London has never been this important to the UK economy

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IT is an astonishing story. London’s share of the UK’s economic output has just reached an all-time high of 21.9 per cent. Yes, that’s right, despite the crisis, and the City’s woes, London accounts for more of Britain’s economy that at any time in recorded history. The last time it came close was in 1911, when London was a manufacturing, shipping and imperial centre, and the world’s financial capital.

In 1997, when Tony Blair became prime minister, London’s share was 18.8 per cent of gross value added (GVA); by 2011, it had reached 21.9 per cent, according to the Office for National Statistics. A century ago, London’s share peaked at 21.5 per cent, according to separate numbers compiled by Nick Crafts of Warwick University. London’s economic importance reached a nadir in the 1950s. The economy was transformed after Big Bang and Lord Lawson’s tax cuts of 1988 and piggy-backed on the growth of financial and business services and globalisation; the rest of the UK never recovered from the collapse of manufacturing, a demise which accelerated in the 2000s.

Tragically, vast parts of modern Britain now host only relatively small amounts of private sector producers and depend on the state. Meanwhile, London’s private sector dominated economy boasts GVA per job 39 per cent above the UK average and 66 per cent higher than Wales (which is why wages and the tax take are so much higher in London); gross disposable income 29.7 per cent higher than the UK average; there has been an 11.5 per cent surge in active businesses in London since 2007, against 1 per cent for the rest; and an extra 267,000 net workforce jobs have been created in London since then, against a drop of 284,000 in the rest of the UK. From 2007 to 2011 London’s GVA grew by 12.4 per cent (unadjusted for inflation) compared to 2.3 per cent-6.8 per cent across other UK regions. London’s share of UK output rose from 20.7 per cent to 21.9 per cent.

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The broader London economy extends to a swathe of the inner home counties, those bits within the M25 not technically in London as well as a large number of prosperous commuter towns outside of it in Kent, Buckinghamshire, Berkshire, Essex, Surrey and Hertfordshire. Taking London, the South East and Eastern regions together is imperfect (the latter regions are vast and include lots of non-London related activity) but confirms how economic power is shifting from North to South. Those three regions now account for 45.2 per cent of GVA, up from 41.4 per cent in 1997; the combined East and West Midlands, South West, Yorkshire, North East and North West have collapsed from 36.4 per cent to 32.9 per cent. London, the South East and the Eastern region overtook the rest of England and Wales in the late 2000s.

There are many lessons. The most capitalist and globalised part of the UK is doing best. London is financing the rest of the UK to an ever greater extent, which will cause resentment. The government should play to the UK’s strength and help London prosper by allowing it grow, build homes and extend transport links – and help the City emerge stronger and better managed from the crisis. It would be idiotic to try and rebalance the UK by crippling London and those industries at which we excel. Instead, we need a dramatic supply-side revolution and tax cuts to help the rest of the UK compete once again with the world. London and the rest of Britain can both grow – but the government must make it worthwhile to start creating wealth across the country, or else the divide between North and South will continue to grow, and eventually reach breaking point.

allister.heath@cityam.com
Follow me on Twitter: @allisterheath

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