03London’s lost decade of productivity gains and the costs to the national economy
This section highlights London’s specific role in UK productivity growth in two different periods – before and after the 2008 financial crisis. Its post-crisis productivity performance is also compared to other global cities. The aim is to show the part the Capital has played in the UK’s slowdown and explain its impact on the national economy.
The UK’s productivity slowdown was mostly driven by London
Before the crisis, productivity growth in the Capital was very strong, making a major contribution nationally. As Figure 2 shows, its productivity was growing around 3.1 per cent a year between 1998 and 2007 – almost twice the pace of the rest of the country.
Figure 2: London has gone from leading national productivity growth to lagging behind it
The UK’s productivity slowdown after the financial crisis is well known; what is less known is the role London played. Since 2007, its productivity growth has been close to zero (0.2 per cent a year). And it has gone from leader to laggard – its performance has been marginally weaker than the rest of the country, where productivity grew at 0.3 per cent a year.
Figure 2 also shows that London’s productivity slowdown was not compensated by a boost to productivity elsewhere. It is not the case that there was a reshuffling of growth around the country, so London’s loss was not to the benefit of other parts of the country.
In the same way it had a disproportionate impact on national productivity growth before the crisis, its slowdown was the main drag nationally. The Capital accounts for 15 per cent of the population and 25 per cent of the economy – and 42 per cent of the national productivity gap that has emerged since 2007 (see Figure 3).
Figure 3: London alone is responsible for almost half of the UK’s post-2007 productivity gap
London’s stuttering performance happened at a time when its economy continued to grow because of the jobs miracle that occurred in the Capital.8 Between 2007 and 2019, 1.2 million extra roles were created and because this outstripped job creation elsewhere, London’s share of all British posts rose from 22 per cent to 24 per cent. This shift had positive implications nationally. As London’s productivity levels were still higher than average, its greater share of jobs pulled up national productivity, as Box 2 sets out.
Box 2: The role of London’s employment growth in the UK’s productivity
As London is still significantly more productive than the national average (34 per cent in 2019), employment growth there had a positive contribution to the UK’s productivity.9 A job in London is, on average, more productive than elsewhere, so a shift in the share of roles in the Capital increases the number of high productivity jobs in the country, even if London’s own productivity remains unchanged. If the Capital’s share of the UK’s jobs remained the same in 2019, as it did in 2007, national productivity would be 0.7 per cent lower.10
London differs from many international peers
Just like the UK lags behind other countries in terms of productivity growth, London is underperforming similar global cities. Two measures show this.
The first is a direct underperformance. Of the six global cities analysed in Figure 4 (Box 1 sets out the selection criteria based on two metrics), London had the lowest productivity growth except for Milan.11
Figure 4: Unlike other global cities, London performs below the national average
The second is a relative one. London is the only city in the sample where productivity growth was lower than the national average. For example, in Paris it was 0.9 per cent, nearly twice as high as France’s average of 0.5 per cent.
London’s underperformance costs billions to the national economy
This has at least two implications for the rest of the economy. Firstly, lower productivity growth in London makes national economic growth weaker. Secondly, this reduces the amount of government revenues that the Treasury can redistribute to other areas.
A simple estimate, based on the productivity of other global cities that performed better than London in Figure 4, shows that the Capital’s productivity stagnation cost the economy £54 billion in 2019 alone, the equivalent of two Edinburghs.12 In terms of tax revenue, that would be around £17 billion extra to spend, which is almost twice the overall spending allocated through the Levelling Up Fund (£4.8 billion) and the City Region Sustainable Transport Settlements (£5.7 billion).