I can say with some confidence that London’s economy will not be derailed by Saturday’s cowardly terrorist attack yards from the offices of this newspaper. If there is one thing that the capital has demonstrated throughout history, it is resilience in the face of adversity. London has not been reeling, as one American newspaper suggested, and nor will it. Any impact will be temporary. Such resilience, also demonstrated superbly by Manchester in the wake of its atrocity, adds to evidence that economies almost always take terrorist attacks in their stride.
Staying with London, the risks lie elsewhere. Decisions taken by our politicians, who are competing for our vote tomorrow, will determine whether the capital prospers or struggles in coming years.
I have taken a close interest in regional imbalances since I wrote a book on them, North and South, nearly 30 years ago. Throughout that time there has been a tendency to take the Dick Whittington approach to London and assume that the streets are paved with gold.
In some respects they are, as successive chancellors have been fully aware. London is the cash cow for the rest of the economy, generating a budget surplus of £27 billion in 2015-16 while all but a couple of other regions were in deficit, according to the Office for National Statistics.
London has the highest incomes, with gross disposable household income per head (in other words after-tax average income) of £25,293 in 2015. This was 32 per cent above the UK average and 59 per cent higher than Northern Ireland, the poorest region. Most of the top ten highest income local areas in the country are in London. Disposable household income per head in Kensington and Chelsea was more than £52,000, four times that Nottingham, Leicester and Blackburn.
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London is a formidable generator of tax revenues and enjoys higher incomes than the rest of the country, but the story is more nuanced than it might seem at first. At 6.1 per cent, London’s unemployment rate is the highest in the country. Its employment rate, the proportion of the population aged 16 to 64 in work, is a mediocre 73.3 per cent, more than five percentage points below the highest employment regions and lower than Wales, Scotland, the northwest and Yorkshire and the Humber.
London’s high incomes come with a large housing bill attached. Monique Ebell, in a National Institute of Economic and Social Research briefing paper, Regional Inequality In Productivity in the UK: A Closer Look, points out that while regional wage inequalities have decreased a little in recent years London’s advantage has declined. Inequalities in housing costs, a proxy for which is rents, have gone up. The gap between what Londoners and the rest of the country pay for housing has increased.
The central point of Ms Ebell’s analysis is to remind us how essential London’s contribution is to the economy. Productivity, gross value added (GVA), per head is higher in London than in the rest of Britain, to an almost embarrassing extent. Productivity is 72 per cent above the national average and twice as high as in seven of the other eleven regions.
Even applying a sensible adjustment to the numbers, to measure productivity by GVA per employed worker and so take account of London’s large pull for commuters, productivity in the capital is 37 per cent above the national average. Raise productivity elsewhere to London levels and Britain no longer has a productivity problem. Take away London’s exceptional productivity and the UK’s performance becomes even more abject.
We need to look after the London economy, not treat it as a cuckoo in the nest. George Osborne’s stamp duty reforms hit the London housing market hard, before the Brexit vote inflicted further damage. Labour’s tax policies, if ever implemented, would be disastrous. Income tax rises on the higher-paid would be an open invitation to many in business, professional and financial services to locate elsewhere. Labour’s “Robin Hood” financial transactions tax, an old left-wing idea thought to have been buried long ago, would hit the City hard. Applied unilaterally, it would damage London and help Paris, Frankfurt and Dublinp. Bonkers at any time, Labour’s tax plans would be ruinous in the context of Brexit.
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Those who say that we have had high taxes in the past and survived should remember that these high tax rates ran alongside allowances and reliefs, including mortgage tax relief. High taxation meant that London was a failing city in the 1970s, subject to a significant talent drain. Even then, there was nothing as specifically designed to disadvantage the City as the Robin Hood tax.
Brexit is the second threat to London. Neither of the main parties has anything credible to say about protecting the interests of the service industries on which London depends. More than 92 per cent of the capital’s employment is in the service sector. The Tories and Labour are committed to leaving the single market without any clear idea of what arrangements for services, and in particular financial services, will follow.
Little wonder that investment banks and financial services firms are taking steps to move staff to locations within the single market. Theresa May’s hard line on immigration, harder than most in her cabinet, will also have an adverse impact on the capital.
London is a resilient city. It will remain the biggest financial centre in Europe even if it loses a significant chunk of activity. The important competition is with New York, Singapore, Hong Kong and Shanghai. Politicians need to nurture London. As it stands, their approach will damage it.
