London’s importance to the UK economy keeps on growing

Allister Heath
WHEN Nathan Mayer Rothschild left the family home in Frankfurt in 1798, aged just 21, and moved to set up shop in England, it was Manchester he chose as his first base, establishing himself as a successful merchant. He only moved to the City of London in 1809, when he took premises at New Court in St Swithin’s Lane, where N.M. Rothschild & Sons are still based today.

This story illustrates how London’s domination of the UK economy is a relatively recent phenomenon; there was a time when other great English cities were powerful competitors.

For example, by 1961 household incomes in the west Midlands were 13 per cent higher than the UK average, beating even London and the south east; service sector jobs in the Birmingham conurbation grew faster than in any other region between 1953 and 1964 (as pointed out in a History of Birmingham by A. Stutcliffe and R. Smith, cited on the website of the LSE Spatial Economics Research Centre). Needless to say, output per worker today is much higher in central London.

While London last peaked in 1911, and then entered decades of relative decline, our capital city has been in the ascendant again since the 1980s. Its relatively good performance – and the tragic decline of the other great cities – means that London is now the most important it has ever been to the UK economy, accounting for a record high of 21.9 per cent of UK gross value added. When the commuter belt is added in, the London economic region’s lead is now unassailable.

The latest evidence comes from the Investec/Real Business 2013 Hot 100 list of the UK’s fastest growing privately-owned companies. Mid-sized businesses based in London account for 30 per cent of the list, including five of the top 10. Businesses based in London and the south east makes up 49 per cent of the top 100, up from 43 per cent in 2012.

One way of assessing the full reach of London’s economic area is to look at where else house prices move in tandem with London prices. There is the effect from commuters – but also those relocating out of the capital but taking some of its wealth with them.

Savills has crunched the numbers. Some areas south and south west of London, including Windsor, Guildford, Dorking and Redhill/Reigate share over 97.5 per cent of their house price movements in previous cycles with the capital, behaving like London boroughs. Large areas to the north, south and west of London, incorporating St Albans, Oxford, Reading and Winchester, share over 95 per cent of their house price movements with Greater London. The M4 corridor, stretching to Bristol, shows a 90-95 per cent correlation. Areas where the correlation is at least 80 per cent include North Suffolk, Somerset and Herefordshire as well as Essex and Kent. On that definition, London’s city state extends over most of southern England, south of a line from the Severn to the Wash, and includes 25.5m people.

There are two lessons. First, much more needs to done to boost the UK’s regions. Corporation tax could be abolished in Northern Ireland, for example, which ought to be turned into a giant, low tax, low regulation enterprise zone. The dead hand of the state has debilitated large swathes of the UK, preventing them from finding a post-industrial future.

But London and its region are the jewels in the UK’s economic crown. They too need lower taxes and a supply-side revolution to fulfil their immense potential. They need more infrastructure, including privately financed airport capacity and a house-building boom to cater for a growing population. The City and the finance industry also need to be allowed to thrive again. London is a great asset; it needs to be set free to grow, prosper and create even more jobs.
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