London Still Dominates Our Economy. Can The Trend Finally Be Reversed?
8 min read
The UK is often described as the most regionally unequal developed country. The issue, say experts, hasn't been London overperforming, but second cities underperforming. To truly address this, regions require much more political power, reports Benedict Cooper
Stack all the regions of the UK against each other in the 2023 GDP ranking and, outside the South East, not one manages even half that of London.
To top the performance of the behemoth combined region of London and the South East requires the combination of the next five regions on that list. And London alone almost doubles the GDP of Scotland, Wales and Northern Ireland combined.
It is well known, much lamented, and deeply resented that the UK’s economy is so dominated by one city. This phenomenon extends far beyond economics — the nation’s main political, cultural and institutional bases are almost all in the capital.
Good news for London. Not so much for the remainder of the United Kingdom, where, you might forget, 87 per cent of the population lives.
Neither is it good news for the country as a whole. Not when the corrosive effects of extreme regional inequality are understood. Not when the huge lacuna — much more than is found in comparable European economies — is one of the causes of stunted economic growth nationally.
If the Chancellor, like so many chancellors before her, is serious about growing the UK economy, she might start with the huge gap in the figures between the regions. But does she have the right ideas? Can the potential of the regions be unlocked? And might devolution just be the key to it all?
Under New Labour, it was called the New Deal for Communities. Later, under the Tories and Lib Dems, there was the Northern Powerhouse agenda, to “rebalance the country's economy”. Then there was Levelling Up.
Successive governments have made efforts, or gestures, towards addressing the huge gaping problem staring out of the GDP figures.
Namely, that the UK has “some of the deepest spatial inequalities and regional productivity divergence among the OECD countries”, as the authors of the Bennett Institute’s 2024 The Productivity Agenda report put it, lamenting the “geography of discontent” that has resulted.
Or, expressed even more bluntly by IPPR North, addressing a Housing, Communities and Local Government committee in 2019, “the UK has a severe problem with regional inequalities in productivity, wealth, health and wages. Across a range of measures, we are the most regionally unequal country in the developed world.”
No disagreement about the problem. But how has this been allowed to happen in the first place?
Firstly, there are purely economic factors. Paul Swinney, Director of Policy and Research at the Centre for Cities, puts it down to how the long, drawn-out decline of UK industry was managed, and how UK cities responded.
He says: “The issue that the second cities in the UK faced is that when deindustrialisation happened, they struggled to adapt to more knowledge-based economies.”
On the other hand, he says, London has adapted, and now “offers two big things”. “London has skilled workers and a knowledge base, where businesses can go and share big ideas. Other cities don’t offer that knowledge base.”
London is the booming hub of UK knowledge-based and service-based activities, so valued in the global economy. In comparable countries, the knowledge is shared more evenly, meaning their secondary cities perform better.
As Swinney puts it, the severe regional imbalance is less a result of London’s great economic power, which is comparable to other G7 capitals, than the underperformance of the cities in the secondary and tertiary tiers.
He says: “The big difference we see between the UK and other successful G7 countries is not the performance of the primary cities, it’s the performance of the secondary cities.
“These big places outside London are not playing the role they should be.”
There’s been a mealy-mouthed and modest approach to devolution so far
That was the finding of the Centre for Cities' June 2024 Climbing the Summit report, which reported with alarm that “seven of the bottom 20 large cities for productivity in the G7 are British, which impacts on the UK’s overall performance”.
Those are the uncomfortable outcomes. To find the causes, Dr Simon Kaye, Director of Policy at think tank Reform, says we should look at the “hyper-centralised” system that created them.
He says: “Historically, we’ve been a unitary state for a very long time, with quite a deep tradition of hyper-centralised government.
“Public investment tends to be concentrated in the South East, and private sector investment follows that trend. That means that opportunities — and the pre-existing infrastructure and logistical convenience needed to realise opportunities — have always tended to fall close to the capital.
“After a while, all the agglomeration benefits of centring what you’re doing in or near London mean that there’s a feedback loop: it makes increasingly better sense for economic activity to play out there.”
It’s the phenomenon that Andy Haldane, then Chief Economist at the Bank of England, identified in his Academy of Social Sciences Annual Lecture in 2018, of a “hub with no spokes”. The centre is turning furiously, but the outer circles aren’t getting any movement.
Today, Haldane is the chief executive of the Royal Society of Arts, Manufactures and Commerce (RSA). He is set to retire in June, but still feels passionately about the problem and is clear about the solution.
“The answer is power," he says. "The lack of devolved power to the regions. It goes to the heart of why they haven’t been able to unlock that huge potential. Unlocking the potential of secondary cities could unlock £100bn nationally.
“The UK is both the most spatially imbalanced country in the Western world, but also it has one of the greatest imbalances of power.”
Does the disparity — arguably, gross injustice — of public spending per capita that has favoured London for decades, identified by Dr Kaye, stem from the simple fact that that’s where all the power has been?
If so, all the more reason to intensify efforts to devolve those powers, says Haldane, who isn’t impressed by the progress to date.
He says: “There’s been a mealy-mouthed and modest approach to devolution so far. There’s been a degree of out of sight and out of mind over that. Devolution has been rather half-hearted.
“The powers that are devolved are to a fixed menu dictated by Whitehall rather than local leaders themselves saying they need this power or that power to deliver their local plans.
“It’s much more centralised when it comes to spending powers, but even more acutely when it comes to taxation powers.
“That’s been compounded by putting many of the regional and local leaders on starvation rations financially. There’s been a progressive scaling back of the resourcing of local government.”
Which doesn’t exactly speak to a political system, or a civil service, that’s serious about sharing the powers it has amassed over decades.
Nothing we’ve tried so far has worked. So try something new
The generational nature of the problem puts the ten months that Labour has been in charge, this time around, into context. But people, towns and cities that have waited generations for change won’t have much patience. Labour needs to deliver.
What should delivery look like? There’s much contention over that question, and many different cases are being made, as we await the government’s Industrial Strategy White Paper in June.
But the Green Paper that preceded it, Swinney says, gives enough to go on — although not enough to be hopeful about.
He says: “Yes, there was identification of some of the problems and places [in the Green Paper], but in terms of doing something about it, there’s not a great deal we can point at and say, ‘Yes, they’re doing this’.
“There was a diagnosis. The question is, was there the policy action to deal with it?”
Swinney and the Centre for Cities have a detailed idea about the type of policy action needed, one pillar of which is specific targeted funding, in sciences and other industries, to directly “change the nature of commercial spaces” in those places.
“What we’d like to see is a package of money over a 10-year period invested in R&D in city centres,” he says.
“If we’re going to be more of a knowledge-based country, we have to make sure these cities are places where the companies will want to be.
“We need to remove those barriers to companies being in those cities. Think about the wider drivers: skills, houses, the right office spaces.
“We need to create city centre funds which will change the nature of commercial spaces in those areas.”
Funding is key. But Haldane says that it is only one of three of a “holy trinity” of successful devolution, being “people, power and money”, adding “you need all three to make a success of a place and to unlock that potential”.
The wave of new devolved regional mayors and fiscal devolution is a big step forward — if, as Haldane says, they are given the powers of spending and taxation they need to truly bring about change.
But above all, says Dr Kaye, it will take something of a revolution in Treasury and Whitehall thinking, a tearing up of the “fixed menu” of devolved powers, if devolution is going to progress at anything like a meaningful pace.
He says: “If I could, I would tell the Treasury that it needs to be ready to get really radical. Nothing we’ve tried so far has worked. So try something new.”
A government spokesperson told The House: "Our Plan for Change is transferring power from Westminster to our regions to drive growth across the UK. We've moved quickly to activate Local Growth Plans, and invest £3bbn in local growth, because local leaders know best what will improve lives in their communities.
"These shared priorities deliver real benefits — putting more money in working people's pockets and ensuring communities feel the tangible advantages of devolved power."
