London and the UK Economy

1. London and the UK Economy Duncan Melville Senior Economist, GLA Economics

2. What is GLA Economics? • GLA Economics provides expert advice and analysis on London's economy and the economic issues facing the capital. • The unit is funded by the Greater London Authority, Transport for London and the London Development Agency (LDA).

3. This seminar is based on: • GLA Economics Report – “Growing Together: London and the UK Economy” • Available at: • http://www.london.gov.uk/gla/publications/economy.jsp#growing

4. Three views of London UK relationship: • London grows at the expense of the rest of the UK / “the North” • London is the driver of the UK economy • Both these views are incorrect • Relationship is one of mutual and positive interdependency

5. Growth in London and UK moved in tandem for at least 20 years

6. Many channels via which London and UK interact. Here consider: • Migration and Commuting • Trade and Specialisation • London’s role as a World City • London’s Tax Export

7. More out, than in

8. Net influx into London by people in their early to mid 20s

9. Probably a net inflow of high skilled

10. Inflow early in individuals’ careers and then outflow later

11. Analysis of migration shows: • No one way “brain drain” to London • Rather London acts as training ground • London gains from the net inflow of talented young people • Rest of the UK gains when people migrate out of London later in their careers taking their skills and experience with them.

12. Commuting • Commuting helps to integrate London’s housing & labour markets with those in Greater South East • Just under a fifth of London’s jobs are filled by commuters • Around one in ten of employed residents of South East and East of England regions are employed in London.

13. Commuting 1991-2001 • Census data: • 1991 In: 673,000 • Out: 150,000 • Net: 523,000 • 2001 In: 723,000 • Out: 236,000 • Net: 487,000

14. Commuting Trends 1992-2003

15. Commuters in senior occupations

16. In Commuters more prevalent in Finance

17. Trade and Specialisation • Trade is driven by specialisation • Individuals, regions, and nations specialise in certain activities and then trade to obtain other goods and services • So the more different the structure of the London economy is from the rest of the UK, the more the potential for gains from trade.

18. London’s economy is different

20. London’s specialist strengths: • Almost all in service sector requiring workers with high levels of human capital • Bulk of identified specialist strengths produce intermediate products sold to other businesses • Highly interrelated – finance, business services, ICT • Often co-located e.g. City obvious centre of finance but 36% of employment in business services.

21. Agglomeration benefits • Specialist input services • Specialised labour forces • Knowledge spillovers • Challenge from competitive neighbours

22. Productivity Benefits

23. Agglomeration benefits • A doubling of “City Type” financial and business services reduces unit costs by around 18 per cent. • UK – low cost of capital on OECD – both lending rate and spread between deposit and lending rates. • For UK business the strength of performance of London’s corporate orientated F&B sector is a key source of competitive advantage

24. London’s regional trade patterns reflect its specialisations.

25. London’s international trade pattern is distinct.

26. London is a World City (whatever that is) • World Cities house corporate HQs, corporate financial services and related business services. • Together this bundle of activities allows business establishments within world cities to coordinate economic activity across the world • Empirical analysis centred on the presence & connectedness of finance & business services • London ranked 1, Manchester 101, Birmingham 106

27. London’s Global Linkages (1)

28. London’s Global Linkages (2)

29. London is a global centre of finance and business services.

30. And this benefits UK business • Potential demand for London’s finance and business services is global. • The magnitude of this potential global demand is a key driving force supporting the concentration of these activities in London. • This leads to greater agglomeration benefits boosting the performance of London’s F&B sectors – to the benefits of its customers.

31. Attracts Corporate HQs to London • Concentration of strongly performing F&B encourages location of corporate HQs in London • 33% of European HQs of Fortune Global 500 companies – well ahead of Paris on 9%, Brussels 6%. • International HQs if not in London are unlikely to be elsewhere in the UK.

32. Cosmopolitan nature of London is attractive to international migrants

33. Tax and Public Spending in London • Previous estimates of tax raised in, and public spending in London have consistently suggested that the former outweighs the latter. • So London exports taxes. Only right as London is on average a relatively well off part of the country. • First time we have undertaken a historical analysed this issue – for 1989/90 to 2002/03.

34. London’s tax export increases with London’s output growth

35. UK fiscal policy also affects London’s tax export

36. London’s tax export: • Between £2 bn and £9 bn in 2002/03 • London’s contribution to the nation’s coffers is greater the stronger the performance of the London economy • Hence public investment in London to underpin its economic performance is of benefit to the whole of the UK not just London and Londoners.

37. Summary and Conclusions • London’s contribution to UK rest on its distinctiveness within the UK economy. • Economic growth in London and the rest of the UK move in tandem. • London continues to export taxes to the rest of the UK and was the source of a very large part of the UK public sector financial surpluses of the late 1990s / early 2000s.