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London economy forecast to remain strong at end of decade

by LLB Finance Reporter
29th Nov 23 8:09 am

London’s economy has proved “impressively resilient” in response to challenges such as Brexit, Covid-19, the war in Ukraine and the cost of living crisis, and is on track to remain in a strong position to 2030 – albeit in a weaker one than was hoped for five years ago, new analysis suggests.

The research, by the Policy Institute at King’s College London and supported by the EC Business Improvement District, says greater devolution is needed to prevent a further decline in the capital’s standing and to establish a new settlement for London.

It recommends bringing London together with other major English cities in a “council of mayors”, which would be established with a statutory brief to draw up proposals for government on how this could be achieved.

The report argues the council should be chaired by the prime minister and made up of all elected mayors across England, to help reach a consensus on appropriate levels of devolution and to improve political support for London’s position in the UK economy as a whole.

London’s economy in 2030: strong but could be stronger

Although the London economy has been highly resilient, its position at the end of the decade is expected to be weaker than previously hoped for in 2018, the report says. Devolution of decision-making is therefore seen as key to help drive growth through more aligned incentives such as retaining more of the taxes generated at a local level.

Five years ago, researchers at Cambridge Econometrics devised four possible scenarios for London’s economy in 2030. Their latest analysis confirms the capital is now expected to end up in the strongest one – although the outlook for this scenario has worsened since 2018.

The capital’s share of UK output under this scenario was previously projected to be 27% by 2030, but has since been revised down to 26%. Similarly, London’s estimated share of overall UK employment at the end of the decade has declined slightly, from 19% to 18.5%.

And with UK productivity in 2030 indexed at a base measure of 100, London’s productivity in the same year is now expected to be 145, compared with the original projection of 150.

However, other measures suggest the capital’s economy is on course to remain relatively strong overall by the end of the decade:

  • The proportion of London jobs that are in knowledge-intensive business services – which tend to be more productive – is projected to be 35% in 2030, the same as previously expected under this scenario.
  • London’s economic performance, as measured by regional gross value added, is still outpacing the rest of the country. With a base of 100 in 2015 for both London and the rest of the UK, London is now at 113, with the rest of the country at 107.
  • Recent data from the KOF Financial Globalisation Index shows strong growth in foreign direct investment in London, with an increase of nearly 25% since 2019, suggesting the capital remains a magnet for international investment.
  • Although UK employment figures returned to pre-pandemic levels in 2022, London’s post-Covid employment growth sharply outperformed that seen across the rest of the country, with a rise of 6% in the capital compared with just 2% in the rest of the UK.
  • London’s productivity growth continues to track that of the rest of the nation, but its productivity as measured by real gross value added per job remains vastly higher – at £78,000 compared with £51,000.

The report says the relative robustness of London’s economy is due in part to its international standing in the services sector, including financial services, which has proved sufficiently dominant and resistant to many of the effects of Brexit to date.

However, the capital is not immune from broader political shifts. While London’s status as the UK’s only truly global city means it continues to benefit from strong links outside of Europe, its position has been made less strong by national economies around the world becoming more closed and insular, and by UK government policy becoming less interested in London succeeding alongside other parts of the UK, the report argues.

A council of mayors could drive further devolution and boost the London economy

To address these challenges, and to develop effective ways of devolving decision-making powers, the report proposes a council of mayors be established in law.

Chaired by the prime minister and comprising all elected mayors across England, the council would meet a fixed number of times a year around the country, with the government required to respond to its proposals within a specified time period.

With this breadth and seniority of membership, the council would provide a forum for discussion of the crucial role that a thriving London economy plays in nationwide prosperity, the report says.

It cites the government’s Levelling Up Advisory Council as an example of a body that operates in a similar way, albeit not on a statutory basis.

The report argues devolution of financial power must go hand in hand with the creation of a new council of mayors. If London government were able to retain more of the proceeds of economic growth, there would be greater incentive to pursue pro-growth policies, it says.

What policymakers should do

In addition to addressing the economic impacts of these changes through further devolution, the report makes a range of policy recommendations – across transport, housing, commercial property, sustainability, migration and skills – that would help safeguard the capital’s future.

Key proposals include:

  • Keeping the graduate visa, and the global talent and high potential visas, so that London is able to welcome the next generation of entrepreneurs and innovators.
  • Allowing local authorities to charge higher fees for all planning applications above a minimum size, raising much-needed revenue to reinvest in reforming the planning system.
  • Encouraging a “five-day city”, through new TfL fares policies, to get more workers back in the centre of the capital.
  • Building new housing in inner London, to help ease shortages and help sustain the central London “high street” economy, as well as reviewing London’s green belt to identify areas that could accommodate well-planned new settlements.
  • Developing an updated industrial strategy for London, in a process led by the mayor in collaboration with the boroughs and the UK government.
  • Prioritising investments in sustainable infrastructure, including public transportation, renewable energy, and green buildings, through public-private partnerships, tax incentives, and regulatory measures.

Dr Jack Brown, lecturer in London Studies at King’s College London, said, “London faces severe challenges to its continued success, yet has proven able to deal with these robustly, even if they have taken their toll on our projections for where its economy could end up through to 2030.

“London remains a vital contributor to the UK economy, and its success is the nation’s success. This cannot be taken for granted. To strengthen London’s prospects for the next decade, we need a new settlement for London: a strengthening of devolution in the capital and across England and a set of new policies to back this up in key areas such as housing, transport, migration and planning and property.”

Tony Halmos, visiting professor at the Policy Institute, King’s College London, said, “This research sets out the policies which London needs to sustain and enhance its economic prospects up to 2030 and beyond – but underpinning these reforms is the need for a new council of mayors across England that can work with the government to produce a wide-ranging devolution plan, with real and widened powers for raising finance and greater discretion over how it is spent.”

Nick Carty, chair of the EC BID, added, “I am delighted that we have now been able to support this new report by the Policy Institute. This shows that London’s fundamental economic strength is not in question, but there is more potential, more growth and more opportunity that should be maximised.

“London should never be pitted against other parts of our country. Instead, we should see it as a national asset which, if looked after properly, can deliver for the whole of the UK. For this to happen, it requires a collegial approach and the devolution of greater powers – both in policy and taxation terms – to London and other English cities. The report makes a compelling case for a range of policy changes which could then be implemented by the mayor and would contribute to London’s future success.”

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