The UK economy has a London problem — but it’s not what you think

In popular and political discourse, London is often portrayed as a giant leech, sucking the life out of the rest of the UK. It gobbles up the money, the public spending, the best jobs and talent from other towns and cities, creating the need for “levelling up”.

If this was ever true, it could not be a worse description of UK economic trends over the past 15 years. Ever since the global financial crisis, London’s annual productivity growth of 0.2 per cent has been lower than the 0.3 per cent achieved in the rest of the UK. This contrasts with the decade before 2007, when the capital achieved annual productivity gains of 3.1 per cent, compared with 1.7 per cent elsewhere.

The UK economy does therefore have a London problem. It is that the capital is no longer boosting output and incomes as it once did. New research from the Centre for Cities think-tank shows that the collapse in London’s productivity growth accounts for 42 per cent of the UK’s overall productivity puzzle since 2007, even though it houses only 15 per cent of the population and accounts for 25 per cent of economic output.

In many respects, the problem of weak productivity growth in the capital reflects the one clear finding about the causes of the UK’s growth slowdown since the global financial crisis. It has been concentrated in the nation’s most productive sectors, best companies and most dynamic regions. The UK’s London problem is not part of a wider trend, according to the Centre for Cities, and has not been replicated in comparable cities such as New York or Paris.

This matters for everyone in the UK. With progressive taxation and higher incomes in the capital, economic weakness in London leads to worse public services across the country. Average Londoners paid £4,519 more in tax than they received in public spending in 2019-20 while Britons as a whole received a net government subsidy of £820. If you’re worried about being on an NHS waiting list in Leeds or burglaries in Bradford, you should be gunning for London’s economy to be stronger.

The Centre for Cities makes a strong case that catastrophic property policies lie at the heart of this new weakness. Commercial property rents have risen remorselessly even as productivity has stagnated, potentially squeezing money available for more productive investment and raising the share of London’s economy devoted to real estate management. High residential property costs — both rents and house prices — make the city less attractive to high-productivity migrants.

Median incomes after housing costs are now no higher in London than the UK average. So it is certainly true that people can and do leave the capital to escape its horrendous housing costs, even for a lower-productivity job with worse pay elsewhere in the UK.

Don’t assume though that high-productivity companies will make the same choices. If attracting staff and commercial rents force them to locate outside London, the likelihood is they choose Paris or New York rather than Manchester or Leeds, especially after Brexit. Whether it is people or companies being put off by property prices in the capital, the UK as a whole loses.

Policy solutions naturally lie in simpler, less restrictive planning regulations, more liberal immigration restrictions for high-skilled employees and more devolved powers for London to improve its competitiveness. The mayor, for example, should have wider powers to promote developments and raise taxes for improved transport and other services, as happens in most other large cities internationally.

If the rest of the country objects, many of these policies could be restricted to London as a special case that has national importance. Make no mistake. If the UK wants to level up its growth rate to those of other countries, it needs London to be firing on all cylinders again.

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