Friday, 18 June 2010

The problem is London

Never mind a double-dip recession. Many regions and sectors in the UK are already facing a double economic whammy. The problem is London.

There are huge imbalances between London and the rest of the UK. In almost no other developed country does the largest city dominate to the extent that London does in the UK. Furthermore, in some countries, such as the US and the Netherlands, the capital is not the largest city and this provides a balancing effect between two centres. The over-centralised UK means that political power is concentrated in London.

London also dominates economically as well. It has a disproportionate level of economic activity compared to other parts of the UK fuelled by the financial services sector in the City of London. The focus by governments on the financial services sector has led to a situation whereby manufacturing has been allowed to decline. Between 2000 and 2007 there was large growth in the total GDP of the country but a significant contraction in the proportion of that GDP from manufacturing. Manufacturing now comprises just 11% of GDP but provides 50% of exports. Export-led growth critical to economic recovery but an under-represented manufacturing sector means the economy might not be able to take full advantage of any upturn in global demand.

So what are the implications of this situation?

• It impedes regional economic development. When the London economy overheats, action is taken to bring down the temperature. This action can impact negatively on the rest of the UK.
• There are wide inequalities in income, wealth, health status, and housing standards
• The overheated housing market in London and the Southeast leads to inflationary pricing bubbles that eventually burst and cause huge economic damage
• Insolvency rates, unemployment levels and the state of household finances between 2008 and 2010 show a skewing of recessionary pain and hardship towards regions other than London and the Southeast.

So what might be done? What about a decision to shift the UK capital to (say) Birmingham similar to what Brazil did with its capital several decades ago. This might be an excellent idea but would fall foul of the myriad of vested interests in London.

However, there should be much greater decentralisation of public sector jobs. In spite of token efforts to transfer jobs out of London, there is still a massive preponderance of governmental and quasi-governmental jobs in the capital. There is no logic to this in this age of modern communications. This focus on London also stimulates a concentration of jobs in the head offices of third sector organisations, even though accommodation and staffing costs in the capital are much higher than elsewhere. By taking a lead, government will encourage charitable bodies to relocate their head offices out of London as some, such as Oxfam and World Vision, have already done. Also, people might think about only supporting charities who have their offices located outside London thereby incurring much lower administrative costs.

Similarly, while the government cannot direct the private sector as to where it locates jobs, it can encourage the private sector to locate jobs (and especially highly skilled ones) to different parts of the country through planning consents and other measures.

There is also a pressing need to focus on the role of manufacturing industry to help produce resurgence in the sector. This point has been emphasised for many years by, among others, Sir John Rose, the chief executive of Rolls Royce (one of the few remaining UK examples of world-class manufacturing industry). Until recently, this view seems to have fallen on deaf years as a consequence of the euphoria about the financial services sector but times are changing. Let’s hope it is not too late.

The rest of the UK (ex London) comprises over 80% of the UK population. Its time to tell the Government to start thinking about us as well.

A fuller version of this commentary can be found on
http://www.publicfinance.co.uk/features/2010/04/double-trouble/

What did Cameron say that was new

Following David Cameron’s speech about the UK’s budget deficit on 7 February I was rung up by a few journalists asking me to comment on some of the “terrible” things he had said. My initial reaction was to ask what was new about what the Prime Minister had said in his speech.

For months before the general election many academics (including me) and think tanks such as the IFS have commented at length on the size of the huge budget deficit (and associated Government borrowing requirement) and major remedial actions would be needed to reduce it. Also, comments were made by the same people about the fragility of the UK economy and the likelihood that low levels of growth would inhibit attempts to reduce the deficit (UK economic growth forecasts have now just been downgraded).

To a large extent it seemed to me that the deficit problem was the non-mentionable subject during the general election campaign since none of the parties wanted to spell out the scale of the problem and what needed to be done to resolve it. In his recent speech David Cameron has added little detail to where the cuts are likely to take place and it seems that his speech was just an attempt “soften up” public opinion about what is to come.

To remember the impact of the 1976 deficit reduction exercise, following the IMF bailout, you probably need to be over fifty years of age. A large proportion of public sector managers working today have probably been brought up in an era of continuous economic growth and largely continuous growth in public spending. During that period the term “cuts in public spending” was often used to describe reductions in planned growth in public spending. Many parts of the public sector now face substantial real terms reductions in funding over a period of several years. Thus one of the key questions for me is whether public sector managers (and financial managers) really do appreciate the scale of the challenges they now face.