Through the annals of time, the wars and the revolutions, and the rise and fall of empires, much has changed in the United Kingdom. Yet one thing has remained constant – the position of London as the nation’s leading city, and a thriving centre for international trade. Since the days of the British Empire, the global economy was dominated and monopolised by large trading firms like the East India Company, headquartered in the City. In the 17th century, its coffee shops were the business venue of choice for the world’s fledgling insurance market. It was one of the first inaugurated cities, and the world’s largest between 1831 and 1925.
Such a long and proud history of innovation in trade and finance has doubtless contributed to London’s current status as one the world’s leading business venues. The historical financial district of the City of London – and its younger sibling in Canary Wharf – have each helped to cement its place as financial capital of the world for several years in a row, before being narrowly overtaken by New York last year. Recent growth figures mean optimism in the capital is at a high unseen since before the financial crisis. It will not be long before the crown is regained.
The City pulls further revenue from large volumes of tourists, owing to its status as one of the most popular destinations worldwide. Last year, tourist spending in the city made up just over half of all revenues attributed to tourism in the UK. Millions of tourists descend upon London yearly, drinking in its intoxicating mix of architectural tradition and cultural modernity. And not all of these travellers are of the Canon-wielding, tour bus-dwelling type. London’s thriving international business environment has been the real spur for the city’s cultural diversity. The capital has become renowned for attracting a number of wealthy oligarchs; primarily Russian and Chinese, but also many closer to home. French and German millionaires have flocked to the capital in droves of late.
Of course, this arrangement cannot please everyone. Housing prices have skyrocketed with the almighty flow of capital into the City. Indeed, they have soared to a level that cannot even be matched by other global cities of note. London’s most expensive neighbourhoods now cost well in excess of double the most expensive neighbourhoods in New York: Savills’ researchers have shown that its pinnacle, Knightsbridge, costs £2,490 per square foot. Its American counterpart, Flatiron District, reports a price of just £1,061 ($1,818) by contrast.
Things don’t cheapen around the middle ground either. Sellers ask £2,030 for a square foot in Kensington, the fifth most expensive of districts, which again compares unfavourably with its New York equivalent, Upper East Side, at £796. Only some of this may be explained away by geographical features. The districts in Manhattan are, of course, larger than their London counterparts, and the US has other financial districts of note in Chicago, San Francisco, and Boston which may also attract yuppies on the move. But both London and New York wield world-class financial clout, and each attracts scores of tourists. How is it that one is so much more expensive to live in than the other?
Growth… But For Whom?
Uncontrolled growth is part of the problem, with Britain touted the largest growth story in Europe. The nation’s favourable conditions for expansion – its comparative lack of red tape for businesses, its flexible labour market and indeed, its absence from the common currency union – have finally yielded some fruits. Manufacturing is up, with PMI rising to 57.5, and national unemployment is falling. The UK is expected to achieve 3% expansion this year, unparalleled in Europe. The incumbent government hasn’t faltered in reminding everybody about any of this. But while 3% should usually be an easily manageable (indeed, quite welcome) figure, the real problem is where this growth is centred.
Outside of London and the Southeast, Britain has experienced few of the benefits of growth. In the Northeast, employment still peaks at 10%, and is still rising. While London house prices increased by 18% year-on-year in Q1, house prices in the North were up by just 6%. In the UK as a whole, 18% of households have no-one in work. In the North, this figure ranges from 27% to 30%.
Some would accuse Britons of wanting to have their cake and eat it too. This is one of the few nations enjoying an apparently genuine economic recovery. Spaniards can only dream of the figures Brits bemoan, with a national rate of unemployment that dwarfs even Britain’s worst areas at 25%. But to do so would be to miss the crux of this debate.
It is not so much the size of the figures which rankle with UK voters. It is the disparity between key metrics on other cities – particularly Northern ones – and those of the ever-booming capital. The idea that Conservative politicians are wedded to the South and neglect the North has been a trope used by opposing parties since the days of Margaret Thatcher, who decimated most of the manufacturing industry and deregulated the financial sector, centralising Britain’s economy in the capital.
There is a real challenge for the government and the Bank of England to properly manage the prospering London economy whilst doing what is necessary to spur growth in the regional areas. This is particularly important for those areas in the North, where political sentiment is highly charged. Indeed, Scotland’s recent separatist movement has had its fires stoked by a general feeling that the Tories haven’t changed since the days of Thatcher, and do not have their interests at heart.
In any debate, it is important to get a broad sense of perspective. Much of the furore about London has centred on house prices, which have ballooned out of control in the eyes of many. Still, this effect may actually be due to their being so comparatively high in the first place. In percentage terms, house prices in Greater London actually increased the least since 2007 with the exception of Northern Ireland:
However, consider the index since 2012, and one can understand the heightened volume of the debate. Greater London’s house prices have accelerated far more rapidly than any other region. Notable in the below graph is the near-absence of any mitigating drops in the rise. This is a trend that is gathering momentum:
Furthermore, London house prices have been growing steadily unlike some of the other regions, which have swung between erratic negative and positive growth. Indeed, house prices in the centre of London have risen 25.8% year on year. Greater London still exceeded the UK average of 8.5%, with its 13.3% upswing in housing fees.
Furthermore, if the UK recovery is too heavily based on unsustainable sectors like construction, there is a danger of returning to the familiar murky territory of the last crash. Noticing the trend for valuation increase, large construction companies with deep pockets have begun buying up large areas of land for planned mass housing projects. If the current prices prove unsustainable, as their rapid rise suggests they might, the UK may find itself in a similar situation to the crash, with a bubble bursting and the shrinking of the construction industry as house prices regain equilibrium.
All Eyes On London: Controlling The Capital
Such conditions call upon the central bank to act, and it has done so, albeit in a somewhat limited manner, this month. The Bank Of England’s first action in easing inflationary pressure comes in the form of a measure to cap mortgage lending to 4.5x the borrower’s income. It is hoped that these restrictions on large loans, imposed by the bank’s Financial Policy Committee, will avert any potential spike in lending. Regulation has also been implemented to improve the rigour of affordability checks performed on mortgage holders. The measures are, according to Chairman Mark Carney, to “prevent lending getting too far ahead of income growth, and . . . prevent a slide into riskier lending and higher indebtedness [which] undermine the economic expansion over the medium term”.
Mr. Carney has also hinted several times at a rise in interest rates earlier than anticipated, though predictions are that this will not take effect until early next year. The hands of regulators are tied. It is impossible to set regional interest rates, with the current rate of 0.5% appropriate to stimulate growth. Yet London’s expansion is incomparable to any national average, making its ideal rate of interest surely around 2%. For the rest of the country’s economy, barely sowing the seeds of economic growth as of yet, that rate would be ludicrous. The Bank has done, for the time being at least, all it could. It remains to be seen whether its actions will have the desired effect.
Yet it is not just the Bank Of England which has cause for concern. The incumbent government have also been forced into action, what with an impending 2015 general election upon them. The Northern vote is usually the margin between success and failure for Conservative governments, who have their electoral power centre firmly in the south. Something must be done to win over the sentiments of voters who have historically found it difficult to trust the Tories. This is partially since Thatcher’s aforementioned rampage through the region, which uprooted industries in its wake. But allegations of Southern favouritism have been a generations-old bugbear for British Conservatives, with critics pointing to the party’s perceived love affair with ‘old boys clubs’ in Oxford, Cambridge, and London (from which, incidentally, many of their current roster are recruited).
Northerners have largely convinced that the party does not have its interests at heart. The region broadly votes to the left, with Scotland having elected only one Tory MP (another commonly cited argument for separatism). Mr Bernstein described the lack of support up North as being due to the lack of funding. ‘Oxford, Cambridge, and London routinely secure the bulk of funding… other institutions are left fighting for scraps’.
Northern Lights: Hopes For A Brighter Future
No crystal ball was required to predict that the Tories would try to plug this gaping chasm in its support from the North and South. Nor indeed, that London, as the biggest topic of debate in geographical discussions of inequality, is being used as the benchmark for a new Northern project. What is surprising is the man who is pushing these new ideas. It is Chancellor George Osborne, so often the phlegmatic face of grinding economic austerity in the past, who has now become the unlikely provider of exciting – and expensive – news.
His plan is to develop a northern ‘supercity’ which combines Leeds and Manchester, to contest the dominance of the capital, following the construction of a ‘HS3’ high speed rail network. Manchester and Leeds are currently linked by a leisurely rail service taking nearly 50 minutes, which is often plagued by heavy congestion. Anything which could rapidly reduce commute time, it is suggested, would drastically increase the pool of talent employers have to choose from, and the working opportunities available to jobseekers.
Yet cities aren’t all offices blocks and banks. This new urban zone will also look to become an innovative centre, with the help of the area’s leading universities and tradition of cultural excellence. “You have to create the conditions where smart, entrepreneurial people want to work and make their lives,” the chancellor told his aides. The idea has been dubbed ‘agglomeration theory’ – the concept that by combining two strong cities, the resulting whole can be vastly more powerful than the sum of its parts.
Envious eyes have been cast to Leeds and Manchester by their near neighbours following the proposal. The economy of each is larger than that of Wales. They surely deserve recognition. But if linking cities is the engine for growth, why stop at two? The deputy prime minister and Sheffield Hallam MP Nick Clegg has hastily moved to suggest his own adopted city be included. ‘Three cities – Manchester, Leeds and Sheffield – should become a ‘northern golden triangle’ to drive economic growth in the north”, he said. Liverpool may also be included as a propitiating gesture, particularly after one of its leading tabloids, The Liverpool Echo, ran a headline of ‘Liverpool to miss out AGAIN’ in reference to the news (the city is not set to be served by the previously proposed £50bn HS2 north-south development). Together, Greater Manchester, Liverpool, Sheffield, and Leeds have a population of 9m, a £154bn economy and almost 3m jobs. Now that’s an economy that could fight a few rounds with London.
There are predictable rumblings of discontent in other Northern areas. The MP for Hull East, Karl Turner, has suggested the idea ignores more pressing infrastructure needs. “Instead of announcing pie-in-the-sky ideas, he should address the desperate issue of electrifying the final 70-mile stretch of railway between Selby and Hull.” Catherine McKinnell, who represents Newcastle North, said it was ‘concerning but unsurprising’ that Mr. Osbourne overlooked the ‘long neglected’ Northeast. It seems that by winning over some parts of the region, the government will unavoidably alienate others.
Critics see all this as a desperate ploy to win over Northern voters prior to the 2015 general election and a sign that David Cameron’s pledge to “rebalance” Britain’s economy away from the overheated southeast has been, at best, only partially successful. Voters shouldn’t forget that it is also a long overdue investment on transport in the North: a recent IPPR report suggested spending on large transport projects was £2,731 per head in London against £134 per head in the north-west. Lord Prescott spoke for many when he suggested the announcement was ‘more about Northern votes than Northern growth’. He also pointed out the conspicuous lack of timescale for taking HS2 to the North as a reason to avoid overexcitement.
But – provided it does go ahead – for every naysayer, there are many more who will welcome the idea with open arms. The idea is certainly favourable to business, which, if not the primary aim of this administration, is surely their most recited rationale for action. Indeed, Michael Taylor, chairman of Downtown in Business, a pan-northern business network, described a “general excitement about the proposal”. This buzz, combined with corporate leaders’ general chagrin at a number of restrictive policies planned by Mr. Cameron’s Labour opposition Ed Miliband, may cement the Conservatives’ status as the party for businesses.
One notable partisan is Howard Bernstein, chief executive of Manchester City Council, who wrote an enthusiastic article in praise of the idea. Published in the FT with the title ‘The North Is An Engine Of Growth’, he argues that HS3 would indeed see enormous improvements in the economic performance of the North. Businesses will, of course, benefit from the wider pools of talent to choose from which will become available with improved transport links. In this way, improved connectivity does lead to improved productivity.
However, Bernstein also believes – and these authors are inclined to agree with him – that improved transport should be only the beginning of the revolution. Powers should be devolved to Leeds, Manchester, and Liverpool: all examples of cities with sufficient economic contribution to have a right to its own decisions. Manchester and Leeds have larger economies than Wales, which has its own devolved parliament. There are several other large non-capital cities which have been handed autonomy, with Munich and Barcelona notable success stories among these.
Through the implementation of HS3 and the decentralisation of crucial economic powers, the government can begin to rebalance the economic landscape of the nation, which will in turn give the Bank of England more of the control it needs to stimulate balanced growth. It is the hope of this publication that whoever is in charge come 2015’s election, the North is given the attention it deserves. London has ruled unchallenged for far too long. It is time for the City to meet its match.
Words: Josh Lelliott and Richard Saint
Images: Josh Lelliott