Rob Whitehead identifies the three key causes behind London’s stagnant productivity, and why it’s urgent for policymakers to address them.

London’s economy has many strengths. For decades London was the engine of economic growth for the UK. Rising productivity here helped drive rising living standards, inside and outside the M25. But over the past 15 years it has flatlined.

It looks inescapable now that London’s economy needs a reboot if it’s to continue delivering growth for the country. London’s policymakers can achieve this by investing in infrastructure, upskilling workers and reforming tax rules.

The problems facing London’s economy

The London economy, for all its richness and diversity, is stagnant. Although the components and causes of this are open to debate, some things are clear.

Fresh evidence shows faltering growth in productivity since the financial crisis of 2007-8. There appear to be three main causes.

Priced out of land

First, the rising price of land has crowded out other investment.

Investment has veered towards real estate, driven by the rising price of land, and low rates of return elsewhere. This has starved more productive sectors, from established TV companies to medical services start-ups, of capital.

As a result, firms wanting equity or loans to upgrade or expand have struggled to invest in intangible assets like design, software and human capital, and traditional capital goods like plant and machinery.

The fierce competition for land also raises housing costs, and so living costs, indirectly placing another burden on organisations and their staff.

A growing brain drain

Partly because of this, but worryingly for other reasons too, skilled people are settling here less. This is the second big factor in London’s stuttering economic performance.

London was a magnet for many, including the brightest and best from high skilled, advanced economies. But London’s attractiveness to skilled workers and young people has waned in the past decade. Housing costs are part of this, but not all.

In some finance circles there is talk of a ‘moron premium’ demanded by those investing in the UK, i.e. investors demanding a higher return to account for higher risks thanks to government incompetence.

This has leeched far beyond financial markets. The practical barriers and reputational damage wreaked by Brexit on London will probably take a generation to repair. This gets us to our third major factor.

Polycrisis

London has suffered badly not just from Brexit but from a series of shocks. What some call a ‘polycrisis’: Covid, the war in Ukraine’s impact on supply chains/global demand and the slower burning climate emergency.

Londoners, especially its most vulnerable residents, suffered disproportionately from Covid.

And as a highly internationalised economy and population, and a largely Remain voting one to boot, Brexit has hurt the nation’s capital beyond just its damaged appeal to talented individuals. New business barriers and capital flight are just two new arenas of economic pain.

Tackling planet killing emissions is as tough here as anywhere. Governance that is not fit-for-purpose, widespread poverty, far more renters than elsewhere, are just some of the barriers.

And then came the invasion of Ukraine, and the now familiar story of supply chain shock, energy price spiral and cost of living crisis.

Londoners, already the region with the highest rates of poverty after housing costs, have suffered hard from this cocktail of shocks.

The solutions – ways to reboot London’s economy

So how should we respond?

Making London competitive

First, we should focus on making London a competitive place to live and do business.

This should look at how to improve London’s infrastructure to make it more affordable and better connected.

Policy areas of focus could include:

• Reform planning decisions to reduce the price of office space in line with comparable global cities and entice businesses to locate and stay in London.
• Improve access to sustainable modes of transport to increase connectivity. Make London’s economy more inclusive by providing better economic opportunities to more Londoners.
• Improve infrastructure, planning decisions and high street placemaking to provide a solid foundation for a wide range of sectors to thrive (including those in the green sector).

Attracting and Developing Workers

Second, we need to push hard to attract workers and develop worker’s skills.

Here we should focus on making it easier for people to develop the skills necessary to access good economic opportunities and support green industries.

These could include:

• Reform of restrictions on migration to London to enable workers to locate here.
• Improve connections between employers and providers of education and training to supply the skills needed for young people working in tomorrow’s green industries.
• Do more to connect marginalised communities and parts of London in need of levelling up with opportunities from growing sectors of the economy.

Reforming governance and tax

Finally, we urgently need to reform the governance of the city and the tax system to drive growth and productivity.

We must improve the targeting of taxes and public spending to support growth by devolving fiscal powers to the Mayor of London.

In this some policy avenues could be:

• Investment in key infrastructure, business support, workforce development and other areas that would support economic growth.
• Reforming Council Tax to make it fairer and London a more attractive place for workers to locate to.
• Introduce new sustainable taxes, such as road user charging or a tax on single use plastic, to support London’s transition to a green economy.

Conclusion

Doing nothing is no longer an option. Neglect London’s economic sclerosis and not only will Londoners suffer, but so will, in some regard, everyone in the UK.

Londoners, and the policymakers responsible for looking after London, are surely smart enough to find a new upwards spiral of sustainable growth. But it won’t happen without a concerted effort.