Alexander Jan: The government is letting central London’s high density economy unravel. That’s a mistake

Decades of positive pro-growth policies based on good public transport and tightly-packed city centre businesses are at risk of going into reverse

This week has seen our friends in the government’s Newport-based statistics powerhouse make an important correction – the Office for National Statistics reversed an estimate of the UK’s average output per hour during Covid (2020 and 2021) from plus five per cent to minus 0.3 per cent.  Its previous analysis suggested that in 2021 the country had seen the fastest growth of any of the so-called G7 major industrial countries, with the exception of Japan. Their revision means that the UK’s was, in fact, the second slowest growing economy over that period.

This revelation comes at a bad time for the UK economy and indeed for the government. In addition to Chancellor Jeremy Hunt’s big tax rises and planned public spending cuts, gloomy economic growth predictions abound. Late last year, government watchdog the Office for Budget Responsibility forecast that the British economy will contract by 1.4 per cent this year. That means yet more pain for hard-pressed households. Clearly the war in Ukraine, higher energy prices and post-Brexit challenges are all part of the reason for Britain’s poor economic outlook and performance. But as the ONS correction helpfully highlights, there is another factor in the equation – Britain’s woefully weak labour productivity.

According to the National Institute of Economic and Social Research, between 1974 and 2008 UK productivity grew at a (real) average annual rate of 2.3 per cent. This contrasts dramatically with a post-global financial crisis rate of just 0.5 per cent, a level unparalleled in our country’s economic history. The ten-year effect of this gap is a staggering 20 per cent difference in wealth creation. Productivity growth matters because as well as affecting a country’s ability to compete internationally it feeds directly into better wages and higher living standards. And as part of a growing economy, it means more tax revenues for public services and investment.

Central London has been at the heart of UK output and growth. Work for the London Property Alliance, which brings the City and West End property industry together, has estimated that, pre-Covid, Central London, which accounts for just 0.01 per cent of the UK by geographical area, generated 11 per cent of UK economic output and provided employment for 1.9 million people. And yet although during the decade leading up to the 2008, when the financial crisis began, London’s productivity grew by a third more per annum than that of the country as a whole, over the subsequent 14 years years it has flatlined. Only an expanding working population has sustained our economic performance.

This needs to be addressed. Before the pandemic government policy, as in other countries, was geared to making all UK city centres into thriving, densely-packed places of employment, served in London’s case by sustainable modes of transport such as railways, the Underground and buses.  In the capital and the wider South East our season ticket system, though pricey, meant passengers were able to make extra journeys at no additional cost to themselves. This was not only good for London’s theatres, museums, restaurants and retailers but also highly sustainable. It put downward pressure on car use and encouraged people to increase their use of public transport.

Crucially from a work perspective these policies helped to make our economy more productive by generating so-called agglomeration benefits,  produced when firms draw into the same location a broad and deep pool of labour covering a whole range of occupations and skillsets. With high densities of skilled workers, central London allows workers and firms and the wider economy to generate higher levels of innovation and better paid jobs than would otherwise be the case. Research shows that a 10 per cent density increase in banking, financial and insurance services leads to a 2.2 per cent productivity improvement. The same is true for business services. These two sectors form a major component of central London’s economy.  The investment plan for the Elizabeth Line was in part built on its ability to stimulate such economic outcomes, which can add as much as 20 per cent to the other benefits enjoyed by passengers.

Since the pandemic policy makers appear to have lost much of their interest in the economic benefits that flow from people working in the same physical place at the same time. Working from home – which was turbo-charged by the public health emergency has remained above pre-Covid levels long after the restrictions were lifted.  Some in government appear to be taking a “wait and see” approach to this. As a result we are now effectively living through a very large, real-time experiment with our economic competitiveness. There is a risk that by allowing lots of home working businesses will, through no fault of their own, be weakening the competitiveness of their sectors and indeed the economy at large.

We need those charged with promoting the wellbeing of the economy – and indeed the path to net zero – to be thinking about density-related economic benefits with greater urgency. More pro-growth, pro-productivity policies should be put in place to support employment in central London employment and the UK’s other major city centres.

Here, a simple step would be to make travelling into work on the the quiet Monday and Friday weekdays significantly cheaper. Tax relief on season tickets could be introduced. Campaigns to get people back into central London for work – not just for leisure – could be launched, highlighting the value of this for career development, learning and, yes, higher earnings. And a significant shift in business taxes away from bricks and mortar and towards the world of, say, on-line commerce should also be developed. Longer term, plans for Crossrail 2 and the Bakerloo Line extensions should be taken off the shelf. Doing that would give employers confidence that there will be further long-term, high quality rail capacity to get their staff into work on a regular basis.

Britain is weathering its biggest economic crisis for over 70 years. As businesses battle to play their part in generating good growth, government at all levels is going to need to deploy every means available to boost the economy, competitiveness and sustainability. It could do worse than ensure that the hard-won gains that came from focusing on city centres as places to work are not lost by ditching decades of pro-high density policies.

Alexander Jan is chair of the Central District Alliance and Hatton Garden business improvement districts and an advisor to the EC BID. Follow Alex on Twitter.

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