‘The London Effect’ – The UK’s Dependency on its Capital
London, specifically the City of London, has taken the lead as the financial centre of the world for centuries, attracting both domestic and international businesses in search for wealth.
Its geographical location, business-friendly time-zone and use of the English language makes it a perfect location for industries and financial monopolies to settle into. However, recent years have not looked favourably upon the capital.
The financial crisis of 2008-2009 caused a shift in the economy and a loss of confidence in finance. Moreover, the uncertainty of Brexit has led many large businesses to reconsider their position in the city, with many looking to cities like Dublin and Frankfurt as possible sites for relocation, should Brexit ~ actually ~ happen.
The UK has a problem of dependency on its capital, particularly the City itself. There are several pieces of evidence to suggest this is the case, for example, a report that was conducted by the Centre for Cities, a think tank, which found that London generated 30% of the UK’s tax revenue in 2014-2015, an increase of 5% from 2004-2005. The report also found that other cities were lagging behind significantly, with Manchester’s tax revenue only increasing by 1%. This is significant because tax is the largest source of revenue for the government; by 2020, income tax will generate £263.8 billion while indirect tax will also generate over £300 billion. This means greater investment for public services, infrastructure, job-creation, environmental initiatives, overseas investment, and so on.
With London generating the most tax, the rest of the UK depend on it for its financial strength. London’s dominant contributions to the UK economy are exactly why it prospers, and other cities do not. Jeremy Corbyn, current leader of the Labour Party, noted that 44% of all infrastructure investment is going towards London. Infrastructure drives growth, providing means for businesses to transport their goods and services, and allowing for people to commute as easily and as effectively as possible. Without significant infrastructure investment, other cities around the UK lose out massively, which only creates further dependency.
Future trajectories do not bode well for the rest of the country. The TUC stated in 2017 that London and the south-east region will account for 40% of GDP by 2022, compared to 38% in 2015. London alone in this case will account for nearly 25% of this figure by 2022, demonstrating the imbalance of the economy. The TUC also noted that regions such as Scotland are actually declining in economic power, and we can infer from this that their decline is resulting from fewer jobs being available in these regions, pushing those who live there closer to London.
Less tax is paid in these regions, meaning fewer resources to invest and upgrade. Brexit is also a key factor to consider, as with many other issues facing the country at the moment. Uncertainty has already led to the economy losing around £40 billion per year, according to a member of the Bank of England. Such disruption could lead to a recession worse than the financial crash. Even if these figures weren’t true to the exact number, it does illustrate how Brexit has created less favourable conditions for cities to prosper. With the direction of Brexit in the air, there is no clear solution to these issues and uncertainties as of yet, barring a complete reversal of Brexit.
So, what is there to do about the situation?
What the UK needs is balance. A system of greater interdependency between the major UK cities, including Glasgow, Leeds, Sheffield, Birmingham, and London. This means a greater distribution of the investment going towards the UK so that other cities receive more funding in areas such as finance and public services too.
There also needs to be a fundamental rebalance in dependency on finance. Finance is predominantly centred in London; the two go hand-in-hand. So, in order to change the London effect, there must be investment elsewhere.
That’s not to say we need to return to the days of polluting industry that no longer makes any money but, instead, look towards the ‘green economy’ as one of the many possible solutions. According to the ONS, the UK’s green economy is worth £42.6 billion. Renewable energy is the future of the world, as we face the problem of declining non-renewable resources such as oil and gas. This is particularly important when considering the decline of the North Sea oil economy. Investment in this area, an area that is still developing around the world, could allow the entire country to take the lead in this sector internationally and stop its dependency on London for financial power and revenues.
Nevertheless, the spanner in the works is always Brexit.
A no-deal Brexit could cause chaos and stop any chance of a rebalance in the economy for quite some time, until stability is ensured. A Brexit that is secured by a deal might allow opportunities to change the economy sooner. Reversing Brexit might produce a completely different result.
This article isn’t focusing on the future of Brexit, but it is so interconnected with this discussion that it is hard to ignore its potential impacts on the British economy. Brexit must be dealt with first, therefore, but there must be a redistribution of resources across the country – one way or another. Otherwise, a collapse in London’s strength could mean a collapse in the UK economy, or at the very least it will cause great problems for growth. There must be a rebalance.