failed to keep up with global peers 

If London’s productivity had performed in line with global counterparts such as New York, Paris, Stockholm and Brussels (all of which performed better than their respective national average) this would have added £54 billion to the UK economy in 2019 alone, which would have generated an extra £17 billion for the exchequer to spend. As a point of comparison, that is comfortably more than the monies allocated to the Levelling Up Fund (£4.8 billion) and the City Region Sustainable Transport Settlements (£5.7 billion) combined. 

Unlike many other global cities, London’s productivity has trailed the national average 

What has hampered London’s productivity? 

The Capital’s slowdown has been most marked amongst its so-called ‘superstar’ firms that had previously been driving productivity growth, and has fallen sharpest in central London, where these firms disproportionately locate. And while finance has been part of the cause of this slowdown, it hasn’t just been limited to this sector, with information and communications and professional services also seeing a slowdown in productivity growth. 

It’s difficult to point definitively to the causes of this with the data available, but the report shows two likely drivers: 

  • Rising costs for office space appear to have been eating up business budgets and crowding out investment associated with innovation that would boost the Capital’s productivity. There’s also been underinvestment in areas increasingly important for the growth of London’s economy such as software, databases and R&D. 
  • Increasing housing prices and a restrictive migration policy also appear to have reduced London’s ability to compete for global talent. 

What needs to change? 

To restart growth in London, policymakers need to bolster the Capital’s reputation as a great place to do business.  

Government should do this by: 

  1. Reforming the planning system to ensure London can develop sufficient housing and office space.
  2. Extending the graduate visa to five years to widen the pool of high-skilled workers that businesses in and outside of the Capital can hire from.
  3. Devolving fiscal powers to London to allow for greater freedom of policy and strengthen incentives to tackle the Capital’s economic challenges.
  4. Reforming Transport for London’s struggling funding model by working with the Mayor of London to secure the future of the city’s public transport network.
  5. Reviewing and amending the UK’s trading arrangements on services with Europe. While Brexit isn’t the cause of the problems highlighted in this research, action should be taken so that it doesn’t compound them.

The UK's productivity puzzle

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