06What needs to change

London plays an important role in explaining the national productivity slowdown. The stuttering of its ‘superstar’ businesses within its centre appears to be the main driver of this, which has meant that both the Capital and the national economy are considerably smaller than they would have otherwise been if productivity had continued to grow at its pre 2008 trend.

That these trends occurred even before the Capital has been hit by the further headwinds of Covid-19 and Brexit (noting that while the referendum result will have influenced behaviour from 2016, the UK did not officially leave the EU until 2020 and so it is reasonable to assume that its full impact will not have been captured in the data in this report) is further cause for concern. The performance of London has a large impact on the performance of the national economy, and another decade of poor performance in the Capital would be bad for both the national economy and the exchequer.

Recent policy attention has turned away from looking at weak productivity growth to looking at sub-national disparities in productivity levels through the levelling up agenda. Both are big policy challenges and require attention. The levelling up agenda rightly requires focus and investment from politicians. This research shows though that this must not come at the cost of also tackling the recent growth challenges that have developed in the Capital.

To encourage growth in London, policy should look to maximise the benefits that a big city offers while minimising as much as possible the costs of doing business in it. In doing so, this would increase the attractiveness of the Capital as a place to do business. To do this it should do the following:

  1. Rather than looking to limit foreign student numbers,central government should facilitate high-skilled migration by extending the graduate visa to five years. This would deepen and widen the pool of higher skilled workers businesses in London (and other cities) can hire from and make the British university system more competitive by making it relatively more attractive to attend a UK university..
  2. Policymakers should address rising housing and commercial space costs by changing the approach to planning. Specifically:
    • Central Government should introduce planning reforms to make redevelopment of both residential and commercial space more certain. 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. A system that is more rules-based would reduce uncertainty, lower costs and make it easier to build in places like London where planning constraints have the biggest impact.
    • In the meantime, The Mayor and local authorities should use Mayoral Development Orders and Local Development Orders respectively to allow the redevelopment of land near existing public transport building on the work that has been started by Transport for London. These orders differ from the usual process because they are much more rules-based. Currently, Mayoral Development Orders are not in effect for the Mayor of London so it would require secondary legislation from Government.
    • The Mayor, supported by central Government, should also revise the most costly planning policies in the London plan. While changing the planning system and using development orders may help making development more certain, the London Plan includes further policies which restrict the provision of homes and office space in London. The greenbelt, conservation areas in central London, and protected views are some of them. They should be revised.
  1. Central government should devolve further powers to London, particularly fiscal powers. Not only do more fiscal powers provide greater freedom of policy but would also strengthen the incentives to tackle the economic challenges highlighted in this paper by allowing London to keep more of the gains from its growth.58 Options for this include:
    • A Parisian-style ‘versement transport’ tax on payroll to fund transport services
    • Powers to capture revenue from land value uplift, which would allow London to raise revenue from who directly benefit from improvements in the Capital’s (i.e. public transport connections). This tool has been used sporadically in London;59
    • Changes to the council tax system within London, for example through adding extra bands to increase the charges paid by the most expensive property, or revaluation of all properties in the Capital. This would follow similar reforms done in Scotland and Wales;
    • Give powers to implement a city sales tax similar to cities like New York or assign the GLA a share of VAT raised in London;
    • A tourist tax;

To deal with any negative fall out that Brexit and Covid-19 may have on London’s economy, which would come in addition to the analysis in this report, the following should also happen:

  1. Central government and the Mayor should work together to reform the Transport for London (TfL) funding model. A competitive London requires a world-class public transport system that links workers to jobs. The pandemic has left TfL in a more vulnerable position than transport systems in Paris, New York and Hong Kong because a much higher share of its revenues comes from ticket revenue than in the other cities. To underpin the sustainability of this key part of the ‘plumbing’ of London’s economy, the Mayor should work with central government to reduce TfL’s dependence on the farebox.
  2. Central government should review and amend the UK’s trading arrangements on services with Europe. While Brexit may not be the main cause of London’s poor productivity performance between the financial crisis and Covid-19, restricting the ability of its services firms to EU markets could cause further problems through the 2020s. Despite low productivity growth, the financial sector continues to be a key part of London’s economy and the EU market was 37 per cent of its exports in 2019.60 By exiting the single market for financial services, London’s position is likely to be weaker.