This submission engages mostly with the first part of the inquiry, concerning the nature and consequences of the UK’s regional imbalances. Our main task is to offer a new prism through which to view the issues. We also make some focused and some general recommendations, including suggestions for improving measurement.
In particular, this article uses a short piece of forensic research, complemented by a growing body of research from the International Monetary Fund (IMF,) the Bank for International Settlements (BIS), and others, to challenge a widespread view that London is necessarily the ‘engine’ of the British economy, creating jobs and wealth and showering taxes and subsidies on other parts of the country, in a grand one-way flow.
For example, a 2017 article in the Financial Times, entitled “Why London deserves a thank you note from the rest of Britain,” argued:
London “is definitively the cash cow that allows [politicians] to promise the high quality public services all parts of the country crave 2 . . . Official estimates show that “In 2015-16, average Londoners paid £3,070 more in tax than they received in public spending . . . if London was a nation state, it would have a budget surplus of 7 per cent of gross domestic product, better than Norway. . . . the idea that London sucks the life out of other parts of Britain is absurd.”
Supporting this view, the Office for National Statistics (ONS) presents regional data for Gross Value Added (GVA,) showing London’s per-capita productivity at 179 percent of the UK average, while West Wales & the Valleys are at just 63 percent. While other studies suggest that the true picture is less stark after adjusting for workforce, housing, industry mix and other factors, this has not dented the conventional view.
Our view paints a more nuanced picture, which shows how a group of actors concentrated heavily in London and the South-East of England are as likely to have wealth extracting effects from other parts of Britain, as they are to have wealth creating effects that allow redistribution to the regions. This worsens London’s gravitational pull on resources and talent from other parts of the country. The actors involved are disproportionately employed in the financial sector. As one analysis put it, “The vigour of finance derives precisely from its ability to capture resources from the rest of the economy.”
As documented in this paper, this has important regional implications given that in the case of those activities that have wealth-extracting effects, the regions away from London (along with poorer parts of London) are more likely to be the parts of Britain extracted from, while wealthier parts of London and its hinterlands are more likely to be where the national or global headquarters are located, receiving the proceeds. So the very obvious one-way flow of wealth as evidenced by London’s tax and budgetary and jobs contribution, is only the most visible part of a more complex, less visible, two-way flow, with powerful and troubling regional implications. We argue that these sorts of activities are far more pervasive than is commonly understood.
- This submission challenges challenge a widespread view that London is necessarily the ‘engine’ of the British economy, creating jobs and wealth and showering taxes and subsidies on other parts of the country, in a one-way flow.
- Our view paints a more nuanced picture, showing how a group of actors concentrated heavily in London and the South-East of England, disproportionately employed in the financial sector. are as likely to have wealth extracting effects from other parts of Britain, as they are to have wealth creating effects that allow redistribution to the regions
- A simplistic approach to addressing Britain’s regional economic imbalances would identify parts of the financial sector as extractive, then seek to shrink such parts, in the name of regional rebalancing.
- It may indeed be possible to consider how and which parts of the financial sector may usefully be made smaller, and regional and national cost-benefit analyses conducted of various strategies for doing this.
- A more nuanced approach would recognise that many of the more extractive sectors, and more broadly those forces that represent the ‘gravitational pull’ of investment and resources and effort and talent away from the regions (and from poorer parts of London) towards parts of London and its hinterlands, the ‘winners’, are frequently inseparable from one another.
- Useful and productive lending and investment are entangled with leverage techniques and securitisation, which contributed to the global financial crisis and may do so again.