London's Competitive Place in the UK and Global Economies

RESEARCH REPORT

City of London Corporation Economic Development Office

London’s Competitive Place in the UK and Global Economies

JANUARY 2011 RESEARCH REPORT

City of London Corporation Economic Development Office

London’s Competitive Place in the UK and Global Economies

Oxford Economics Ltd Abbey House 121 St Aldates Oxford OX1 1HB

Tel: 01865 268900 Fax: 01865 268906 www.oef.com

JANUARY 2011 London’s Competitive Place in the UK and Global Economies is published by the City of London. The authors of this report are Oxford Economics.

This report is intended as a basis for discussion only. Whilst every effort has been made to ensure the accuracy and completeness of the material in this report, the authors, Oxford Economics, and the City of London, give no warranty in that regard and accept no liability for any loss or damage incurred through the use of, or reliance upon, this report or the information contained herein.

January 2011

http://www.cityoflondon.gov.uk/economicresearch

Contents

FOREWORD 1 EXECUTIVE SUMMARY – LONDON TODAY 3 1. INTRODUCTION 6 1.1. Background and purpose...... 6 1.2. Structure of the report ...... 6 2. DYNAMIC AND COMPETITIVE – TRENDS IN THE LONDON ECONOMY 7 2.1. High value-added evolving economy...... 7 2.1.1. A young, diverse population that continues to rise… 7 2.1.2. …with an ongoing appeal to international migrants 9 2.1.3. A dynamic, high value employment base … 12 2.1.4. …a clear national productivity leader, despite the recession… 15 2.1.5. …and a ‘can do’ business culture 19 2.2. With diverse local conditions...... 21 2.2.1. Mixed performance on job creation, even during the decade of growth… 21 2.2.2. …with pockets of acute and persistent socio-economic deprivation… 23 2.2.3. …and very mixed local labour market fortunes… 23 2.2.4. …with up to a million lower-skilled London residents currently out of work 24 2.3. And a unique role in the UK...... 25 3. LONDON AS A GLOBAL CITY: THE IMPORTANCE OF FINANCIAL & BUSINESS SERVICES 29 3.1. London is a Global City… ...... 29 3.2. …and a global financial hub ...... 30 3.2.1. A magnet for overseas talent… 32 3.2.2. …supported by academic excellence… 33 3.2.3. …and policy that supports evolution and innovation 35 3.3. London’s global links drive the London economy ...... 37 3.4. London’s preeminence: not to be taken for granted...... 41 4. THE RECESSION IN LONDON 46 4.1. How has the recession impacted London?...... 46 4.1.1. Uncertainty over labour market impact 46 4.1.2. Assessing the BRES data 48 4.1.3. A recession on par? 50 4.2. Sectoral impacts ...... 51 4.2.1. Job losses in most sectors… 51 4.2.2. …and a mixed picture for the visitor economy 52 4.2.3. A generally strong position to adapt to public spending cuts 53 4.3. Unemployment back to 6% in certain areas ...... 55 4.3.1. Widespread impacts but felt most keenly in vulnerable areas… 55 4.3.2. …and persistent worklessness issues slowing the recovery 56 4.4. Leaving a number of longer-term challenges...... 57 4.4.1. Two-track impacts on a two-track economy… 57 4.4.2. …an ongoing struggle for the ‘lost generation’… 57 4.4.3. …and a long-term skills and structural challenge 59 5. LONDON’S FINANCES 61 5.1. Measuring London’s contribution to UK public finances...... 61 5.2. Financial picture mirrors UK difficulties...... 62 5.3. Tax receipts from London key in official outlook ...... 63 5.4. Conclusions...... 65 6. LONDON’S FUTURE 66 6.1. Forecast relatively strong ...... 66 6.1.1. Global recovery underway – but will it last? 66 6.1.2. UK recovery facing headwinds 68 6.1.3. London forecast to lead the way 68 6.1.4. Sluggish labour market recovery initially 70 6.1.5. Even with strong growth problems will remain 73 6.1.6. But labour supply will continue to grow 74 6.2. But risks predominantly on the downside...... 75 7. CONCLUSIONS 79 APPENDIX A: CALCULATING THE CONTRIBUTION TO PUBLIC FINANCES 81 APPENDIX B: ESTIMATING THE DRIVERS OF INTERNATIONAL FBS 93 APPENDIX C: ADDITIONAL DATA 96 BIBLIOGRAPHY 104

FOREWORD

Stuart Fraser Chairman, Policy and Resources Committee City of London

London provides the principal gateway for international trade and inward investment for the UK economy. It is also of course a major centre of global finance. The ongoing global economic recovery is therefore very good news for London and the UK. Many of the most direct negative effects of the financial crisis and the global recession are now much less pressing as far as the London economy is concerned and while challenges remain, they seem of a lower order of concern than a year ago. The London economy and the UK is well placed to be a leading location for business benefitting from the growth of international trade and so a likely focus of inward investment if, as we anticipate, the policy environment is set to be favourable to the location of international business in the UK.

In this latest edition of our series of annual reports on London’s economic role in the UK, we have set a more challenging task for our consultants than previously. This is to look forward to the future given the likely global competitive position of London, and reflecting on all that London offers to the world of business. In London’s Competitive Place in the UK and Global Economies Oxford Economics examines and highlights the globally competitive advantage that London offers for the UK and EU economies, paying especial attention to the international professional and business services that are a core competitive advantage for the future.

Oxford Economics’ analysis shows London as a dynamic world city whose population has been rising for 25 years – between 2000 and 2009, London’s population rose by a substantial 7%, outstripping the UK as a whole by almost a factor of two. This strongly reflects London’s position as the UK’s leading centre of high value, export-oriented employment, and the evidence of its comparatively advantageous position in this regard shows no signs of abating. The effect of the recession has been to hit London as it has all regions. London’s economy however continues to make a substantial net contribution to the UK Exchequer, with tax revenues from London exceeding spending in the greater London region.

With its core focus on global financial services London’s economy was always likely to face the earliest effects from the global financial crisis where the economic downturn originated, and to suffer to a significant extent in terms of job losses once the full effects of the crisis began to work through the UK economy at large. Whilst there is no room for complacency, and considerable uncertainties remain over the measured impact of the recession on London – a matter of some concern as government tries to understand the balance of effects of its fiscal policy – there is also cause for encouragement.

The report shows London’s fortunes will be closely aligned to global economic growth and the flow of world investment and as these are projected to grow the prospects for London are relatively encouraging, especially going into the medium term of the next few years. This will be an important source of private sector demand driving a sustained recovery in the UK as fiscal balances are tightened by

the coalition government. It will be important by government to continue to emphasise the benefits of open markets and to ensure the UK, and EU, remains an attractive location for international firms.

Stuart Fraser

London

January 2011

Executive Summary – London today

A dynamic, globally-focused economy… Despite the impact of the global financial crisis, London is a dynamic world city whose population has been rising for 25 years, reflecting its ongoing commercial, leisure and living appeal. Between 2000 and 2009, London’s population rose by a further 7%, outstripping the UK as a whole, with the national population seeing expansion of 4% overall between 2000 and 2009. At the same time, London is the UK’s leading centre of high value, export-oriented employment, and its position in relation to other UK cities and regions in this regard shows no signs of abating.

The core driver of this has been London’s financial and business services sector, at the heart of a globally connected economic world. This part of the economy grew by nearly 6% a year during the decade before the global financial crisis, noticeably faster than growth in the same sector in other mature economies - though slower than in emerging market financial centres in Asia. London’s share of the market for financial services across Europe, the USA and Japan grew from 2.0% in the late 1990s to 3.7% by 2008.

…and a unique place with unique people… London’s economy is very different from other parts of the UK, however you look at the activities in which different parts of the country specialise. This is not just about financial services. Business and management consultancy activities score very highly on our specialisation index, indicating the extent to which London supplies these services for other parts of the UK and overseas. And there are several other areas of financial and business services that are high in these lists. But media sectors, telecoms, tourism and software consultancy are also sectors which are very important to London compared with the minimum across the UK. Indeed, looking at sectoral specialisation in this way implies that London is likely to be responsible for over half of the UK’s exports for activities auxiliary to financial intermediation and for legal activities, and over 40% of UK exports for accounting and other monetary intermediation.

This is accompanied by a uniquely strong human capital position - in 2009 almost 34% of the city’s workforce possessed a degree compared with a national average of 19%. In total there are an estimated 1.7m graduates working in London in 2010 and the economy is home to a disproportionately large number of alumni from the world’s elite universities.

…supporting public spending across the UK London has consistently contributed more to the Exchequer through its share of tax payments than it receives through its share of public spending. Of course, this is to be expected for a region with high average productivity and wages, and this element of re-distribution has typically been shared by neighbouring regions in the “greater south-east”. This year, however, the sharp plunge of the UK public finances into record-breaking deficit is reflected in a much lower contribution from London, and our mid-point estimate is for a net contribution of only £1.4 billion in 2009/10, compared with an average of £17 billion over the previous decade. Of course, the figures for other regions have also been affected by the national picture, with all other regions of the UK in deficit, so London’s contribution continues to be important for the UK’s overall fiscal position.

But London has not escaped the recession … With its core focus on global financial services where the global economic downturn originated, London’s economy was always going to suffer to a significant extent in terms of job losses once the full effects of the crisis began to shake out. However, there are considerable uncertainties over the impact of the recession on London, with the latest data from the Office for National Statistics appearing to show a much bigger shake-out of jobs than suggested by previously published data which showed a relative mild recession in London. Our best assessment is that London’s recession may in the end have been on a par with that in other parts of the UK.

Either way, the recession has reinforced the deep-rooted worklessness challenges present in several of its economically lagging boroughs, pushing many vulnerable residents even further from the labour market and creating concerns that the employment benefits of key development projects such as the Olympic Park are not filtering through to those who need them most in local areas. The risks of incoming cuts to welfare benefits are unlikely to be as great anywhere in the UK as they are in the deprived communities of London, and careful economic management will be needed to ensure a safety net remains in the event of lower-skilled job creation rates failing to spark.

… and prosperity is very unevenly spread across the city Despite the ‘high end’ of London’s economy capturing much of the publicity and media attention, one of its most striking features when viewed as a whole is the co- existence of significant pockets of deprivation, worklessness and economic under- performance alongside highly mobile and skilled professional labour markets – the Index of Multiple Deprivation shows four London Boroughs in the national top ten of most deprived locations (Tower Hamlets, Hackney, Newham and Islington) and a further six in the national top 10%.

London is key to UK recovery…. The London economy is expected to lead the UK recovery as a result of its high export orientated, flexible, dynamic and competitive economy both in terms of its businesses and its people. London’s fortunes are closely aligned to the flow of world investment and as this is projected to grow the prospects for London are relatively bullish, especially into the medium term. This is likely to be an important source of demand behind a recovery in the UK, especially in the light of public spending cuts which will limit the growth of domestic demand.

The recovery we are forecasting for London’s economy should also result in a significant increase in future tax receipts from London, and with on-going restraint on spending, London’s net contribution to the UK fiscal position is forecast to rise substantially by 2015/16.

…and needs to meet the challenges ahead However there are significant risks to the economic recovery given prevailing uncertainties and growing challenges to London from global cities across the world. Not only is there uncertainty over the scale and impact of public sector cuts, uncertainty over the state of the Eurozone economies and uncertainty over the sustainability of the global recovery, there is also uncertainty over London’s continued pre-eminence in global financial and business services. Higher taxation,

increased regulation, infrastructure issues, reputational damage from the financial crisis.

Unless London returns to making the significant contribution to the Exchequer that has been the norm over recent years it is hard to see the overall UK budget deficit getting back to manageable levels. At the same time, the level of tax and the rates at which it is levied are a potential competitiveness issue for London, and have become a significant source of uncertainty for companies looking at a London base. The right balance for growth needs to be struck between the need to raise sufficient revenue and the need to avoid threatening London’s competitiveness.

1. Introduction

1.1. Background and purpose The global economic climate is very uncertain at the moment in the aftermath of the financial crisis. Although most economies have returned to growth after rare falls in world output in 2009, there are significant doubts about the future of the euro, the impact of necessary fiscal retrenchment, the potential for commodity price inflation to constrain growth and several other factors. Against that background, London’s ability to compete successfully in a global marketplace is critical for the UK economy to achieve a return to more typical growth rates.

This report, a development in the latest series of annual reports commissioned by the City of London looking at London’s place in the UK economy, therefore places particular emphasis on competitiveness and the global economy, alongside an updated assessment of trends in London’s economy and its role in the UK.

1.2. Structure of the report The report is structured as follows:

 Chapter 2 analyses the underlying economic trends that have driven growth in London, and the specific nature of the London economy in terms of its diversity and its unique role in the UK  Chapter 3 focuses more specifically on London’s role in an international context, covering its role as a global financial hub, what supports this role and what opportunities and threats it faces.  Chapter 4 looks at the impact of the recession on London, both in terms of the immediate effects and the longer-term challenges it leaves.  Chapter 5 presents an updated assessment of London’s role in the UK’s public finances, including a forecast of the potential contribution from London over the 5 year budget horizon.  Chapter 6 sets out Oxford Economics’ forecasts for the future of the London economy, including the potential difference to the outlook if London proves less successful than over the past decade at increasing its importance in global financial activity.  Finally, Chapter 7 offers some conclusions.

Appendices provide more detail on some of the analysis in the report. We have also compiled a data manual giving information on data sources and calculations as well as the actual data underlying some of the charts and tables in the report. This will be available to download separately from the City of London website.

2. Dynamic and Competitive – Trends in the London Economy

Key Points

• London’s economic vibrancy is a key factor behind its continued population expansion, with its 7% population growth rate between 2000-2009 being almost double the wider UK figure. This reflects London’s ongoing appeal to both international migrant workers and higher-skilled UK residents of prime working age.

• London is the UK’s leading centre of high value, export-oriented employment. Though growth in total jobs has slowed since 2000, productivity growth has been such that London now generates 21% of the UK’s total GVA.

• Financial and business services are at the heart of London’s global competitiveness, and together accounted for around 1.7 million jobs, or 36% of the city’s total, in 2010. High earnings in these sectors push London’s mean weekly wage above £700 – around 25% above the average for other UK regions – and attract leading talent from overseas, as well as providing jobs for a fifth of new graduates from the UK’s top twenty universities each year.

• But the major disparities in economic performance across London’s 33 boroughs continue to persist. Just four boroughs generated 55% of the 450,000 net new jobs in London between 1998-2008, while around 900,000 lower-skilled London residents are currently out of work and profound deprivation challenges remain in several

areas.

2.1. High value-added evolving economy

2.1.1. A young, diverse population that continues to rise… London is a dynamic world city whose population continues to rise, reflecting its ongoing commercial, leisure and living appeal. By 2009, just under 7.8 million people were resident in London, solid growth of around 7% since 2000. The city’s population has been rising steadily since the 1980s, and latest trends indicate that growth has continued even throughout the recent economic downturn. That a relatively expensive living location has continued to grow its population even as job prospects declined is a striking indication of its ongoing popularity.

Chart 2.1: Population, London, 1990-2009

8000 7800 7600 7400 7200 7000 6800 Population (000s) Population 6600 Population 6400

6200

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Source: ONS

Growth in London’s population has over the past decade clearly outstripped that of the UK as a whole, with the national population seeing overall expansion of 4% between 2000 and 2009. As a result of this trend, perhaps driven most notably by immigration from overseas, London’s share of the total UK population has crept up to 12.5%, making it the second most populous UK administrative region after the South East.

Table 2.1: Population, London and the UK, selected years

1990 1995 2000 2005 2009 London 6799 6913 7237 7485 7754 UK 57238 58025 58886 60236 61792 London as % of UK 11.9 11.9 12.3 12.4 12.5

Source: Oxford Economics / ONS

The growth in London’s population relative to other UK regions is stark, and represents one of the major UK demographic trends of the last twenty years. As recently as 1990, the city’s population was broadly the same as that of the North West (6.8 million). Despite that region’s own notable economic renaissance in the intervening period, which has made it arguably the most economically and culturally important provincial area of the UK, its population has risen by less than 1% in the subsequent two decades, compared to growth of 13% in London. More recently, throughout both the damaging recession and the preceding decade of strong economic growth, London’s population has grown the fastest of any UK region.

Chart 2.2: Percentage Population Change, UK Regions, 1998-2008 and 2008-2010

9 1998-08 8 2008-10 7

4 % chang e 3 2

st st s s t st a a UK le d ds s a E E a n e E a W th umber W tlan th Londo n u Ireland o rth r o rn H Sc o South West S e & N No th East Midlands r hire West Midl No rks Yo Source: Oxford Economics / ONS

London’s population is also significantly younger than the national average, a trend which has become much more pronounced over the last twenty years. The share of the under-50 British population living in London had risen from 12.8% in 1991 to 14.6% by 2009, with growth in the proportion of under-16s and mid-career 30-49 year-olds the most rapid. This changing demographic can be linked in significant part to London’s greatly improved economic fortunes over the past two decades. Overall, 54.8% of London’s population are now in the prime working age group of 16-49 year- olds, compared to a British average of 46.8%. In consequence, the share of people in the city aged 50 and above is fully ten percentage points lower than the national average.

Table 2.2: Population profile, London and GB, selected years

1991 2000 2009 London London as London London as London London as (000s) GB (000s) a % GB (000s) GB (000s) a % GB (000s) GB (000s) a % GB Children (<16) 1,341 11,334 11.8 1,463 11,533 12.7 1,499 11,167 13.4 Young w orking age (16-29) 1,669 11,759 14.2 1,576 10,132 15.6 1,654 11,267 14.7 Middle w orking age (30-49) 1,891 15,232 12.4 2,278 16,533 13.8 2,597 16,814 15.4 Older w orking age (50-64) 964 8,655 11.1 1,021 9,918 10.3 1,111 10,905 10.2 Elderly (>65) 964 8,851 10.9 899 9,087 9.9 893 9,851 9.1 Total 6,829 55,831 12.2 7,237 57,203 12.7 7,754 60,003 12.9 % of the total population Children (<16) 19.6 20.3 - 20.2 20.2 - 19.3 18.6 - Young w orking age (16-29) 24.4 21.1 - 21.8 17.7 - 21.3 18.8 - Middle w orking age (30-49) 27.7 27.3 - 31.5 28.9 - 33.5 28.0 - Older w orking age (50-64) 14.1 15.5 - 14.1 17.3 - 14.3 18.2 - Elderly (>65) 14.1 15.9 - 12.4 15.9 - 11.5 16.4 - Source: ONS mid-year population estimates, Oxford Economics

2.1.2. …with an ongoing appeal to international migrants The story of London’s ongoing popularity as a place to live and work reflects both domestic and international migratory trends. As would be expected for the largest city in any country, particularly one with such a strong global status, London is home to a far higher proportion of foreign-born people than any other UK region. Of the 7.1 million current UK residents born abroad, 36% live in London, equivalent to just over 2.5 million people or a third (33%) of the capital’s population.

The recent growth in concentrations of foreign-born residents across the UK regions has again been most rapid in London, confirming the city’s ongoing status as the destination of choice – through better job opportunities, leisure amenities, transport links and cultural reference points – for many immigrant workers. In the last 20 years, London has seen the proportion of its population who are foreign-born more than double, to its current level of 33%.

There are some evident patterns to be found in the distribution of migrant workers across the UK. London is not only home to around a third of all foreign-born workers, but to around half of those workers arriving in the UK before 20041. Many of these were migrants from Commonwealth countries such as India, the West Indies and Australia, and indeed analysis of migration flows by country of origin continues to show the Commonwealth countries driving total net migration into London. It is also clear from the data that immigrants from Commonwealth countries continue to show a strong locational preference towards London over other locations within the UK.

Table 2.3: Net international migration breakdown, London, 2004-2009

2004 2005 2006 2007 2008 2009

London (000s) EU 19 17 -3 14 15 -8 EU15 311-442-6 A8 166-296-4 Other EU003172 Commonwealth 47 38 38 36 21 26 Other foreign 16 10 6 9 3 5 Net (international)826540594023 Percentage point difference in composition London-UK EU 137 -37-1431-63 EU15 12 28 -1 5 14 -41 A8 -2 -21 -41 -23 6 -24 Other EU - - 4 3 11 3 Commonwealth 3 8 55 28 -2 74 Other foreign -16 -16 -16 -14 -32 -11 Source: ONS International Passenger Survey (long term international migration estimates).

Note: ‘Percentage point difference in composition London-UK’ refers to the percentage point difference between the ‘percentage of net international migration’ in London and the ‘percentage of net international migration’ in the UK. A positive value implies that London has a larger share of migrants originating from (or a smaller share of migrants destined) the region than the UK; a negative value implies that London has a smaller share of migrants originating from (or a larger share of migrants destined for) the region than the UK.

Note II: EU = EU25 (2004-06) and EU27 (EU25+ Bulgaria and Romania) (2007-2009). EU15 = (Austria, Belgium, Denmark, Finland, France, Germany, Greece, Republic of Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain and Sweden). A8 = (Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia and Slovenia). Commonwealth = All Commonwealth countries excluding Malta and Cyprus.

1 Oxford Economics (2009)

Of migrants arriving since 2004 from EU countries (including the ‘A8’ migrants from the new EU member states of eastern Europe), the spread across the UK has been much more even – partly reflecting the types of work, such as agriculture, construction and food processing, that A8 migrants have most commonly sought. Regions such as the East Midlands, Northern Ireland and the East of England were all thought, as the volume of A8 migrants in the UK grew to record levels in 2008, to possess equal or greater ‘concentrations’ – defined as the share relative to the size of the total workforce – of newer EU migrant workers than did London (Oxford Economics, 2009).

Our development of ‘migrant location quotients’ in this same study, undertaken for Communities and Local Government, showed that workers from the A8 countries have become especially prominent in a small number of specific sectors in different parts of the UK – including those mentioned above plus, in London, other high- turnover industries such as hospitality and retail. Our report suggested that London’s hospitality sector was in fact one of a very few examples (others included the East of England’s agricultural sector) of relatively high dependence on A8 migrants, though the potential risk of a supply constraint if they left in large numbers is now significantly reduced by the recent and likely future rise in UK-born jobseekers following the recession.

Chart 2.3: Total Net Migration, London, 1990-2009

1 1 3 5 6 7 90 0 0 04 0 -20 9 99 0 0 008 1 1 1992 1993 1994 1995 1996 1997 1998 1999 2000 20 2002 20 2 200 2 200 2 2009

Total migration (000s) migration Total -40 Net Migration -60

Source: ONS

Total net migration is of course a two-way story, reflecting the movement of people around the UK regions as well as arrivals or departures from abroad. London’s annual net migration has fluctuated significantly over the past two decades, peaking between 1999 and 2001 with a net inflow of around 50,000 people a year, but hovering closer to zero in the period since then. This reflects a net outflow to the other UK regions to counterbalance the net inflow from abroad – put simply, more people leave London to move to other UK regions each year than go the other way and move in.

There is in fact a significant disparity in migration rates between London and the rest of the south of England, with aggregate flows having moved in broadly opposite directions since 2000. In London, the recent story is one of net migration having a small overall negative effect on population. By contrast, in the rest of the south, total net migration remains significantly positive, driven primarily by some of the highest domestic inflows in the UK. These trends mean that despite the increasing phenomenon of older or retired people moving into London to enjoy the arts and

cultural scene – a trend recently encouraged by some niche property development activity, for example on the South Bank – the traditional pattern of middle-aged workers moving out of the city to enjoy larger properties and a different style of life is still very much in evidence.

Table 2.4: Migration Summary, London, Selected Years

Net flow from Years Inflows from Outflows to the rest of the Inflows from Outflows to Net flow from rest of UK rest of UK UK abroad abroad abroad

(000s) (000s) (000s) (000s) (000s) (000s) 1991 149 -202 -53 77 -68 9 1996 169 -209 -40 130 -64 66 2001 164 -232 -69 213 -90 123 2004 169 -279 -110 179 -91 88 2006 187 -264 -77 172 -101 71 2009 205 -237 -32 156 -117 40

Source: ONS (Components of Change) and Oxford Economics

The overall growth in London’s population, achieved in spite of net UK outflows that have roughly balanced net overseas inflows for much of the past decade, is due in no small part to a relatively high level of ‘natural increase’ – the excess of births over deaths within the resident population. This is an expected consequence of a falling average age amongst Londoners, and of course has important implications for the provision of social infrastructure such as schools.

2.1.3. A dynamic, high value employment base … London is the UK’s leading centre of high value, export-oriented service sector employment, and its advantage over other UK cities and regions in this regard shows no signs of abating. The city’s jobs base is most notable for its high productivity and earnings, and it is on these indicators where the growth of recent years has been most significant, rather than on the total volume of employment per se. Productivity growth has been such that London now generates 21% of the UK’s total GVA2

As of mid-2010, London had a total of just over 4 million employee jobs3, down around 200,000 (5%) from its late-2008 peak and broadly at the same level as early 2001. The rather flat profile of the city’s total employment line chart since 2000 illustrates that its recent performance on overall job creation has been comparatively muted, although expansion did quicken through 2007 and 2008, prior to the effects of the credit crunch and broader economic downturn beginning to take hold.

2 ONS only publishes data on regional GVA in nominal terms. Except where otherwise stated, references to GVA in this report are to Oxford Economics’ estimates of real regional GVA, based on deflating regional GVA at a sectoral level using deflators derived from the National Accounts.

Chart 2.4: Employee jobs, London, Q2 1996 – Q2 2010

4400 4200 4000 3800 3600 3400

Employee jobs (000s) 3200 3000

9 0 4 5 6 7 9 0 -96 -97 -9 -0 -01 -02 -03 -0 -0 -0 -0 -08 -0 -1 Mar Mar Mar-98Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar

Source: ELMR, non-seasonally adjusted

The national leadership and international significance of London’s economy can be glimpsed in part from its sectoral composition, particularly relative to the rest of the UK. Overall, London holds three in ten of the UK’s knowledge-intensive jobs, using the accepted Eurostat definition, and it has become the dominant UK location for a range of high value added and export-orientated service industries, including motion picture (80% of GB jobs), security broking and fund management (74%) and advertising (46%).

The city accounts for a quarter of all business services employment in the UK, and a third of the national total in financial services, despite an overall job and population share of just 15%. As of 2010, financial and business services together accounted for an estimated 1.7 million London jobs, still around 36% of the city total despite the economic downturn having its roots in the financial markets.

Though the recession has reduced the number of London financial services positions back to its approximate level a decade ago, employment in wider business services – which includes sectors such as accountancy, legal services and marketing – remains 10% up. The decline in public sector consultancy commissions, now seemingly inevitable following the Comprehensive Spending Review in October 2010, may well put pressure on parts of the business services sector over the next 18 months, but its rapid recovery from significantly reduced private sector demand through 2008 and 2009 is impressive, and indicative in part of a confident, diversified business base able to react to changing conditions and explore new markets at home and abroad.

Table 2.5: Sectoral Employment, London, 1998 – 2008 and 20104

1998-2008 2010 London as a % change (000s) % of UK Other production -7.4 15.6 2.0 Manufacturing -34.0 199.4 7.3 Construction 9.5 200.9 10.2 Distri bution & retai l -1.0 581.3 12.4 Hotels & restaurants 23.9 308.3 16.1 Transport & communications 6.4 322.4 18.7 Financi al services 7.8 350.3 32.9 Business services 31.3 1308.1 23.5 Public admin. 9.0 227.3 14.7 Educati on 25.1 318.5 12.1 Health 23.6 512.5 12.8 Other personal servi ces 25.9 378.5 20.2 T otal 13.2 4734.5 15.4

Source: Oxford Economics

The flipside of London’s high concentration of office-based services employment is of course a lower concentration of other economic sectors. The UK’s manufacturing and construction industries, for example, are estimated to have only 7% and 10% of their current total jobs in London. The city’s manufacturing presence has in fact declined 40% in the last decade, to the extent that London is now thought to have fewer than 200,000 jobs in the sector – of which some 30% are in the service-oriented publishing industry – for the first time. The move towards a service-based economy appears inexorable, even if the hive of construction activity around London’s Olympic Park, plus the numerous other regeneration initiatives underway across London’s outer fringe, may prolong the availability of jobs in that sector for some time.

The expansion of the UK’s public sector since 1998 has been felt in London primarily in the form of additional jobs in education and healthcare, rather than in public administration itself where other UK regions have seen a much faster rate of job creation. The average 25% growth of jobs in education and healthcare between 1998 and 2008 is amongst the fastest overall rises of any employment sector in London. The relatively modest rise of just 9% in public administration employment – a reflection of the previous government’s decision to base many of the newer non- departmental organisations outside the city – means that the employment impact of deep public spending cuts is likely to be felt to a lesser degree in London than elsewhere in the UK. Within Whitehall, current thinking suggests that the vast majority of job losses through planned central department budget cuts will comprise natural turnover rather than redundancies – though wider pressure to relocate up to a third of public sector jobs away from London, created and maintained by the Lyons (2004) and Smith (2010) reviews on the subject, could gain further momentum if the economic recovery proves slow to take hold across the regions.

Of the three million net new jobs created in the UK economy during the decade of economic growth between 1998 and 2008, almost one in five (563,000) was created in London. Though other regions grew their employment bases as quickly in relative

4 See footnote on page 12

terms, the dependence of their growth on public sector expansion means that nowhere else came close to matching London’s pace of private job creation – despite the effective ‘flatlining’ of total employment in the city between 2001 and 2007.

That London could achieve by far the best job creation performance of any UK region during a period of sustained national economic growth, despite enduring a relatively slow period by its own standards and receiving limited benefit from the expansion of government spending witnessed over the decade, clearly illustrates its recent economic vitality and its position at the forefront of UK competitiveness.

Table 2.6: Total employment, UK regions, 1998-2008, 2008-20105

1998-08 2008-10 000s % 000s % South East 389.3 9.6 -163.6 -3.7 London 562.6 13.2 -86.8 -1.8

East 273.4 10.7 -16.0 -0.6 South West 342.2 14.4 -82.9 -3.1 W est Midlands 83.5 3.2 -131.8 -5.0

East Midlands 158.8 7.9 -69.9 -3.2

Yorkshire & Humber 227.2 9.8 -73.0 -2.9 North West 272.0 8.7 -117.6 -3.5

North East 109.7 10.4 -7.2 -0.6

W ales 176.4 14.6 -48.8 -3.5 Scotlands 309.5 12.7 -202.9 -7.4

Northern Ireland 125.6 17.0 -29.8 -3.4

UK 3,030 10.6 -1,030 -3.2

Source: Oxford Economics

2.1.4. …a clear national productivity leader, despite the recession… The strong and seemingly relentless growth in productivity and value added within the London economy is evident from a comparison of total job creation with GVA growth. Between 1993 and 2007, the city enjoyed a fifteen-year period of sustained GVA growth averaging 4% a year – comfortably and consistently in excess of the UK average. Of particular note is the period between 2003 and 2007, when GVA continued to rise on trend despite the slowdown in total employment growth that accompanied it. This divergence is indicative of a period of rapidly rising productivity, value added and earnings.

The global recession brought an abrupt end to London’s period of GVA growth in 2008, but despite a damaging subsequent fall of 4.7% during 2009 – largely the effect of the shock to higher value financial services upon which the city’s economy has come to depend – latest forecast data suggest an overall rise of 1.7% will be recorded during 2010, though this is of course subject to likely revision. London’s economy appears to have recovered quickly from its deepest external shock in 70

5 See footnote on page 12

years, and this partly reflects the vibrancy, resilience and internationalisation of its business base.

Chart 2.5: GVA, % growth, London and the UK, 1991-2010

-2 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

% change year on year on year change % -4 Lo ndo n UK

-6

Source: Oxford Economics

Earnings in London continue to sit around 20-25% above the UK national average, reflecting the extent of the city’s talent pull from both the UK and overseas and the high value added delivered by many of its key industries. A third of graduates from Oxford and Cambridge universities and a fifth from the Russell Group (Britain’s top 20 universities) take jobs in London each year, alongside many top graduates from overseas – many attracted to the high wages on offer in sectors such as finance, law and management consultancy. The salaries in these and other high-earning professions take London’s mean wage above £700 per week, fully £100 above the city’s own median and indicative of the internationally competitive earnings available at the top end of the scale. They also increase the UK mean to such an extent that nine of its twelve regions – all except London, the South East and the East of England – fall significantly below it.

Chart 2.6a: Average (mean) weekly wage, UK Regions, 2009

750 700 UK Average 650 600 550 500 450 Mean weekly wage (£) wage weekly Mean 400 n st st les do Ea East nds ber a tland a We on o West lands um W L th th d uth Sc o rn Ir eland Sou st M id l e North East S Nor e & H Ea est Mi ir W sh rk North Yo

Source: Annual Survey of Hours and Earnings, 2009, Residence Based

Chart 2.6b: Average (median) weekly wage, UK Regions, 2009

650

600 UK Average

550

500

450 M ea n we ekly wa g e (£)

400

t s t s n s d st s d st o a d e n E East la nd W Ea th h We umber Wales re th Lo h t H Scotlan Midlan ort rn I or Sou N Sou st Midlandhe N e T East W orthe and N ire h s

York

Source: Annual Survey of Hours and Earnings, 2009, Residence Based

Just as the migration statistics manifest London’s strong appeal to young and working-age people, and earnings data demonstrate the high skill levels of its workforce, the high level of prime commercial property rents in the city provides an indication of its desirability as a business destination. Data from King Sturge for Q3 2010 show that rents in the West End (almost £800 per square metre) are more than double those in all other European cities except Geneva, Paris and Moscow, and triple the average across all European capitals. In the rest of London, an average just below £600 per square metre still exceeds all but Paris and Geneva. Perhaps reflecting the recent rise in appeal of Switzerland to the financial services sector, partly through changes to the corporate and individual UK tax regime, the Swiss city has overtaken London’s West End in the list for the first time.

Chart 2.7: Prime Commercial Rents, Selected European Cities, Q3 2010

Brat isl av a Bel grade Zagreb Copenhage Sofi a Bu dapest Prague Bucha rest Bru ssels Vienna Warsaw Helsinki Amst erd am Athens Istanbul Madri d Osl o Du bl in Frankfurt Stockhol m Luxembourg Mil an Moscow London Paris London Genev a 0 100 200 3 00 400 5 00 600 7 00 8 00 90 0 £ pe r sq ua re met r e p er an num

Source: King Sturge European Property Indicators and Oxford Economics

The high productivity and value added by the London economy is equally well illustrated by its occupational structure across all industries, particularly relative to the UK as a whole. The proportion of London employees who are managers and senior officials (17.4%) is significantly above the UK average, reflecting the large number of corporate and public sector headquarters located in the city. But since the ratio of managers to other staff tends to be fairly similar across most individual workplaces and locations, the best indication of London’s prime economic competitiveness comes from its share of workers in professional, associate professional and technical occupations, not merely its outright share of managers. At 37% compared to a UK average of just 28%, London’s national leadership in highly skilled and research- oriented professions is clearly evident from these data.

Chart 2.8: Relative occupational structure, London and the UK, Q1 2010

Professional occupations Associate prof & tech occupations

Managers and senior officials

Administrativ e and secretarial occupations

S ales and customer serv ice occupations

Personal serv ice occupations

Process, plant and machine operativ es

Elementary occupations

S killed trad es occup a tions

-4-3-2-1012345

pp difference (London - UK)

Source: Annual Population Survey, residence based, Jan-Mar 2010

Of course, London’s economy has like most others in developed nations experienced the twin effect of a move towards greater service-intensity, namely a rise in the number of lower-skilled and ‘de-skilled’ positions created through increasingly sophisticated managerial techniques to exert control over the workforce and continued growth in technology-driven process automation. Most of the UK regions have in the past decade developed ‘two-track’ service economies, with an ever-widening divergence between higher and lower skilled professions and in turn a growing wage gap. The UK minimum wage plays an important role in guaranteeing basic standards of living for many employees in London, as elsewhere – but perhaps an even more critical role in the capital where the costs of living are significantly higher.

London’s lead relative to other UK regions in terms of productivity can be summarised through a comparison of total GVA per worker. On this measure, which adjusts for the effects of commuting and unemployment rates that would otherwise distort comparisons of GVA per head of population, London’s productivity advantage over the UK average was around 40% in 2008, up from 32% ten years earlier. This advantage, together with its continued growth, confirms London’s

position as by far the most internationally competitive region of the UK in economic terms.

Chart 2.9: GVA per worker (Productivity), UK Regions, 1998 and 2008

UK Wales North East Productivity, 2008 No rthern Ireland Yor kshire & Humber Productivity, 1998 West Midlands Nor th W est Ea st Midlands So u t h W est East Sc o t lan d South East London

60 70 80 90 100 110 120 130 140 150 Productivi ty, UK=100

Source: Oxford Economics

London’s lead over the other UK regions on productivity is not merely a reflection of its industrial structure, particularly its higher than average share of employment in business and financial services. Productivity is notably higher than the UK average in every sector of the economy, with the advantage ranging from around 10-50% in most industries.

Chart 2.10: Relative productivity by sector (UK=100), London, 2009

300

250

200

150 100

Relative productivity, UK=100 productivity, Relative 50

0 Total Hotels Health Ot h er Business services Ot her services

personal Financial retail comms Education pro duction Transport & Transport Co nstruction Distribution & Distribution Pub li c a dmi n. Manufacturing

Source: Oxford Economics

2.1.5. …and a ‘can do’ business culture An important knock-on benefit of London’s strong business culture, networks of talent and international outlook is a positive environment for entrepreneurship. A range of measures of both entrepreneurship itself and sentiment towards it, compiled by the organisation Global Entrepreneurship Monitor (GEM), consistently reveal an environment more conducive towards starting and growing a business in London

than anywhere else in the UK. In 2009, for example, the proportion of Londoners seeing good opportunities for business start-up in the next six months was 29%, still significantly above all other UK regions despite a fall of more than ten percentage points from the corresponding figures of three, four and five years earlier.

Furthermore, the survey showed the percentage of people expecting to start a business in the next three years to be twice as high in London as anywhere else, a fact that helped push the city’s overall score on GEM’s flagship measure of Total Entrepreneurial Activity (TEA) – again the highest in the UK by a considerable margin – more than 25% above the national average (Global Entrepreneurship Monitor, 2010). Such high rates of entrepreneurship have helped to drive strong and consistent growth in London’s self-employed population, from around 500,000 in the mid-1990s to around 650,000 today.

Chart 2.11: Self employed jobs, London, 1996Q1 – 2010Q2

700 650

600

550

500

Selfemployed job s, 000s 450

400

3 4 2 Q Q2 8Q2 2Q1 3 4 9Q3 9 0 0 0 199 6Q1199 6Q4199 7Q319 1999Q11999Q42000Q32001Q220 2002Q4200 20 200 5Q120 05Q42006Q32007Q22008Q12008Q20 2010Q

Source: ONS Note: Figures are seasonally adjusted

The message is clear that London is the most entrepreneurial region of the UK, and this is a factor that, through boosting economic flexibility, will help the city recover and prosper in the wake of the damaging global recession. A moderate note of caution is sounded by London’s relatively high start-up ‘churn’ rate – denoting above average levels of early-stage business failure or closure – but this is in part an expected and inevitable reflection of its higher than average propensity to embrace risk and the tendency of many multi-skilled small business owners to simply switch between ventures every now and again.

Chart 2.12: Sentiment for Entrepreneurship, UK Regions, 2005 and 2009

45 20 05

40 20 09 35 30 25 % 20

n st s t K st s st o d U a d er nd a est E n Ea a E W lan Wes a mb d tl Wales th el Lond th o Hu Ir rt h c n uth Mi o S No r Sou So N ast r e & E i th er sh West Midlands No r York

*Figures represent the percentage of the non-entrepreneurially active resident population agreeing with the statement “there are good opportunities for business start-up in the local area in the next six months”. Source: Global Entrepreneurship Monitor, APS, Oxford Economics

The human capital advantage London enjoys over its UK competitors is summarised by data on the highest level of qualifications possessed by employees, which show that in 2009 almost 34% of the city’s working age population possessed a degree in relation to a national average of 19%. There can be few more powerful indicators of London’s status as a magnet for graduate talent: in total there are an estimated 1.7m graduates working in London in 2010 and the economy is home to a disproportionately large number of alumni from the world’s elite universities.

Table 2.7: Highest level of qualifications (% working age population), London and the UK, 2009

% with higher % with GCSE % with degree education % GCE A Level % with other % no grades A-C or level and above below degree or equivelent qualifications qualifications eq ui val en t level London 33. 7 6.4 15.7 15.4 17.0 11.9 Rest of UK 19. 4 9.1 23.2 23.6 11.9 12.9 pp difference 14. 3 -2.7 -7.5 -8.2 5.1 -1.0 Source: Annual Population Survey, residence based, 2009

2.2. With diverse local conditions Despite the ‘high end’ of London’s economy capturing much of the publicity and media attention, one of its most striking features when viewed as a whole is the co- existence of significant pockets of deprivation, worklessness and economic under- performance alongside highly mobile and skilled professional labour markets.

2.2.1. Mixed performance on job creation, even during the decade of growth… London created 560,000 net new jobs during the decade of strong national economic growth spanning 1998 to 2008, but the spread of these across individual Boroughs was far from even. In fact, 82% of the total was accounted for by just nine of the 33 Boroughs, and 50% by just the four Boroughs of Tower Hamlets (92,000), Westminster (78,000), Islington (61,000) and Camden (52,000). The City of London,

with 33,000 new jobs created, was also very notable for its own employment expansion over the decade, though it lost more of these new jobs in proportionate terms during the recession – a fifth in total – as much as any of the Boroughs aforementioned.

Several Boroughs are also conspicuous for experiencing a significant overall job loss even during the decade of wider economic growth, including Barking and Dagenham (-10,000), Brent (-1,000), Ealing (-6,000) and Richmond (-5,000). The bulk of these losses can normally be traced to individual sub-sectors, such as transport equipment manufacture (Barking), distribution (Brent), construction (Ealing) and business services (Richmond), and sometimes the loss of specific plants or investments.

The story of fluctuating and contrasting fortunes across London’s 33 Boroughs, including the propulsion of overall city-wide growth by a relatively small number of local areas and sectors (notably office-based business and financial services), is indeed a major part of the capital’s ongoing economic tale. During the period 2008 to 20106, the damaging employment consequences of the recession appear to have been played out equally disproportionately across the city, with Westminster (- 18,000), City of London (-7,000), Hillingdon (-9,000) and Camden (-7,000) accounting for almost half of the estimated 87,000 losses seen so far across London as a whole. By contrast, three Boroughs have managed to generate a net job increase during the same period, including most notably Newham (+3,000) on the back of the increasing hive of activity around the Olympic Park.

Whether the 2012 Games will come to generate major net economic impacts for London is uncertain – particularly in tourism where the city is full to bursting in August every year – but their timing is certainly proving a helpful catalyst to the economic recovery in its less prosperous eastern fringe. And the legacy of the Olympics provides a unique opportunity for the regeneration of East London.

Chart 2.13: Employment change, London Boroughs, 1998-2008, 2008-2010

6 New ham

2 Tow er Hamlet s Waltham Forest

-2 -20-100 1020304050607080

% change in employment, 2008-10 employment, in change % Barking and -4 Hillingdon Dagenham

-6 % c hange in em ployme nt, 1998-08

Source: Oxford Economics Note: The axes cross at the Greater London % change in employment (13.2, -1.8)

6 See footnote on page 12

2.2.2. …with pockets of acute and persistent socio-economic deprivation… The contrasting socio-economic landscape across different parts of London can be viewed through the lens of the IMD, the composite Index of Multiple Deprivation published by Communities and Local Government. On this ranking, which considers factors such as employment outcomes, educational opportunity and access to services amongst the resident population of local areas across the UK, four London Boroughs find themselves in the national top ten of most deprived locations (Tower Hamlets, Hackney, Newham and Islington) and a further six in the national top 10%.

The relatively small changes in national ranking, at both ends of the IMD scale, over a period of several years illustrates the intrinsically ‘sticky’ or self-reinforcing nature of many local labour markets, and in turn the difficulties facing policymakers in transforming social and economic fortunes in more deprived areas.

Table 2.8: Index of Multiple Deprivation, selected London Boroughs, 2000, 2004, 2007

5 most deprived 2000 2004 2007 Hackney 4 5 2 Tower Hamlets 1 4 3 Newham 5 11 6 Islington 11 6 8 Haringey 20 13 18 5 least deprived 2000 2004 2007 B romley 275 238 228 Sutton 250 236 234 K ingston upon Thames 316 266 245 City of London 232 226 252 R ichmond upon Thames 341 301 309

Source: Communities and Local Government Note: The figures are ranks out of 354 English local authorities, based on the average score. Note II: The most and least deprived areas shown are based on the 2007 Index.

The IMD ranking has for a number of years demonstrated that parts of London sit alongside locations in inner Liverpool, Birmingham and Middlesbrough as the most socially and economically disadvantaged parts of the UK. The difference of course with London – as the other end of the ranking only partially illustrates due to the contrasting conditions found even within the borders of its most prosperous Boroughs – is that deprivation sits alongside some of the most economically successful locations in the world. This is perhaps better seen by a comparison of average house prices, which in late 2010 still range from relatively little above the UK average (Barking and Dagenham, Newham, Bexley, Waltham Forest) to more than £400,000 in eight separate Boroughs and more than £1 million in Kensington and Chelsea.

2.2.3. …and very mixed local labour market fortunes… The more deprived parts of London are usually, but not always, those where local residents experience the most adverse labour market outcomes. In claimant unemployment rate terms, five of London’s 33 Boroughs in mid-2010 stood in the top 30 local authorities in the UK for unemployment (Hackney, Tower Hamlets, Haringey, Newham and Barking and Dagenham). The recession did not bring about this state

of affairs, though it is quite likely that the prospects for unemployed residents in these parts of London to find work – assuming, of course, that they are genuinely seeking it – have now become even less favourable relative to elsewhere.

In late 2010, the highest overall unemployment rates in London could still be found in Hackney (6.6%), Newham (6.4%), Haringey (6.2%) and Tower Hamlets (6%), relative to a city-wide figure of 4%. The figure for Newham, in light of its positive recent story on job creation, perhaps illustrates that local residents are struggling to benefit from the opportunities of Olympic redevelopment. Indeed, Newham’s overall economic activity rate of just 56.1%, by a distance the lowest in London, hints at the profound extent of its ongoing labour market adversity, as does the fact that its median full- time wage (£492 a week) is also by far the lowest across the city. Accessing employment is just part of the challenge for Newham residents: both supply and demand-side constraints are combining to produce one of the most unfavourable local labour markets in the UK.

Chart 2.14: Average wages, selected London Boroughs and the UK, 2009

1400 Lo nd on t op th reeLo ndo n b ot tom t hre e Aver ages 1200 Mean 1000 Median 800

600 Wages, £ Wages, 400

200

0 UK Brent City of City London London Greater Newham Dagenham K ensingt on Barking and Barking and Chels ea Westminster

Source: Annual Survey of Hours and Earnings (2009), weekly gross pay, full time, residence based

2.2.4. …with up to a million lower-skilled London residents currently out of work Across London, current estimates suggest there are around 900,000 working-age people out of work (unemployed and inactive) with low-level qualifications, indicating the scale of the labour market challenge in parts of the city. In total, almost 1.7 million working-age residents are not currently in employment in London, although this includes inactive students (approximately 500,000) and early retirees (approximately 80,000).

Chart 2.15: Employment rate and unemployment rate, London Boroughs, 2010

Sutton 80 Ric hmon d Up on La mbeth Thames 75

Hackney 70

01234567 65 Ha rin gey City o f Lo nd on 60 To w e r Hamle ts s Employment rate, % rate, Employment 55 New h am

50 Unemployment rate, %

Source: Annual Population Survey (Q1 2010) Note: The axes cross at the Greater London rates (4.0,68.0)

2.3. And a unique role in the UK It is, of course, well known that London has a particularly important role to play in the UK’s business services sector, and even more so in financial services (and this is discussed further in the next chapter on London’s international competitiveness). But there are also a number of other sectors of economic activity where London contrasts strongly with other parts of the UK. This is often analysed by looking at “location quotients” (LQs), which compare the share of London’s jobs provided by a given sector with the share of jobs across the whole of the UK that the same sector accounts for. Sectors with an LQ above one are those where the employment share in London is greater than that in the UK, and vice versa.

Chart 2.16: London’s “conventional LQ”, 1998 and 2008

2.5 Other scheduled passenger Legal activities land transport 2.0

Bus. and man. consultancy 1.5 Other business Retail sale of footw ear activities nec and leather goods 1.0 0.0 0.5 1.0 1.5 2.0 2.5 2008 Conventional LQ Renting of personal and household goods nec 0.5 Other credit granting Storeage and w arehousing MF of metal and 0.0 structures 1998 Conventional LQ

Source: Oxford Economics’ analysis of the ABI Note: The axes cross at the point (1.0, 1.0)

In trying to understand London’s unique role in the UK more clearly, however, we have focused here particularly on the extent to which the importance of a sector in London exceeds what might be regarded as the minimum necessary to meet the needs of the region itself. And in order to do this, we have looked at the lowest share

of jobs the sector provides across all the regions of Great Britain as an indicator of the minimum number of jobs required to meet intra-regional needs7. In summary, therefore, we have calculated a specialisation index using the following steps:

 We started with 4-digit SIC ABI data for all GB regions (for 1998 and 2008)  Any sectors where the minimum employment was less than 1000 employees in any region were excluded  For each sector we calculated the minimum share of employment across the regions accounted for by the sector  We calculated London’s specialisation in the sector by looking at the ratio by which the sector’s share of employment in London exceeded that of the lowest region.

Chart 2.17 illustrates this London specialisation index in 1998 and 2008. (Tables in Appendix C provide detailed figures for all sectors where the sector was at least twice as important for London as it was in the region where it accounted for the lowest share of employment, with figures for both 1998 and 2008).

Chart 2.17: London’s “specialisation index”, 1998 and 2008

Business and management constulancy 5 Other monetary intermediation Publishing of new spapers 4

Industrial cleaning Non-life insurance 3 Compulsory social security activities 2 2008 Specialisation Index 012345678 1 Fire service activities

0 1998 Specialisation Index

Source: Oxford Economics analysis of the ABI Note: The axes cross at the median point.

Business and management consultancy activities score very highly on this specialisation index, indicating the extent to which London supplies these services for other parts of the UK and overseas – in 1998 this sector accounted for more than seven times as high a share of employment as in the region where it was least important. And there are several other areas of financial and business services that are high in these lists. But media sectors also stood out in 1998 in particular, with radio and television activities showing the highest specialisation of any sector, and publishing newspapers at number four. Telecoms and tourism are also noticeable in 1998 as sectors which are very important to London compared with the minimum across the UK. Of course, many of these sectors are also revealed as important to London using a more traditional LQ analysis, but there are some differences. Legal services, for example, have one of the highest LQs of all sectors, but stand out less

7 Northern Ireland was excluded from the analysis because of the difficulties of obtaining comparable data for detailed industry sectors.

clearly in terms of the specialisation index - although they do still have a significant specialisation index at around three times the concentration of the lowest UK region.

By 2008, business and management consultancy activities showed the highest specialisation index in London – and the sector was twice the size it had been ten years earlier. London was also very important for software consultancy and other computer-related activities – not to mention activities of religious organisations. Radio and television activities no longer stood out so clearly as a London specialisation, with activity more evenly spread out across the UK. Within financial services, specialisation remains high – but it increased over the decade for other monetary intermediation, while falling for non-life insurance.

This sort of analysis is perhaps of particular interest in looking at London’s importance for exports. There is no reliable regional data on exports of services (and indeed there are considerable difficulties with the data even for goods in distinguishing the region of manufacture as opposed to the region where the head office or accounting department responsible for invoicing is located). However, to the extent that the minimum share of employment of a sector across the UK regions represents an indication of the scale of sector required to meet local needs, any employment above that level provides an indication of the extent to which the sector is potentially responsible for “exports” to other parts of the UK or to other countries. For sectors with a relatively high London specialisation index, we have therefore looked at how many of all the potential export-orientated jobs in the sector across Great Britain are located in London8 - always remembering that these “exports” could be to other parts of the UK as well as to other countries.

Chart 2.18: London’s % of GB exporting jobs, 1998 and 2008

70 Other schedu led passenger Inv estigation and land transport 60 security services Legal activities

50 Retail sale of footw ear and leathe r goods 40

30 Other business activities nec

% of export% of jobs,2008 20

0 1020304050607010 Regulation of health, education Regulation of business and social services 0 operations % of export jobs, 1998 Source: Oxford Economics’ analysis of the ABI Note: The axes cross at London’s % of GB’s total employment.

Although this is only an indication of export potential, where there is no other data this is likely to be a better guide to London’s importance for the UK’s exports in these sectors than simply London’s share of overall UK employment in the sector. So, for example, the analysis shows that London is likely to be responsible for over half of the

8 In other words, we calculate for each region by how many jobs the sector exceeds the level of employment it would provide if the share of jobs was the same as the lowest region, and the calculate London’s share of these “excess” jobs. As with the earlier analysis, detailed figures are given in Appendix C.

UK’s exports for activities auxiliary to financial intermediation and for legal activities, and over 40% of UK exports for accounting and other monetary intermediation, as well as a handful of other sectors where inter-regional trading may be more important than international trading.

Some of these sectors like legal services where London has a high share of “export” jobs also stand out as being sectors with a relatively high proportion of graduates in the workforce (chart 2.19), pointing to the potential influence of London’s exceptional skills base as a factor behind the success of these parts of the economy – though of course it does not necessarily show which way the causation runs if any.

Chart 2.19: Export jobs (London) and graduate concentrations (GB), 2008

80 Business an d management Technical and vo cational consultancy secondary education 70 Archetecture and engine ering

60 Le gal activities

30 0 10203040506070 % graduate concentration graduate % 20 Other scheduled passenger lan d transport 10 Inv estigation and security Production of meat and poultry Industrial cleanin g services

0 % e xporting jobs

Source: Oxford Economics’ analysis of the ABI and the LFS Note: The “export jobs” analysis is for the Greater London region. The graduate analysis is a three year moving average of the LFS (2007-2009) at GB level. Note II: The axes cross at London’s % of GB’s total employment (X axis) and the average GB graduate level (Y axis).

3. London as a Global City: The Importance of Financial & Business Services

Key Points • London is by some distance the most important financial centre in Europe. At the global level it is second to New York on some measures and surpasses it on others. London’s fortunes in turn are heavily dependent on the health of the world economy. • A number of factors give London this leadership role in international financial affairs, but none more so than its people. London is a magnet for talent from around the world, it benefits from an unrivalled depth of academic excellence within its borders and closely beyond, and a flexible labour market policy supports a process of ongoing innovation and evolution. • London’s global role should not be taken for granted though. To continue to thrive London will need to continue to welcome talent from around the world, and sustain its intellectual (as well as financial) capital. • There are also concerns that regulatory response to the economic crisis could inhibit London’s ability to continue leading financial innovation, or that other financial centres will come to match London’s status as a global transport hub. • That said, if the UK and London governments prove capable of tackling these challenges, London should continue to lead the global financial community, and find that the rise of other financial centres is an opportunity, not a threat.

3.1. London is a Global City… According to The Urban Elite9, a report prepared for Foreign Policy Magazine by the US consultancy A.T. Kearney, you can recognise a global city by “its verve, by the young people that flock to it from around the globe, and by the contrast between the wealth in its centre and the poverty on its fringes”.

Global Cities are the standard bearers for their nations, defining the relationship between that country and the wider world. A Global City is influential across a range of aspects: such a city has to be a critical part of the global economy; it must be a leading centre of political power; it has to be well connected to the rest of the world; and it has to be host to the leaders in culture, media and sport fields that spread influence through rather less tangible channels.

By all these metrics and more, London is a Global City - A.T. Kearney’s report ranks London as the second most important global city, second only to New York. This chapter examines London’s global credentials in one particular sphere – its role in the global economy, and specifically as one of the world’s leading financial centres. We look at the factors that make London one of the world’s financial hubs, examine how this global role influences economic outcomes for Londoners as a whole, and examine the opportunities and threats to London’s financial pre-eminence over the coming years.

9 A. T. Kearney (2010)

3.2. …and a global financial hub Ever since the expansion of the British empire in the 17th and 18th centuries, London has been a hub of global commerce. London’s docks may no longer be the world’s busiest, as they were well into the 20th century, but the legacy of London’s maritime tradition lives on. Latest estimates10 indicate that around 50% of all contracts for shipping services written around the world in 2008 were agreed in London.

London’s leadership of financial services expands well beyond shipping though. London is the centre of the UK’s banking industry, which holds the third largest stock of customer deposits of any country in the world. 17% of all global trading in equities took place in London in 2009, a higher proportion than anywhere except New York. And UK fund managers, predominantly in London, managed portfolios worth 11% of the global total - again second only to the US.

Taking a more historical perspective, London’s financial and business services sector has grown by just under 6 per cent per annum over the decade or so before the global financial crisis. Although slower than in emerging market financial centres in Asia this is nevertheless noticeably faster than growth in the same sector in other mature economies, and London has taken an increasing share of global financial and business services activity, strengthening its position relative to other financial centres right up until the onset of the recent global recession (Charts 3.1 and 3.2).

Chart 3.1: GDP and Financial/Business Services growth, 2001-2008

10 Delh i

8 Singapore Hong Kong 6 Frankfurt 4 London Milan Paris 2 Professional services GDP New York 0 -2024681012

GDP, total

Source: Oxford Economics

10 TheCityUK (2010)

Chart 3.2: London GVA as a % of Europe, USA & Japan Total

4.0 Financial serv ices

3.5 Business serv ices

Financial and Business 3.0 serv ices (FBS) % 2.5

2.0

1.5 1995 1997 1999 2001 2003 2005 2007 2009

Source: Oxford Economics

London’s edge over other cities is borne out by a range of studies comparing the attractiveness of cities around the world as a business location, and specifically a location for financial services. These studies consistently rank London as either number 1 or 2 in the world, highlighting a number of similar themes in terms of the positive and negative aspects of London as a business centre. For example:

 The Global Financial Centres Index11 ranks London as first overall and analyses the strengths of different cities across five metrics – people, business environment, market access, infrastructure, and general competitiveness. In each of these categories, London appears in the top two, with New York invariably taking the other place, and Hong Kong, Singapore and Tokyo consistently outperforming any European city.

Table 3.1 – GFCI ranking of different cities by factor

Source: Global Financial Cities Index 8

11 Z/Yen (2010)

 The European Cities Monitor12 compares London with its European counterparts. London is rated top overall and in a number of categories since the survey began, with the main drawbacks being the cost of staff and office space. However, this reflects the strength of demand for both staff and space rather than a lack of supply.

Table 3.2 – European Cities Monitor Ranking of London within Europe

Source: European Cities Monitor

The surveys highlight a number of strengths that keep London ahead of its rivals in other advanced economies; its location between American and Asian time zones, the quality of transport links within the city and to other main centres of commerce, the business environment and the credibility of English law around the world. But probably the most obvious strength to come out of the surveys is the quality of London’s workforce.

3.2.1. A magnet for overseas talent… In a similar way to other capital cities around the world, London acts as a magnet for talented workers from around the UK. However, in addition to this, the UK’s historically open visa regime has also allowed London to attract the best talent from around the globe. The impact of immigration on London is discussed to a certain extent in the previous chapter, but this merits consideration in an international context here.

Comparable statistics on migrant worker types by city around Europe are not easily accessible. However, data at the national level from the OECD migration statistics indicates that in 2009, the UK had four times as many workers in the top skill categories from Asia and North America as did other major EU economies. As we saw in Chapter 2, a third of London’s labour force is foreign born, so it is reasonable to assume that many of these high-skilled workers work in London.

12 Cushman & Wakefield (2010)

Chart 3.3: Asian and North American Highly Skilled Workers in Europe

400000 350000 300000 250000 200000 150000 100000 50000 0 France Germany Italy United Kingdom

Senior Officials, Managers and Legislators Technicians and associated professionals Professionals

Source: OECD

3.2.2. …supported by academic excellence… London also has a clear advantage in its existing talent pool compared to other financial centres. The concentration of elite academic institutions around London is unparalleled anywhere around the world. Financial services firms know that locating in London gives them direct access not only to graduate talent and academic expertise from the two London universities within the world’s top 2513 - more than any other city in the world other than New York - but also many more leading universities within London and a short train ride away.

More generally, the UK produces more graduates, and more graduates in degrees relevant to the financial services sector, than comparable countries, especially in Europe14 (charts 3.4 and 3.5).

13 According to the Times Higher Education World University Rankings 2010 Imperial College is the world’s 9th best university, and UCL is 22nd. Oxford and Cambridge are joint 6th. 14 It is difficult to find participation rates for higher education in France. Qualitative evidence suggests that participation is higher than comparable countries in Europe, but graduation rates are much lower. There also seems to be a wider disparity between the top and lower ranked institutions in France than elsewhere.

Chart 3.4: Participation Rates in Higher Education (% of relevant age group)

40 35

30 25

% 20 15

10 5

Germany Italy Japan Switzerland United United Kingdom States

Source: OECD

Chart 3.5: % of all graduates graduating in Social Science, Business & Law

45 40 35

25 % 20

5 0 France Germany Japan Spain UK US

Source: OECD

The UK also attracts a much higher proportion of overseas students than other countries in Europe, and a higher absolute number than any country outside the US. By and large overseas students often stay on to work in the UK for at least a couple of years following their degree programme, allowing the UK to draw on a more diverse workforce with a much wider range of language skills than native students.

This is particularly pronounced in London, where around 30% of students are from overseas, compared to a national average of around 15%. Focussing further on institutions specialised in subjects particularly relevant to financial services increases this proportion even higher – almost 70% of students enrolled at LSE and London

Business School were from overseas in 2008-09, according to the Higher Education Statistics Agency. As such, London is particularly well placed to exploit the opportunities that overseas talent brings.

Chart 3.6: Proportion of all International Students, by country of study

25% 20%

15%

10%

e a n n s US UK NZ ria en an y nc pa ai t d a Italy s rm ra J Sp u rland e F Canad A Swe Belgiumzerland G Australia t Swi Nethe

Source: OECD

Chart 3.7: International Students as a % of all enrolled

80%

70% 60% 50% 40% 30%

20%

10% 0% London UK Oxford & Cambridge LBS/LSE

Source: OECD

3.2.3. …and policy that supports evolution and innovation One final aspect of the London labour force that employers value, especially in a fast moving sector like financial and business services, is its flexibility, and a lack of regulation that increases hiring (and firing) costs relative to other European cities. One respondent to the Global Financial Centres Survey put this quite succinctly:

“We have consolidated our European operations in London because we can always get hold of really good experienced people when we need them and it is easier to ‘downsize’ – in Paris and Frankfurt this is an expensive, time consuming and stressful experience”

Looking at the OECD’s index for employment protection legislation confirms that it is easier for employers to lay off workers in the UK (and Switzerland) than elsewhere in Europe as demand changes.

Chart 3.8: Employment Protection Legislation (0-6, 6 most restrictive)

3.5

3.0 2.5 2.0

1.5

1.0

0.5 0.0

Italy tes any dom a anada rance g t C F erm in S G K wit zerland ited S n ited U Un Source: OECD

This is reflected in the pattern of employment levels in the financial and business services sectors in London and other major European financial centres – the losses during the most recent downturn were more severe in London, but periods of job creation tend to be noticeably stronger in London than in Paris or Frankfurt.

The corollary is that workers in London’s financial sector are likely to be re-deployed between firms and sub-sectors rather more quickly than their counterparts in other parts of Europe. Moving into new areas where demand is higher implies a higher level of output per worker compared to economies where workers stay in posts. Looking at the growth rate of output per worker in financial services over the past ten years or so corroborates this assumption – in the 2001-07 period in particular there is good reason to believe London’s flexible labour market helped drive a restructuring of the financial and business services sector into more profitable areas, while in other parts of the continent restrictive labour laws prevented this from happening.

Chart 3.9: Change in Financial & Business Services employment

25% 2001-07 2008-10 (estimate) 2011-14 (forecast) 20%

15%

10%

0% Frankfurt Paris Zurich London -5%

Source: Oxford Economics

Chart 3.10: Output per Worker in Financial and Business Services (2000=100)

130

120

110

100

80 70 60 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Frankfurt Paris London Zu rich

Source: Oxford Economics

Of course, there are other reasons why output per financial sector worker might vary - for example different levels of national financial regulation that requires workers to spend time filling out forms rather than doing business, or differences in average hours between financial sector workers in London and Paris/Frankfurt. Nevertheless, there does seem plenty of anecdotal and empirical evidence to suggest that London’s flexible labour market attracts employers and drives productivity gains.

3.3. London’s global links drive the London economy London’s global role impacts on London’s economic performance more widely, as is apparent from an econometric of London’s links into the world economy, and how this compares with findings for other “global” cities in developed economies. (More detailed results of the econometrics are presented in Appendix B).

Although adequate statistics do not exist to show exactly how export focussed London’s economy is, econometric analysis indicates a very strong link between the world economic cycle and London’s financial and business services cluster. Further statistical analysis suggests that financial and business services are also the key driver of economic activity and growth in other sectors through various multiplier effects (see Chart 3.13 and Appendix B).

Table 3.3 shows the growth rates of both GDP and value added in financial and business services for both London and a number of other large cities. There have been substantial difference in both GDP growth and financial and business services growth over the 18 year period shown. London had the fastest growing economy of all of the cities listed and, perhaps significantly, London also had the fastest growing financial and business services sector.

It is also worth noting from Table 3.3 that both GDP and financial and business services growth slowed down after 2001 in every city except Tokyo (where no equivalent financial service data series exists). Growth relativities remained broadly unaltered after 2001 although the slowdown was particularly marked in Frankfurt.

Despite the slowdown, financial and business service growth continued to outstrip GDP growth in most cities.

Table 3.3: Real Growth in Value Added in NUTS 3 Regions (% p.a.)

GDP 1992-2008 1992-2001 2001-2008 Frankfurt 1.4 1.9 0.7 London* 4.2 4.9 3.3 Milan** 0.8 2.1 1.0 New York*** 3.1 3.4 2.4 Paris**** 2.0 2.3 1.5 Tokyo 0.7 0.4 1.2

Financial & Business Services

Frankfurt 2.3 3.3 0.9 London* 6.0 7.2 4.6 Milan** 2.1 3.3 0.9 New York*** 4.1 4.5 3.6 Paris**** 2.3 2.7 1.8 Tokyo n.a.n.a.n.a. * Inner London ** 1995 data start in 1995 *** Metro area (based on State data pre-2001) *** Paris and Haut de Seine

There are other internationally focussed sectors in London, particularly tourism and higher education, but they are dwarfed by the financial and business services sector: financial and business services make up over 40 percent of GVA in Greater London - a far bigger proportion than any of London’s other major sectors (table 3.4).

Table 3.4: Composition of GVA in 2008 (% of total)

Distribution, Financial & Public Admin, Hotels & Business Education & Restuarants Services Health Greater London 10.4 43.4 12.2 Paris 13.9 41.5 13.9 Frankfurt 13.6 45.2 9.1 Milian 15.3 32.0 10.1 New York 12.3 48.9 15.7 London and Paris are the NUTS 1 definitions while Frankfurt and Milan are based on NUT 3 estimates, New York is the Metopolitan Area.

However, the size of London’s financial and business services sector does not stand out as being particularly large relative to the whole economy when compared to its developed country peer - financial and business services are much more important to London than Milan (which still has a substantial manufacturing sector) and marginally bigger than Paris, but less important than in either New York or Frankfurt.

The comparison with Frankfurt is probably affected by the German city’s absolute size - a population of around two million is substantially less than any of the other cities, yet the city is Germany’s undisputed financial capital. So, London’s financial

and business services sector is large relative to the overall size of its economy but not necessarily more concentrated than other international centres.

What does set London apart is its sensitivity to fluctuations in the world economy. If financial and business services in large cities are global in any sense we would expect them to be at least as well correlated with international as they are with national variables. The econometric evidence we present in Appendix B corroborates this – by far the most important driver of output in London’s business and financial services sector is world investment. World investment has a much greater influence on prospects in “the city” than do either world output or UK economic variables, indicating that London is again, a global city.

Chart 3.11 shows the annual growth in Inner London financial and business services real GVA charted with UK GDP growth and the annual growth in world fixed investment. Chart 3.12 shows an equivalent chart for central London employment in financial and business services. The superior correlation with world rather than UK economic growth and investment is immediately apparent. In particular, world investment tracks the post 2001 slowdown in financial and business services (decline in employment) and its subsequent recovery, while UK GDP shows only a very small deceleration after 2001 and any change in the rate of UK employment growth is barely perceptible.

Chart 3.11: Drivers of Inner London FBS output

15%

10%

0% % pa

5 9 7 8 87 93 95 97 9 03 0 09 9 9 9 001 0 19 1 1989 1991 19 1 1 19 2 2 2005 20 20 -5%

Inner London FBS growth -1 0% UK GDP

World trade -1 5%

Source: Oxford Economics

Chart 3.12: Drivers of Central London FBS employment

1 000%

500%

4 6 8 92 08 986 988 9 99 99 000 002 0 % pa 1 1 199 0 1 199 1 1 2 2 2004 2006 2 -500% Inner London employment in FBS -1 000% World Inv estment, ex China

UK employment -1 500%

Source: Oxford Economics

World investment is shown because it has a far better correlation with large city financial and business services than world GDP. Note that world investment here is fixed investment and not the capital flows associated with the acquisition of purely financial assets (though the two may be correlated). New fixed investment requires financial, legal and other professional services in which London financial and business services sector specialises, so it is understandable that London’s prospects in this sector will be more closely linked to world investment than world GDP.

Is the global economy also important for London’s economy outside financial and business services? Chart 3.13 shows that there is a close relationship between the financial and business services sector and activity in the wider London economy, with business and financial services GVA driving about half of the variation in the other sectors of London’s economy. The R2 value denotes the “goodness of fit” of the regression, indicating what proportion of growth in non-business and financial services can be explained by financial and business services and a constant. An R2 value of 0.9 indicates a very good fit between the financial and business sector and the rest of London’s economy (also see Appendix B).

Chart 3.13: GVA Growth in Greater London 1993-2009

12%

10% Growth in GVA in Other 8% Sectors = 0.47*Growth in Financial 6% & Business Services + 4% constant

2% t=11.6 2 % pa R = 0.90 0% DW = 2,26

5 -2% 5 7 9 1 5 7 9 3 0 7 9 98 00 1 198 198 199 1993 199 199 199 2001 2 20 200 200 -4% FBS GVA

-6% Other sectors -8% GVA

Source: Oxford Economics

So world investment cycles drive London’s financial and business services sector which, in turn, drives much of the rest of the London economy.

3.4. London’s preeminence: not to be taken for granted What implications do London’s global financial role, the strengths that give London its position, and the impact this has on other workers in the city, have for the future? What risks should we be alert to?

Although much of the financial and business services work supporting the growth of emerging markets will of course be done locally, UK expertise will remain important across a number of spheres. For example, UK banks, law firms and other specialists have a substantial role in allowing emerging market corporations to access investment from the advanced economies. The number of overseas companies listing on London’s stock exchange has grown rapidly over the past decade, and London has established itself as the venue of choice in particular for Russian and Indian firms to launched public offerings. Although New York narrowly remains the preferred destination for Chinese businesses, overall London is regarded as the premier venue for international listings.

Chart 3.14: Overseas Listings by Stock Exchange

700

600

500

400

300

200 100

0 London Stock NYSE Eu ro nex t , US NYSE Euro ne x t , Deutsche Börse Ex change Europe

Source: efinancialnews.com

The growth of other financial centres also provides London with an opportunity to outsource lower value added functions to other regions to reduce costs. Although this has potentially negative impacts on employment in the short-run, like any development of this kind it should ultimately act to expand London’s capacity and ability to innovate over the medium to long term.

However, it would be complacent not to acknowledge the risks that exist to London’s current position. Issues about regulation and taxation are often raised as potential threats to London’s competiveness. A recent GLA report 15noted that “the UK’s risk-based approach to financial market regulation has been cited as an important driver of London’s position as a global financial centre”. However, in light of the increased focus on banks’ capital and liquidity requirements, as well as banking sector remuneration, this is a potential cause for concern.

Adair Turner, head of the FSA, recently commented that in an ideal world he thought capital requirements should be set even higher than in the Basel III agreement – implying that there could be some additional regulation to come specific to UK firms. Exactly what shape this takes, and how it compares to measures taken elsewhere, will determine whether this places London at a disadvantage compared to other banking centres. The UK has been a beneficiary from the “over-regulation” by other financial centres in the past – the most obvious example being the shift in international listings to London from New York in light of the Sarbanes-Oxley act in 2002. Many industry participants now fear there is a risk of UK regulators making a similar error.

Changes to the tax regime have also been highlighted as a potential risk to London’s position. The decision of the last government to raise income tax for high earners was highlighted by many financial services sources as potentially discouraging key personnel from locating in London – it pushed marginal tax rates for top earners well above those seen in Switzerland and the US, and even above European countries traditionally known for taxing higher earners heavily. It has subsequently been cited

15 GLA Economics (2010)

by several firms as a reason why they will consider moving business from London, or may struggle to attract talent. The new government has different views on taxation but with the emphasis currently firmly on fiscal consolidation (and a coalition partner to keep happy) it seems unlikely that cuts for top earners will be on the agenda any time soon.

Table 3.5 – Top personal income tax rates in selected OECD states

Top tax Multiple of average rate earnings France 47.8% 2.8 Germany 47.5% 6.2 41.7% 3.6 United States 41.9% 9.6 United Kingdom (2009) 40.0% 1.3 United Kingdom (2010) 50.0% 5.8

While access to quality staff is usually seen as a positive for London, there are also less positive factors that can be highlighted. Firstly, the UK continues to score not particularly highly on many indicators of the educational levels of the workforce as a whole. For example the most recent WEF Global Competitiveness Report16 ranked the UK only 55th out of 139 in terms of the quality of its mathematics and science education. This may be less important to the financial sector which depends upon top graduates from the UK’s highly rated university system. But it does highlight the extent to which the UK financial sector depends on these workers and also international expertise.

From this perspective, it looks helpful that changes have recently been announced to soften the immigration measures the Conservative party campaigned on during the general election– with the “Tier 2” skilled workers quota being raised by 7,000, and intra-company transfers being exempted entirely. However, this is unlikely to be the last word in the immigration debate. Proposals to tighten eligibility for student visas could cause some more cause for concern, but it may be that these will bite more on lower rated universities and English language colleges than top ranking universities, so the risk to London’s financial sector may be less than headline numbers imply.

A final area of risk highlighted by surveys is potential deterioration in the transport system. This is still generally noted to be a positive for London, particularly in terms of the quality of the internal transport infrastructure. But London, and the UK in general, risks being left with an inter-city transit system from the 20th (or even 19th) century. In contrast with other countries where high speed lines link major cities, high speed rail is non-existent in the UK other than the link to the channel tunnel. Possibly more seriously, large parts of the intercity network remain non-electrified; therefore train companies are more reliant on slower and less reliable diesel locomotives.

16 World Economic Forum (2010)

Chart 3.15: Proportion of rail network by type of line (2008)

100% 12%

90% 10% 80%

70% 8% 60%

50% 6%

40% 4% 30%

20% 2% 10%

0% 0% Belg ium Germany S pain Fr anc e Italy UK

Electrified (LHS) Hig h S p eed (RHS )

Source: Eurostat

There are also clear bottlenecks in the UK’s aviation sector – in contrast to all other major EU countries, passenger growth at UK airports has been minimal since 2004, and there is well publicised opposition to further expansion of runway space, especially in the South East. Although passenger numbers remain around a third higher than in Germany and France, the gap is closing rapidly, indicating that London’s advantage as a hub for international business travel might not last for much longer.

Chart 3.16: Air passenger numbers in selected EU countries (domestic and international, 2004=100)

150

140

130

120

110

Index, 2004=100 100

80 2004 2005 2006 2007 2008 2009

Germany Spain France

United Kingdom Switzerland

Source: Eurostat

That said though, none of these challenges is by any means insurmountable. London’s position as a lynchpin of the global financial system is ultimately for London (or at a push, the UK) to lose. With such a disproportionate share of London and the UK’s tax revenue being generated there, there is likely to be a continued focus on ensuring London’s financial sector remains competitive.

4. The Recession in London

4.1. How has the recession impacted London?

Key Points

 With its core focus on global financial services where the global economic downturn originated, London’s economy was always going to suffer to a significant extent in terms of job losses once the full effects of the crisis began to shake out. However, there are considerable uncertainties over the impact of the recession on London. Prior to publication of the most recent employment data for 2009 the perceived wisdom was that London had escaped the worst ravages of the recession and that despite the financial origins of the crisis, the city had shown remarkable reliance. The BRES data for 2009 has cast doubt over this view by recording London as the most severely impacted region, losing 192,000 jobs (4.5%) between 2008 and 2009, compared to the GB average of 2.9%. This is at odds with a variety of other data, though, and our best assessment is that London’s recession may in the end have been on a par with that in other parts of the UK.

 Looking at the impact of recession at a sectoral level, the initial round of job losses between 2008 and 2009 appeared to have been concentrated very strongly in auxiliary business services (not directly in financial services), with additional losses in the traditionally pre-cyclical construction sector – which suffered heavily as developer finance packages were withdrawn by banks – and manufacturing. Including estimates for 2010, however, job losses appear to have been much more widely spread, with something of a bounce back in business services and all sectors other than health and education showing a net fall in jobs.

 But the recession has reinforced the deep-rooted worklessness challenges present in several of London’s economically lagging boroughs, and has pushed many vulnerable residents even further from the labour market. Careful economic management will need to accompany incoming cuts to welfare benefits in these locations.

4.1.1. Uncertainty over labour market impact Prior to publication of the most recent employment data for 2009 - the Business Register and Employment Survey (BRES) which succeeded the Annual Business Inquiry (ABI) - the perceived wisdom was that London had escaped the worst ravages of the recession and that despite the financial origins of the crisis, the city had shown remarkable resilience. The BRES data for 2009 has cast doubt over this view by recording London as the most severely impacted region, losing 192,000 jobs (4.5%) between 2008 and 2009, compared to the GB average of 2.9%. This is at odds with the previous Quarterly Employment Survey (QES) data and the Labour Force Survey (LFS). In addition the latest regional GVA data for 2009 recorded London’s contraction at somewhat less than the UK average (-1.5% compared to -2.1%).

This makes assessment of the recession’s impact very difficult. Table 4.1 summarises a range of key data sources on the labour market for GB and London and clearly highlights the divergence across the sources – though it is always worth remembering that the different data sources all have acknowledged margins of error17. The contrast between the BRES and the LFS and APS estimates is particularly marked but note that the APS and LFS are grossed up using population estimates and it is quite possible that these too will be revised downwards in the future. The BRES data will be used to benchmark the next release of QES data and in a sense will therefore become the ‘official’ picture of London’s employee numbers, so until such time as any future revision is carried out, history will record a severe labour market recession in London.

Table 4.1: Labour market data, London and GB, 2008-10

Quarterly Employment LFS (4 qtr avg APS (4 qtr avg, London, annual Survey (mid residence workplace Claimant change (000s) year) BRES (Sept) based) based) unemployment 2008 120 - 96 93 -8 2009 -72 -192 -46 31 74 2010 -78 - 30 12 6 (Percentage London, annual change, % point) 2008 3.0 - 2.6 2.3 -0.2 2009 -1.7 -4.5 -1.2 0.8 1.4 2010 -1.9 - 0.8 0.3 0.1 (Percentage GB, annual change, % point) 2008 0.8 - 0.7 0.8 0.1 2009 -2.8 -2.9 -1.5 -1.0 1.5 2010 -1.8 - 0.1 -0.8 -0.1

Source: ONS workforce jobs, Business Register and Employment Survey, Labour Force Survey, Annual Population Survey, Claimant Count Note: Due to significant commuting, resident measures should not be considered comparable to workplace estimates for London, though it is unusual for there to be large scale divergence in overall magnitudes. Note II: The ONS workforce jobs figures refer to the employee job series and are non seasonally-adjusted mid year figures (Q2).

The Oxford Economics models whose forecasts are reported in this study have not been updated with the new BRES data given the concerns over its possible lack of consistency with other information available, but the very real risk that the recession in the region has been more severe than previously envisaged should not be discounted. When the latest GVA data is analysed it further suggests the need to be cautious in using the BRES data, though there may be revisions to come to the GVA data as a result of the latest BRES data. The QES, which will be revised to ‘line up’ with BRES later in 2011 has already undergone significant revisions and the contrast between a loss of 72,000 jobs relative to 192,000 in BRES suggests 2011 will bring further large scale revisions. It is worth remarking that the QES has always been subject to significant revision.

17 The standard errors published by ONS for the BRES data, for example, imply that they are 95% confident that the actual employment figure for London in 2009 was within 164,700 either side of the published number.

It is also worth drawing attention to the fact that it is not only London where there seems to be little correlation in the data sources. The South West records frankly implausible growth in BRES jobs, despite a GVA contraction close to the GB average. The North East has the strongest QES and GVA performance and the weakest BRES. Extreme caution must be exercised in the recession / short term analysis and conclusions should not be drawn for any one source alone.

Table 4.2: Annual percentage change, BRES, QES and GVA, UK regions, 2008-09

2008-09 % change

BRES QES GVA (employee (employee (Regional jobs) jobs) Accounts) South East -3.0 -3.7 -2.7 London -4.5 -1.7 -1.5 East -2.2 -0.9 -3.2 South West 0.2 -0.6 -2.1 W est Midlands -5.2 -3.5 -2.7 East Midlands -2.3 -4.5 -2.7 Yorkshire and Hum ber -2.1 -2.7 -2.6 North W est -1.5 -2.0 -1.6 North East -4.8 1.5 -1.5 Scotland -3.3 -7.5 -0.9 Wales -3.2-4.0-2.2 Northern Ireland - -3.5 -2.0 Great Britain -2.9 -2.8 -2.1 United Kingdom - -2.8 -2.1

Source: Business and Employment Register, ONS workforce jobs, ONS Regional Accounts Note: The ONS workforce jobs figures refer to the employee job series and are non-adjusted mid year figures (Q2). Note II: In order to remain consistent with the data used in Oxford Economics’ model, the UK GVA figure does not include the contributions of North Sea Oil as it is not assigned to a region.

4.1.2. Assessing the BRES data The BRES data (published in December 2010) provides employee data on an SIC 2007 basis for 2009, alongside 2008 ABI-based data re-compiled using a comparable method to the BRES. In assessing the recorded change, or job loss, between 2008 and 2009 there remains a possibility that the job level in London in 2008 may be inaccurate, with the levels in 2009 correct and thus may be more modest than reported. The 2009 BRES is due to be revised following next year’s survey.

Table 4.3: BRES employee jobs change by sector, London, 2008-09 (SIC 2007)

2008-09 change

No. %

Primary and utilites -3900 -14.3 Manufacturing -21000 -16.0 Construction -22700 -15.2 Motor Trades -2800 -6.7 Wholesale -12600 -8.8 Retail -13200 -3.5 Transportation and storage -24300 -10.2 Ac commodation and food services -19800 -6.3 Informa tion and communication -28800 -9.3 Finance a nd insurance -34000 -9.7 Real estate activities 14200 18.8

Professional, scientific and technical -2900 -0.6

Administrative and support service activities -49800 -11.0

Public administration and defence 0 0.0

Education 21400 6.8 Health and social work 28200 7.3

Arts, entertainment and recreation -14900 -12.7 Other service activities -5200 -4.9 Total -192100 -4.5

Source: BRES

Looking at the data sectorally the pattern is broadly as would be expected, though in a number of cases the scale of losses looks rather striking. Close to 50,000 administrative and support services jobs lost is a significant contraction. Allied to the losses in finance this would appear to fit with the perception of a financial serviced led recession. However anecdotal evidence and property data do not entirely support this scale of contraction, nor does the published unemployment data; although unemployment data is not directly comparable with jobs data for a range of reasons. It is resident based and there are many people who flow into unemployment from other routes (most notably education), some people migrate out rather than remain on the unemployment register, some people do not sign on to the register (especially those coming from well paid jobs) and in the case of London many of the people who have lost jobs would have been resident outside the region. However, the ‘usual sought occupation’ data usually bears some correlation with the jobs data. For London the year Sept 08 to Sept 09 saw an increase in unemployment of 84,000, and a rise of just 13,600 in people seeking an administrative job. This would appear to suggest the BRES figure of 50,000 losses in administrative and support services is perhaps on the high side. The losses in manufacturing and construction sectors appear more broadly comparable, though even here the BRES data appears towards the upper end of expectations.

Looked at spatially again there seems little match-up between the claimant unemployment data and the BRES employee data. The extent of commuting into London makes this comparison only partially useful but it does raise concerns due to the scale of divergence in the pattern. The employee data suggests an increase in employment between 2008 and 2009 in Newham (which could be linked to the Olympic construction and retail developments) but yet unemployment rose by more than either of the five boroughs in which the most significant job loss was recorded.

The losses are more marked (in percentage terms) in the outer London areas, which is arguably consistent with the losses in relatively lower value added activities such as administrative support, manufacturing and construction, but this pattern is not shared into the wider commuter belt in the East and South East region. This suggests extreme caution when using the raw BRES data to assess the spatial aspects of the recession across London.

Table 4.4: BRES employee change and Claimant Count change, selected London Boroughs, 2008-09

2008-09 change Employees Claimant %Nos.Count Sutt on -9.6 -6700 1700 Richm o nd upon Tham es -9.3 -6800 1400 Croydon -9.1 -11900 4100 Ea li ng -8.5 -9700 4100 Waltham Forest -7.5 -4300 2700

Lambeth -2.9 -3700 3800 Kingston upon Thames -2.8 -2200 1400 Ba rn et -2.3 - 2600 2900 Newham 0.1 100 2800 Hackney 0.4 300 2900

Source: BRES, Claimant Count Note: For the Claimant Count, September figures have been used in order to correspond with the timing of the BRES Note II: The table shows the top 5 and bottom 5 London Boroughs in terms of the percentage change in employees

One other piece of evidence that might help give an indication of the change in employment in London between 2008 and 2009 comes from the demand for transport. The overall number of trips made to, from, or within London each day was 0.4% lower in 2009 than 200818, which appears more consistent with some of the other data sources than with the latest BRES data.

4.1.3. A recession on par? Perhaps considering all the data sources the most plausible assumption to come to would be that London experienced a recession broadly on a similar scale with that in the UK as a whole. The BRES labour market data would appear to overstate the scale of losses given evidence from the LFS, claimant count, Regional Accounts GVA data and the property markets (and survey data such as the PMI, which has only latterly been highly negative for London). However any assertion that London has ‘escaped’ the recession or been only tangentially impacted would also appear wide of the mark. The ability of the region to bounce back may help to mask the impacts over time but to ignore the latest BRES data and its warnings over the “London recession” would be unwise. The impact has, by and large, been on the lower-skilled, less well- paid activities. This mirrors the patterns elsewhere in the UK and is likely to have only exacerbated the labour market divergence within the region.

18 TfL (2010)

The Oxford Economics Winter 2010 forecast for London is summarised below. Note, though, that the forecasts are likely to be subject to downward revisions during 2011 as the BRES data becomes the official employment source.

Table 4.5: Percentage change in total employment and GVA, London, 2007-10 (Oxford Economics Winter 2010)

2007 2008 2009 2010 To t al em pl oym ent 1. 8 2 .6 -1. 3 -0 .5 GVA 4.20.0-4.81.7

Source: Oxford Economics Note: Does not take account of the BRES data or Regional Accounts GVA data.

In the rest of this chapter we look in more detail at a number of aspects of the recession in London, the region’s ability to respond, the differential labour market impacts, the tourist economy and the ‘twin speed’ outturn that all of the data, including the latest BRES, suggest has occurred. The divergent data sources give cause to consider the recessionary impact in London, and casts at least doubt on the supposition that London escaped the recession. Though the Oxford Economics model does not incorporate the BRES results, this report and its findings are not to be discounted or ignored. London’s economy has suffered perhaps to a similar extent as in the UK as a whole, though its ability to respond and recover remains strong, for reasons discussed elsewhere in this report.

4.2. Sectoral impacts

4.2.1. Job losses in most sectors… Looking at the impact of recession at a sectoral level, the initial round of job losses between 2008 and 2009 appeared to have been concentrated very strongly in auxiliary business services (not directly in financial services), with additional losses in the traditionally pre-cyclical construction sector – which suffered heavily as developer finance packages were withdrawn by banks – and manufacturing.

Including estimates for 2010, however, job losses appear to have been much more widely spread, with something of a bounce back in business services and all sectors other than health and education showing a net fall in jobs.

Table 4.6: Employment by sector change, London, 2008-10 (Oxford Economics Winter 2010)

2008-10

000s % Other production -1.2 -7.4 Manufacturing -21.7 -9.8 Construction -27.1 -11.9 Distribution & retail -36.9 -6.0 Hotels & restaurants -14.2 -4.4 Transport & com m unications -27.9 -8.0 Financial services -1.9 -0.5 Business services -7.0 -0.5 Public adm in. -2.1 -0.9 Education 1.1 0.4 Health 68.2 15.4 Other personal services -17.9 -4.5 Total -86.8 -1.8

Source: Oxford Economics Note: Does not take account of the BRES data or Regional Accounts GVA data

4.2.2. …and a mixed picture for the visitor economy London’s tourism sector has experienced mixed fortunes since the beginning of the recession. On the one hand, the weakening value of sterling has helped to lure many additional European visitors on short breaks, and has helped many retailers to counteract reduced spending by hard pressed elements of the domestic population. On the other hand, the data suggest that London’s tourism sector, along with that of the UK as a whole, has been significantly affected by the recession. Though data on visitor spending can appear encouraging – reflecting the limited effect of the downturn on spending amongst the wealthy – analysis of total overnight visits by foreign visitors to both London and the UK clearly shows a marked and persistent downturn since the middle of 2007. A temporary collapse in global business travel in 2008-09 is one factor here, but the data paint a picture of declining average stays – in spite of an increasingly favourable exchange rate for visitors – that helps explain one of the highest proportional GVA and employment losses of recent times. A strong recent pickup in global business travel should at least provide some relief and improve prospects for 2011.

Chart 4.1: Overseas Overnight visits, London and the UK, 2003-2010

25 London UK 20

0 Q1 Q 2 Q 3 Q 4 Q 1 Q2 Q3 Q4 Q 1 Q 2 Q 3 Q 4 Q1 Q2 Q3 Q4 Q1 Q2 Q 3 Q 4 Q 1 Q 2 Q3 Q4 Q1 Q 2 Q 3 Q 4 Q 1 Q2 -5

% change (year on y ear) 2003 2004 2005 2006 2007 2008 2009 2010 -10

-15

-20

Source: ONS International Passenger Survey

4.2.3. A generally strong position to adapt to public spending cuts Looking ahead, one of the most important economic features of the next five years will be the impact of major cuts to many parts of UK government spending, as the coalition government embarks on an aggressive programme of fiscal tightening in a bid to balance the country’s record budget deficit. To assess the prospects for local economies in the wake of these public sector cuts, Oxford Economics constructed a UK ‘risk and response’ index in 2010, assessing firstly each local authority area’s existing dependence on public sector employment and procurement (alongside its existing unemployment rate), and secondly the ability of each area to recover based on its workforce skill levels, export intensity and likely responsiveness to a change in labour demand.

The findings of this exercise rejected the notion that northern regions of the UK would be clearly the hardest hit by public spending cuts, as had been suggested in some quarters: pockets of deep public sector dependence were found to be scattered across the whole of the UK. For London, though, the outcome was generally positive: five of the top six UK areas best placed to respond were all located within the capital, and of those most at risk, only three Boroughs (Lambeth, Newham and Greenwich) featured in the national top thirty and only nine in the top 30%. In terms of generating a strong private sector response to compensate economically for the contraction in public spending, higher-ranked Boroughs such as Kensington & Chelsea (2), Tower Hamlets (3) – of course the home of Canary Wharf – and the City of London (4) all benefit from their high concentration of skills and export-friendly service industries.

Table 4.7: Oxford Economics’ Risk, Response and Combined Index, London Boroughs, Rank out of all UK Las

Risk Resp onse Co mbined Bark ing a nd D agenha m 159 333 120 Barnet 180 87 262 Bexley 197 297 164 Brent 199 97 270 Brom le y 159 172 205 Camden 231 32 327 City of London 434 4 434 C ro ydon 107 192 174 Ealing 302 6 383 Enfield 66 203 145 Greenwich 25 196 123 Hackney 32 113 177 Hammersmith and Fulham 213 26 319 Haringey 86 73 222 Harrow 207 151 246 Havering 170 395 92 H illin gdon 416 49 410 Hounslow 364 8 406 Islington 137 39 266 Kensington and Chelsea 385 2 417 Kingston-upon-Thames 258 69 321 Lam beth 13 128 157 Le w isham 37 137 162 Merton 331 15 393 N ew ham 21 370 25 Redbridge 31 232 107 Richmond-upon-Thames 298 43 368 Southw ark 102 73 230 Su tton 150 208 185 To w er Ha m lets 326 3 397 W altham Forest 28 292 68 Wandsworth 133 99 237 W estm inster, City of 415 1 432

*Note: for the risk index, 1 = most at risk; for the recovery index, 1 = the best placed to recover. Source: Oxford Economics

Overall, London certainly cannot afford to be complacent about its recovery from the recession, and will continue to face challenges as it re-adjusts to an almost unprecedented period of labour turnover. But as the Oxford Economics ‘risk and response’ analysis showed, prospects for both its top-performing and its more economically challenging areas do not at present appear likely to be significantly worsened by at least one major legacy of the crisis, namely the ongoing cuts to government spending.

4.3. Unemployment back to 6% in certain areas

4.3.1. Widespread impacts but felt most keenly in vulnerable areas… Despite the largest net job losses being concentrated in a small number of local areas and sectors, the unemployment impact of recession in London, based on actual claimant count data, has been somewhat more evenly distributed, with an outright increase in unemployment recorded across all 33 Boroughs. With a couple of exceptions, the majority of Boroughs have experienced somewhere between a one and two percentage point rise in their claimant unemployment rate since their ‘trough’ – when local unemployment was at its lowest – typically during the first half of 2008.

That said, those Boroughs with higher initial unemployment rates pre-recession have tended to experience a slightly higher-than-average rise in resident unemployment, highlighting how the recession has hit the most vulnerable and disadvantaged communities hard. This also partly reflects the fact that many high-skilled service sector workers made redundant choose not to join the claimant register, thereby masking the effect on total unemployment in more prosperous Boroughs. Nevertheless, though the story of London unemployment in the first three quarters of 2010 has been one of cautious optimism, with almost all Boroughs seeing a marginal decrease in their claimant unemployment rates, the exceptions again include the boroughs of Newham, Hackney, Haringey and Tower Hamlets, where the worklessness challenge continues to be as profound in terms of accessing new employment as it has been in terms of job loss and redundancy.

Table 4.8: Unemployment, London Boroughs

Change Jan 10 - Oct 10 Change trough - Oct 10 Claimants Rate, pp Claimants Rate, pp Bark ing and Dagenham -100 0.0 2,570 2.2

Barnet -560 -0.2 6,560 1.2 Bexley -560 -0.3 4,280 1.6 Brent -480 -0.3 9,070 1.7 Brom ley -630 -0.3 5,270 1.3 Camden -470 -0.2 5,500 0.9 City of London -20 -0.2 10 0.1 Croydon -80 0.0 4,640 2.0 Ealing -820 -0.3 8,650 1.7 Enfield -140 -0.1 3,890 2.0 Greenwich 40 0.0 3,140 2.0 Hackney 80 0.0 9,980 2.1 Hamm ersm ith and Fulham -390 -0.3 4,960 1.4 Haringey 160 0.1 3,400 2.2 Harrow -560 -0.3 4,060 1.1

Havering -360 -0.3 5,040 1.8 Hillingdon -1,150 -0.6 5,260 1.4 Hounslow -680 -0.3 4,990 1.4 Isl ington -890 -0.5 7,040 1.5 Kensington and Chelsea -140 -0.1 3,430 1.2 Kingston upon Thames -450 -0.4 1,990 0.8 Lambeth -810 -0.3 10,870 1.7

Lewisham 130 0.0 3,830 1.9 Merton -390 -0.1 3,590 1.2 Newham 40 0.1 10,260 2.2 Redbridge -360 -0.2 6,790 1.6 Richmond upon Thames -370 -0.3 2,060 0.8 Southwark -60 0.0 9,780 1.6 Sutton -520 -0.4 3,260 1.3

Tow er Ham lets -220 0.0 10,140 1.3 Waltham Forest -270 -0.1 8,360 1.9 Wandsworth -730 -0.4 6,050 1.0 Westminster -400 -0.1 4,990 1.0 G reater London -12,170 -0.2 213,790 1.5 UK -214,420 -0.5 631,030 1.6

Source: NOMIS Claimant Count

4.3.2. …and persistent worklessness issues slowing the recovery London’s total unemployment benefit claimant count in September 2010 stood at just over 215,000. This represents a fall of just over 10,000 (4%) since the beginning of the year, although the rate still stands some 65% above its low in April 2008. The city’s unemployment peaked in February 2010, with nearly 230,000 claimants, a level last witnessed in August 1998. Interestingly, the UK as a whole has fared considerably better than London in unemployment terms during 2010, with a 13% decline in total claimants since January considerably higher than London’s own 4% cut. This emphasises the intrinsic challenge of long-term unemployment in parts of the capital, and the sheer distance many of its out of work residents have moved from the labour market in terms of job readiness and attitudes towards employment.

Chart 4.2: Claimant Count Unemployment, London, January 2000 – October 2010

250

200

150

100

Unemployment (000s) Unemployment 50

0 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10

Source: NOMIS Claimant Count

4.4. Leaving a number of longer-term challenges

4.4.1. Two-track impacts on a two-track economy… The recession has affected London in a different way to the rest of the UK. Whilst the relatively modest total number of jobs shed, particularly in flagship industries such as financial services, encourages a positive outlook towards the future prospects of the city’s high-end knowledge economy and the preservation of London’s status as a global business capital, the reality for many disadvantaged communities is much harsher.

The recession has reinforced the deep-rooted worklessness challenges present in several of its economically lagging Boroughs, pushing many vulnerable residents even further from the labour market and creating concerns that the employment benefits of key development projects such as the Olympic Park are not filtering through to those who need them most in local areas. The risks of incoming cuts to welfare benefits are unlikely to be as great anywhere in the UK as they are in the deprived communities of London, and careful economic management will be needed to ensure a safety net remains in the event of lower-skilled job creation rates failing to spark. Restrictions on the maximum amount of housing benefit payable in particular have bigger potential impacts in London than elsewhere given the nature of London’s housing markets, and it is possible that some of London’s workless will move to the outskirts of the city or out of London altogether if housing benefit no longer covers the cost of their existing housing.

4.4.2. …an ongoing struggle for the ‘lost generation’… At the UK level, this has been a recession of the young. From brutal cuts in graduate job prospects for the better qualified to significant increases in redundancy, inactivity and disengagement amongst the lower skilled, the evidence is stark in its confirmation that the most severe labour market effects of the crisis have hit the 16- 25 age group most severely.

In London, the story is similar but not quite as simplistic: youth unemployment has clearly risen, and indeed more than 50,000 of the current 215,000 benefit claimants in the city are aged under 25, but the disproportionate impact on young people has not been as significant as it has in other parts of the UK. Claimant data for September 2010 show that unemployment affects a larger than average share of 25-49 year-

olds in London than elsewhere in the country, indicating that many middle-aged workers with families, as well as younger people leaving education, have been amongst those most severely affected in London.

Chart 4.3: Unemployment by Age Band, London, October 2010

20 Unemp loyment (000s) 10

0 < 25 25-29 30-34 35-39 40-44 45-49 50-54 55-59 > 59

Source: NOMIS Claimant Count

Table 4.9: Unemployment by age band, London, October 2010

Claimants Age band (000s) % of total <25 51.8 24.3 25-29 30.1 14.1 30-34 24.3 11.4 35-39 23.4 11.0 40-44 25.9 12.2 45-49 24.6 11.5 50-54 18.6 8.7 55-59 12.6 5.9 >60 1.9 0.9

Source: NOMIS Claimant Count

Chart 4.4: Unemployment by Broad Age Group, London, October 2010

100% 90% 80% 70% Over 50 60% 25‐49 50% 19‐24 40% Under 18 30% 20% 10% 0% London UK

Source: NOMIS Claimant Count

4.4.3. …and a long-term skills and structural challenge The disproportionate lasting impacts of the recession on lower-skilled workers are also partially evident from an occupational breakdown of the unemployed (defined as their most recently held occupation). As of September 2010, a quarter of benefit claimants were classed within sales and customer service occupations, and a further fifth within elementary occupations. The recession has clearly affected workers across the board, with one in five current claimants formerly holding either managerial, professional or associate professional roles (the three highest categories). But with job creation prospects relatively bright in the higher value business and research-driven sectors, it is the majority of lower-skilled unemployed people – likely to include many victims of the de-skilling and outsourcing culture within modern customer service industries – who are likely to face the most significant longer-term challenges in re-entering and holding down work.

Chart 4.5: Unemployment by Occupation, London, October 2010

Pr ofess i ona l Ma na gers and Occupations Senior Officials Sa les and Pr ocess, Plant and 5% 5% Customer Service Ma chine occupa ti ons Opera tives 24% 6%

Personal Serv i ce Occupations 6%

Skilled Tra des Occupations 8% Associate Professional and El ementary Techni cal Occupa ti ons Occupations Adm in is trative 22% 10% and Secretarial Occupations 14%

Source: NOMIS, Claimant Count

Across the first three quarters of 2010, just over 41% of people employed in London held a degree-level qualification or equivalent, compared with less than 23% of the city’s unemployed. Between 2007 and 2010, however, the proportion of unemployed people with a degree rose by fully 7 percentage points – indicating that job losses have been indiscriminate in taking effect across different skill levels of working population. What is much more pronounced, of course, is the difference in short-term prospects for getting back into work between these two groups.

Table 4.10: Economic activity by skill level, London, 2010

Degree or GCE A Level GCSE grades Other No equivalent Higher educ or equiv A-C or equiv qualifications qualification Em ployed 41.1 7.4 15.8 14.1 14.6 5.9 Unem ployed 22.5 5.5 20.4 20.0 19.5 11.6 Inactive: of which 14.1 5.1 16.0 19.5 18.8 25.2 Seeking a job 26.9 6.1 18.4 22.2 11.3 12.3 Long term sick 5.4 4.5 9.6 17.4 20.0 41.2 Looking after fam ily / hom e 15.4 4.0 10.9 16.9 26.6 25.3 Other 24.2 5.6 11.6 18.5 19.0 18.7 Student 13.4 2.9 29.2 26.8 14.1 12.8 Retired 13.7 9.0 13.3 15.8 15.5 32.0 Total 32.2 6.6 16.2 16.1 16.1 11.8

Source: Oxford Economics’ analysis of the LFS Note: The LFS data is a 3 quarter average (Q1 2010, Q2 2010 and Q3 2010) Note II: The table should be read in a horizontal manner: for example, “41.1% of the employed have a degree”, as opposed to “41.1% of those with a degree are employed”

5. London’s Finances

Key Points  London has consistently contributed more to the Exchequer through its share of tax payments than it receives through its share of public spending. Of course, this is to be expected for a region with high average productivity and wages, and this element of re-distribution has typically been shared by neighbouring regions in the “greater south- east”. This year, the sharp plunge of the UK public finances into record-breaking deficit is reflected in a much lower contribution from London in the range -£5.4 to +£7.9 billion, with a central estimate of a £1.4 billion contribution. Of course, the figures for other regions have also been affected by the national picture, with all other regions of the UK in deficit.

 Receipts from London are likely to fall in the current financial year, and 2010/11 may indeed see London’s tax payments fall below public spending for London for the first time since these estimates have been produced. However, the subsequent recovery we are forecasting for London’s economy should result in a significant increase in future receipts from London, and with on-going restraint on spending, London’s net contribution is forecast to rise to a record £27 billion by 2015/16.

 Indeed, unless London returns to making the significant contribution to the Exchequer that has been the norm over recent years it is hard to see the overall UK budget deficit getting back to manageable levels. At the same time, the level of tax and the rates at which it is levied are a potential competitiveness issue for London, and have become a significant source of uncertainty for companies looking at a London base. The right balance for growth needs to be struck between the need to raise sufficient revenue and the need to avoid threatening London’s competitiveness.

5.1. Measuring London’s contribution to UK public finances Annual reports on London’s place in the UK economy have contained a regular analysis of public spending in London compared with the revenue raised from London, and we have repeated this analysis this year, alongside a more detailed look at how we might expect this to change over the future. The methodology closely follows that used in previous studies (more details of which are provided in Appendix A.) In summary:

 Expenditure in London is measured on a “for” basis. In other words, where possible the focus is on the region on behalf of whose residents the expenditure is undertaken, rather than on the actual location where the money is spent.

 Where expenditure is allocated to region by the “Public Expenditure Statistical Analyses” published by HM Treasury this is used. For unallocated, expenditure a range of different assumptions are used, with the focus of subsequent analysis on the average across these different assumptions.

 Revenues attributable to London are estimated for each major tax on the basis of the most reliable proxy for payments made by people living or working in

London. Estimates are made on both a residence and workplace basis, with the mid-point of these estimates being the one we use for calculating London’s net contribution reported.

5.2. Financial picture mirrors UK difficulties Previous analysis has consistently shown that London contributes more to the Exchequer through its share of tax payments than it receives through its share of public spending. Of course, this is to be expected for a region with high average productivity and wages, and this element of re-distribution has typically been shared by neighbouring regions in the “greater south-east”.

This year, the results reflect the global and national context, with public sector deficits soaring around the world from both the automatic effects of the recession and from government actions taken to avoid a worse recession. In the UK, the sharp plunge of the UK public finances into record-breaking deficit is reflected in deteriorating balances for all regions.

Table 5.1: Regional contributions to UK public finances, 2009/10

RevenueExpenditure Balance Residence Workplace Residenc e (£ W orkplace (£ Mid-point (£ (£bn) (£bn) (£ billion) billion) billion) billion) North East 16.7 17.0 29.0 -12.3 -12.0 -12.1 North West 49.9 50.6 74.2 -24.3 -23.6 -23.9 Yorkshire & the Humber 35.3 35.7 52.4 -17.1 -16.8 -16.9 East Midlands 32.9 31.6 42.0 -9.2 -10.4 -9.8 W est Midlands 38.8 38.8 54.8 -16.0 -16.0 -16.0 Eastern 49.1 46.8 53.5 -4.4 -6.7 -5.5 G reater London 91.3 99.6 94.0 -2.7 5.5 1.4 South East 81.9 77.8 80.9 1.0 -3.1 -1.0 South West 40.1 39.5 55.5 -15.3 -16.0 -15.6 W ales 19.0 18.7 33.5 -14.5 -14.8 -14.6 Scotland 48.3 46.8 61.9 -13.6 -15.1 -14.3 Northern Ireland 11.5 12.0 22.6 -11.1 -10.6 -10.9 UK 514.7 514.7 654.2 -139.5 -139.5 -139.5 UK + exp outside UK 666.5 -151.8 -151.8 -151.8 Source: Oxford Economics analysis

Public sector spending on behalf of London in 2009/10 was an estimated £91.7-£96.7 billion, depending on the methodology used for apportioning unallocated spending, with an average estimate of £94.0 billion. This compares with £91.3 billion revenue from London on a residence basis, and £99.6 billion on a workplace basis (the biggest factor behind the larger workplace revenue figure being income tax and NICs from people who work in London but commute in from outside the city). So, using the average measure of spending, London’s fiscal balance in 2009/10 was - £2.7 billion on a residence basis and +£5.5 billion on a workplace basis, with a mid- point contribution to the UK Exchequer of £1.4 billion.19

19 Different ways of calculating the contribution are likely to be appropriate for different purposes. Comparing the lowest figure for revenue with the highest figure for expenditure and vice versa gives an overall range for London’s net fiscal contribution between -£5.4 billion and +£7.9 billion.

Chart 5.1: London’s contribution to UK public finances over time, £bn

0 London's contribution -20 (mid-point estimate) -40

-60

-80

-100

-120 UK total budget balance -140

-160 1999/00 2000/01 2001/022002/03 2003/04 2004/052005/06 2006/072007/08 2008/09 2009/10

Source: Oxford Economics

5.3. Tax receipts from London key in official outlook Looking ahead, we have extended the analysis to consider how London’s contribution is likely to develop over the future, taking account of our economic forecasts for London and the UK, as well as the expected impact of changes in future spending announced in November’s Comprehensive Spending Review (CSR). Details of how we have done this are set out in Appendix A. However, key aspects of the methodology are:

 Forecasts of spending in each region are based on looking at CSR spending limits in three broad categories – health, social security and other spending. Within each category, we have assumed that the planned growth or reduction in spending at the national level applies in each region.

 Forecasts of receipts from each region are based on apportioning our forecasts of UK tax receipts for each broad category of taxation according to forecasts of appropriate indicators of the relevant tax base in each region (such as employment and wages for income tax, or consumer spending for VAT).

Chart 5.2: Forecasts of revenue and public spending for London over time

140 Revenue

120 Expenditure

100

billion£ 60

0 4 6 7 8 0 2 3 4 6 /0 /05 0 0 /0 /1 1 /1 /1 /1 3 7 9 2 3 5 0 0 0 11/ 1 1 1 0 0 0 0 0 0 0 2 2004 2005/ 2006/ 2 2008/09 2 2010/11 2 2 2 2014/15 2

These projections show that receipts from London are likely to fall in the current financial year, and 2010/11 may indeed see London’s tax payments below public spending for London for the first time since these estimates have been produced. However, the subsequent recovery we are forecasting for London’s economy (see Chapter 6) should result in a significant increase in future receipts from London, and with on-going restraint on spending, London’s net contribution is forecast to rise to a record £27 billion by 2015/16 – between 2010/11 and 2015/16 spending in London is set to increase by only £8 billion, while we expect London’s tax payments to rise by £38 billion, with a particular recovery in corporation tax but also rises in other taxes as GVA, employment, wages, consumer spending and other sources of tax revenue grow.

These forecasts for tax receipts are dependent on our forecasts for employment and GVA growth in London, and if London does not lead the recovery in the way we are forecasting it is likely both that London’s fiscal contribution will rise more slowly than we are forecasting and that the UK public deficit will remain higher for longer.

Chart 5.3: Forecasts of London’s net contribution to UK public finances over time

London UK 0

4 6 9 2 4 0 0 1 /1 4/05 5/0 7/08 0/11 5/16 03/ 0 0 0 08/ 1 11/ 13 1 0 2 20 20 2006/07 20 20 2009/10 20 20 2012/13 20 2014/15 20 -50 £ billion £ -100

-150

-200

5.4. Conclusions Of course it is not a surprise that London typically pays more in tax than is accounted for by London’s share of public spending. This is what should happen with a progressive tax system, given the relative strength of London’s economy compared with many other parts of the UK. However, it is worth bearing in mind given the very large turn around required in the UK’s public finances that London will almost certainly have to play a significant part. Unless London returns to making the significant contribution to the Exchequer that has been the norm over recent years it is hard to see the overall UK budget deficit getting back to manageable levels. At the same time, the level of tax and the rates at which it is levied are a potential competitiveness issue for London, and have become a significant source of uncertainty for companies looking at a London base. The right balance for growth needs to be struck between the need to raise sufficient revenue and the need to avoid threatening London’s competitiveness.

6. London’s Future

Key Points

 The London economy is expected to lead the UK recovery - London’s fortunes are closely aligned to the flow of world investment and as this is projected to grow the prospects for London are relatively bullish, especially into the medium term.

 However there are significant risks to the economic recovery given prevailing uncertainties and growing challenges to London from global cities across the world. Not only is there uncertainty over the scale and impact of public sector cuts, uncertainty over the state of the Eurozone economies and uncertainty over the sustainability of the global recovery, there is also uncertainty over London’s continued pre-eminence in global financial and business services. Higher taxation, increased regulation, infrastructure issues, and reputational damage from the financial crisis are all potential challenges.

 Alternative scenarios illustrate the potential impact of an erosion of international competitiveness in London that could be due to any combination of the factors listed above – if the impact of world investment on economic activity in London’s financial and business service sectors is 20% less over the future than implied by the relationship we have identified historically, London’s “market share” in financial and business services might level off after 2017, and overall London GVA could be 6% lower by 2020 than in our baseline forecast.

6.1. Forecast relatively strong

6.1.1. Global recovery underway – but will it last? The global recovery is already underway, with global trade returning to pre-crisis levels and world GDP expanding by over 3.5% year on year in both Q2 and Q3 2010. Economic activity in London’s financial and business service sectors, which is strongly correlated with World investment (excluding China), has also started a tentative recovery and was up by nearly 4% year-on-year in Q3 2010 although this was still nearly 10% down on the Q1 2008 peak.

Chart 6.1: World GDP and trade, 1990-2020

GDP Trade Forecast 15

Annual % change Annual -5 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

-10

-15

Source: Oxford Economics

However the recession was a stark reminder that the global economy is highly interconnected and the risks to recovery from the problems of debt in the developed West cannot be discounted. The acute problems in the Eurozone (most notably in Greece, Ireland, Portugal and Spain) relating to debt levels and ability to repay, cast a significant shadow over short term prospects. The UK and US are not seen to be as high risk, despite significant problems of rising levels of national debt. The concern remains that debt levels are high throughout the West and the process of re-balancing will affect not only domestic economies but also the global recovery as the developing world still requires an affluent developed world to purchase its exports. We forecast global GDP growth to be slower in 2011 than 2010 as austerity and uncertainty dominate the global mood, before a more sustained recovery in 2012 and beyond. World investment growth, by contrast, is forecast to accelerate in 2011 as companies continue to make up lost ground, but there remain risks to global financial stability.

Table 6.1: GDP growth, selected countries, 2008-2020

Avg annual % change (annual) % 2008 2009 2010 2011 2012 2013 2014‐20 US 0.0 ‐2.6 2.7 2.5 3.5 3.8 3.0 Japan ‐1.2 ‐5.3 3.4 0.9 2.1 2.0 1.2 Eurozone 0.3 ‐4.0 1.7 1.4 1.7 2.0 1.8 Germany 0.7 ‐4.7 3.5 2.1 1.7 2.1 1.8 France 0.1 ‐2.5 1.6 1.8 2.0 2.1 1.8 Italy ‐1.3 ‐5.1 1.0 0.8 1.1 1.4 1.5 UK ‐0.1 ‐5.0 1.7 2.1 2.6 3.0 2.5 China 9.6 9.1 10.1 9.2 9.1 8.8 8.3 India 7.3 6.8 8.8 8.2 9.0 8.8 7.6 Other Asia4.02.06.85.56.16.05.5 Mexico 1.5 ‐6.1 5.0 4.5 5.7 4.6 3.6 Brazil 5.2 ‐0.2 7.3 4.5 5.1 4.6 3.9 Other Latin America 4.7 ‐0.7 4.7 4.0 4.7 4.3 3.6 Eastern Europe 4.8 ‐5.6 3.3 3.9 5.0 5.0 4.0 MENA 4.31.55.35.75.75.44.8 World 1.6 ‐1.9 3.7 3.3 4.0 4.0 3.6 Source: Oxford Economics Note: MENA = Middle East and North Africa

6.1.2. UK recovery facing headwinds The Winter 2010 Oxford Economic forecasts predict a sluggish UK recovery with the economy facing strong headwinds as both the government and consumers face significant pressures on their ability to spend. Recovery will be led by business and in particular exporting firms who can sell to the parts of the world where demand is growing more rapidly. Consumer and government spending are expected to be more modest contributors to economic growth than in the recent past, in fact government consumption is forecast to have a contractionary effect for at least 6 years.

Table 6.2: Average percentage point contributions to UK GDP growth

1998-08 2008-10 2010-15 2015-20 Consumption 1.9 -0.3 1.1 1.5 Investment 0.6 -1.1 0.8 0.6 Gov ernment spending 0.5 0.3 -0.2 0.0 Exports 1.0 -0.5 1.9 1.6 Imports 1.4 -0.6 1.3 1.4

Source: Oxford Economics

6.1.3. London forecast to lead the way The London economy is expected to lead the UK recovery as a result of its high export orientation, flexible, dynamic and competitive economy both in terms of its businesses and its people. As Chapter 3 clearly indicated, London’s fortunes are closely aligned to the flow of world investment and as this is projected to grow the prospects for London are relatively bullish, especially into the medium term.

Chart 6.2: GVA, London and the UK, 1990 – 2020

8 London UK For eca st 6

0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

% change (annual) change % -2

-4

-6

Source: Oxford Economics Note: Latest regional GVA data is 2008; latest UK GVA data is Q3 2010

The recovery is projected to be led by the professional services20 sector as it continues to service strong global demand, with GVA growth in this part of the economy averaging 4.9% GVA growth over the 2010-15 period. In total, of the extra GVA projected by 2020 two-thirds is accounted for by professional services, with transport and communications the next largest sector in terms of GVA contribution.

Table 6.3: Average annual percentage change in GVA by sector, London, 1998-2020

1998-08 2008-10 2010-20 Other production -0.3 -8.9 0.8 Manufacturing -0.8 -2.9 1.0 Construction 1.9 -3.2 2.1 Distribution & retail 2.1 0.1 2.0 Hotels & restaurants 4.8 -1.4 2.7 Transport & communications 4.3 -3.7 2.8 Financial serv ices 6.9 -1.8 4.2 Business serv ices 6.1 -2.8 5.3 Public admin. 1.6 0.7 -0.4 Education 1.0 -0.3 0.7 Health 3.5 6.4 1.1 Other personal serv ices 2.1 -4.9 2.3 Total 3.6 -1.5 3.2

Source: Oxford Economics Note: Other production = agriculture, extraction and utilities

Our focus on international demand and the export orientation of much of London’s economy may seem slightly at odds with the perception of exports as primarily about manufacturing, given the relative unimportance of manufacturing to the London economy. But services exports rose strongly prior to the impact of the global financial crisis, and several service sectors export more than many traditional manufacturing export sectors (Table 6.4). Not only that – key manufacturing exports like motor vehicles often include a major imported component, so the impact on the UK economy of additional exports of these may be less that the impact of the same

20 Financial and business services

amount of additional exports of services. Ultimately, although manufacturing output has out-performed services over the past year, it is likely to be services that provide the main growth in jobs over the forecast.

Table 6.4: Top 20 exporting sectors by value, 2008

Total exports of goods and services (£m) Banking and finance 33060 Other business services 27366 Motor vehicles 26106 Auxiliary financial services 21794 Oil and gas extraction 18920 Coke ovens, refined petroleum & nuclear fuel 18657 Pharmaceuticals 18112 Aircraft and spacecraft 14279 Medical and precision instruments 9965 Water transport 9580 Hotels, catering, pubs etc 9142 Non-ferrous metals 8939 Iron and steel 8821 Organic chemicals 8128 Office machinery & computers 7860 Mechanical power equipment 7668 Computer services 7495 Recreational services 7420 Special purpose machinery 6681 Insurance and pension funds 6477 Total 422905 Source: Input-output tables for 2008

6.1.4. Sluggish labour market recovery initially In the UK as a whole, the recovery of the labour market is expected to be slow, with 2008 levels of employment not recovered until late 2014. In many regions the period of recovery is over 10 years as the public sector cuts impact both directly and indirectly. For London the job recovery is predicted to be more rapid, and the city is forecast to regain its 2008 level of employment during 2013. The rate of job growth during the protracted economy recovery phase of the cycle is more rapid in London, reflecting the sectoral outlooks. These are forecast to be dominated by export orientated activities and professional services activities in particular, and not by the public services sector which has been such a significant source of jobs over the last decade in the UK.

Chart 6.3: Total employment, London and the UK, 1971-2020

130

125 London UK 120 115 110 105 100 95 90

Total employ ment (1990=100) 85 80

1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019

Source: Oxford Economics

Professional services are forecast to be the predominant source of jobs with a net job creation of 460,000 in the decade ahead, 83% of the total net jobs forecast. The importance of the sector is evident when the plight of the public sector is considered. Having been a major contributor to London’s labour market performance in the last decade it is expected to lose 37,000 net jobs in the decade ahead. The bullish professional services forecasts do build in an assumption that at least some of the activities currently carried out in the public sector will move into the private sector. This may be in the form of privatisations but equally may be via increased outsourcing of activities, much in the way industry has transformed over the last 20 years.

The expansion of office and commercial capacity in London, particularly in the East of the city means that the level of job growth forecast is viable and not likely to lead to prohibitive costs in terms of rent, labour or constraining infrastructure demands which would likely emerge without the expansion of capacity. This has important implications for other locations in the UK, most notably major cities, where jobs will be at a premium and the likelihood is that vacant property will depress rents and improve the relative cost position. The extent to which the regions outside of southern England struggle economically may increase pressure to relocate larger numbers of public sector jobs than are currently built into the base forecast.

Table 6.5: Employment change by sector (000s), London, 1998-2020

1998-08 2008-10 2010-20 Other production -1.3 -1.2 -2.4 M anufactu rin g -113.6 -21.7 -43.9 Construction 19.8 -27.1 7.7 Distribu tion & retail -6.4 -36.9 22.0 Hotels & restaurants 62.2 -14.2 42.3 Transport & communications 21.1 -27.9 33.0 Finan cial serv ices 25.5 -1.9 24.5 Business serv ic es 313.8 -7.0 435.6 Pu blic admin. 18.9 -2.1 -38.8

Education 63.7 1.1 -7.3 Health 84.9 68.2 8.8 Other personal services 81.4 -17.9 69.5 Total 562.6 -86.8 550.9

Source: Oxford Economics Note: Other production = agriculture, extraction, utilities

We forecast growth in the hotels sector as London is expected to continue to attract both leisure and business visitors, boosted by the Olympics in the short run and by the growing international professional services sector in the longer run. Elsewhere growth in secondary activities such as construction and retailing is expected to respond to overall growth in the labour market. Other services are expected to expand, reflecting the strong leisure, cultural and media base in the city but elements of the sector will be vulnerable to cost pressures given the likelihood of extremely competitive costs elsewhere in the UK as a result of weaker labour markets.

Overall we forecast that London will grow in relative importance within the overall UK, rising to 22% of UK GVA by 2020 and 16% of employment. This will be a higher level of UK GVA accounted for in London than at least since 1971 and the highest employment concentration since the mid 1980’s.

Chart 6.4: London’s share of employment and GVA, 1971-2020

Em ployment GVA Forecast 22

London % of UK total 14

1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019

Source: Oxford Economics

6.1.5. Even with strong growth problems will remain The forecast is for unemployment levels to begin to fall in 2012 as job creation finally begins to accelerate. The level is expected to fall in line with the UK rate, thus maintaining the regions’ convergence with the UK average after 15 years of consistently higher unemployment. The rate however is expected to fall only very slowly and even by 2020 it does not reach the lows achieved in 2009 which we believe were artificially low due to excess spending levels and unsustainable rising levels of debt. The unemployment levels may change drastically as a result of the welfare reform system which is underway. It is possible that significant numbers of people currently economically inactive will be moved onto the unemployment register, this has not been factored into the forecasts given the uncertainties over the scale of people likely to move across benefit classification.

Chart 6.5: Unemployment rate, London and the UK, 1971 – 2020

250

Forecast 200

150

100

50 London UK

Unemployment rate (1990=100) 0

1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019

Source: Oxford Economics

The Oxford Economics forecasts suggest that the jobs will not be spread evenly across London, with the increased capacity in the East drawing additional employment and the mis-match in demand and supply of skills in certain labour markets meaning that London remains a city of contrasts in 2020. Over half of the net jobs forecast by 2020 are expected to go to just 6 boroughs and for some boroughs it may be more than 10 years before they return to their 2008 level of employment.

Table 6.6: Employment change and return to peak, London Boroughs, 2010-2020

Employment change (2010- Year return to 20) peak 000s Barking and Dagenham 1.7 >2020 Barnet 10.2 2014 Bexley 5.6 2015 Brent 4.5 2017 Bromley 13.9 2015 Camden 41.7 2013 Ci ty o f Lo ndon 53.8 2013 Croydon 10.5 2015 Eali ng 10.3 2017 Enfield 7.6 2015 Greenw ich 7.0 2010 Hackney 9.8 2013 Hamm ersm ith and Ful ham 23 .5 20 12 Haringey 4.6 2015 Harrow 5.4 2015 Havering 5.7 2015 Hillingdon 22.8 2015 Hounslow 18.1 2014 Isli ngton 39.0 2012 Kensington and Chelsea 11.4 2014 Kingston-upon-Thames 11.3 2013 Lambeth 13.3 2013 Lewisham 6.6 2013 Merton 7.7 2014 Newham -0.8 2010 Redbridge 6.2 2014 Richmond-upon-Thames 13.5 2013 Southwark 34.0 2013 Sutton 10.7 2013 Tower Hamlets 37.5 2010 Waltham Forest 4.3 2014 W andsw o rth 12.0 2014 Westminster, City of 87.1 2014 London 550.9 2013

Source: Oxford Economics

6.1.6. But labour supply will continue to grow We forecast that London’s population will continue to grow as the strength of the labour market will continue to draw in additional labour. Indeed there are some upside risk to the forecasts as the outflow to other regions’ may moderate and an increased flow of migrants from other parts of the UK may be attracted to the city as a result of the more favourable economic conditions. The path of migration remains highly uncertain and extremely sensitive to the economic conditions. The Oxford Economic forecast is more bullish in net terms than the current official projections with higher net migration the major factor in this divergence.

Chart 6.6: Population, London Chart 6.7: Net migration forecast, and the UK, 1971-2020 London, official vs. Oxford Economics

130 60 Forecast Oxford Forecast London UK Economics 120 40 Official

110 20

100 0

0 2 4 6 8 0 2 4 6 8 0 2 4 8 9 9 9 00 00 01 19 199 19 199 19 200 2 200 2 200 2 201 201 2016 201 2020

Net migration, 000s -20 Population (1990=100) 90

-40 80

-60 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019

Source: Oxford Economics Source: Oxford Economics, ONS

6.2. But risks predominantly on the downside At the time of writing the economy continues to operate under great uncertainty. Uncertainty over the scale and impact of public sector cuts, uncertainty over the state of the Eurozone economies uncertainty over the sustainability of the global recovery and uncertainty over London’s continued pre-eminence in global financial and business services. This suggests multiple downside scenarios but here we focus on one of the threats. Chapter 3 argued that London’s economy was strongly linked to the world economy, particularly to world fixed investment cycles, and that London’s continued international success could not be taken for granted. Higher taxation, increased regulation, infrastructure issues, reputational damage from the financial crisis, and the emergence of competing centres in emerging markets are all potential threats. With this in mind it is useful to explore scenarios where the economic outlook is damaged by the realisation of some of these potential risks to London’s international position. We have constructed two scenarios in a version of the Oxford Model which embodies the two relationships discussed in Chapter 3 (that world investment is the main driver of economic activity in London’s financial and business services sectors, and that financial and business services are in turn a major driver of other private sector activity).

Scenario 1 simulates an erosion of international competitiveness in London that could be due to any combination of the factors listed above. This is done by assuming that in future the impact of world investment on economic activity in London’s financial and business service sectors is 20% less than it is in the baseline forecast (that is, that it is 20% lower than the coefficient presented in Appendix B).

The main impact of the scenario is to reduce economic activity in financial and business services in London relative to the baseline forecast. In Scenario 1, London’s “market share” still increases but it levels off at a lower level after 2017 compared to the further expansion seen in the base case (Chart 6.8). As might be expected, the growth rate of financial and business services in the scenarios is much weaker than in the base although it is still stronger than GDP growth (Tables 6.7 and 6.8).

Chart 6.8: London’s market Share in Financial and Business Services

3.1

2.9 Scenario Base

2.7

2.5

2.3

2.1 London share (%) 1.9

1.7

1.5

5 7 9 1 3 5 7 9 1 3 5 7 9 9 9 9 0 1 1 1 19 19 19 200 20 200 200 200 201 20 201 20 20

Table 6.7 Key Indicators: Baseline & Loss of Competitiveness Scenario

Scenario 1: Errosion of International Competitiveness

Average Annual Growth Rates 2000-8 2008-20 2020 per cent diff from Base Scenario base GVA Total 3.4 2.4 1.8 -6.3 GVA: Financial & Business Services 5.8 3.5 2.6 -10.1 Employment 1.2 0.8 0.3 -5.5 Unemployment rate* -0.2 0.0 0.2 1.8 Population 0.8 0.8 0.7 -1.7

* annual differences

Scenario 2 adds in the downside risk to world economic growth – it incorporates the erosion of international competitiveness from Scenario 1 and also assumes that world economic growth is weaker than expected in the future. Specifically, world investment growth is 500 bp a year weaker than in the base case. The marginal impact is not as great as Scenario 1, but that is partly because both scenarios reduce London’s sensitivity to the world economy. It is still enough, however, to practically wipe out any employment growth between 2008 and 2020 and to leave GVA nearly 9% below base.

Table 6.8 Key Indicators: Baseline & Loss of Competitiveness & Weaker World Growth Scenario

Scenario 2: Errosion of International Competitiveness & Weaker World Growth

Average Annual Growth Rates 2000-8 2008-20 2020 per cent diff from Base Scenario base GVA Total 3.4 2.4 1.6 -8.8 GVA: Financial & Business Services 5.8 3.5 2.2 -14.2 Employment 1.2 0.8 0.1 -7.8 Unemployment rate* -0.2 0.0 0.2 2.6 Population 0.8 0.8 0.6 -2.4

* annual differences

Chart 6.9 Employment in London

5500

5300 Base Scenario 1 5100 Scenario 2

4900

4700

4500

4300

4100 Total employment (000's)

3900

3700

3500

4 6 8 0 2 4 6 8 0 2 4 6 8 0 2 4 6 8 0 98 98 98 99 99 99 99 99 00 00 00 00 00 01 01 01 01 01 02 1 1 1 1 1 1 1 1 2 2 2 2 2 2 2 2 2 2 2

In both scenarios, weaker growth in financial and business services brings total GVA growth down both through direct and multiplier effects. Employment is also hit (down 293,000 and 412,000 relative to base in 2020 in Scenarios One and Two respectively). The impact on unemployment is mitigated by a reduction in net migration and a fall in commuting in to London. Nonetheless, the scenarios are severe enough to cancel out any of the reductions in unemployment in the baseline forecast between 2011 and 2020.

On the other hand, the possibility of a more buoyant London economy than projected in our baseline should not be ruled out, particularly given the rapid bounce back in UK GDP in 2010 Q2 and Q3. Perhaps the most likely driver that would result in a faster growth trajectory would be an improvement in global trade and

investment, for example resulting from agreements over Eurozone debt, a restoration of confidence and increased spending by businesses. The main impact of this scenario would be a more rapid ‘bounce back’ in GVA growth and in the labour market, but in the longer run the gains would be more modest over the baseline which itself embodies a strong global London when the current headwinds begin to ease.

7. Conclusions

London occupies a unique position in the UK economy, based on its competitive position in key global financial and business services. At the same time, London is the UK’s leading centre of high value, export-oriented employment, and its advantage over other UK cities and regions in this regard shows no signs of abating. As a result, London’s economy is very different from other parts of the UK, whether looked at in terms of a “specialisation index” or location quotients. This specialisation is accompanied by a uniquely strong human capital advantage - in 2009 almost 34% of the city’s workforce possessed a degree compared with a national average of 19.

But London has not escaped the recession - with its core focus on global financial services where the global economic downturn originated, London’s economy was always going to suffer to a significant extent in terms of job losses once the full effects of the crisis began to shake out. However, there are considerable uncertainties over the impact of the recession on London, with the latest data from the Office for National Statistics appearing to show a much bigger shake-out of jobs than suggested by previously published data which showed a relative mild recession in London. Our best assessment is that London’s recession may in the end have been on a par with that in other parts of the UK.

Despite the ‘high end’ of London’s economy capturing much of the publicity and media attention, one of its most striking features when viewed as a whole is the co- existence of significant pockets of deprivation, worklessness and economic under- performance alongside highly mobile and skilled professional labour markets. And the recession has reinforced the deep-rooted worklessness challenges present in several of London’s economically lagging boroughs, pushing many vulnerable residents even further from the labour market and creating concerns that the employment benefits of key development projects such as the Olympic Park are not filtering through to those who need them most in local areas. The risks of incoming cuts to welfare benefits are unlikely to be as great anywhere in the UK as they are in the deprived communities of London, and careful economic management will be needed to ensure a safety net remains in the event of lower-skilled job creation rates failing to spark.

Nevertheless, the London economy is expected to lead the UK recovery. The economic fortunes of London have been shown to be strongly linked to world investment flows, the city has been shown to provide a significant proportion of the UK’s highest value added service sector exports and it attracts some of the brightest and most entrepreneurial talent from around the world. However the analysis has also highlighted the risks to the economic recovery given prevailing uncertainties and reminded us of the growing challenges to London from global cities across the world. The pressures of cost, of bureaucracy and regulation and of congestion and time delays remind us that the risks to the outlook are not only global but also closer to home. The development of increased capacity, through the Olympics and other ongoing regeneration, commencement of Crossrail development and, thus far, limited ‘UK only’ regulation give reason to suggest that the obstacles can be surmounted. The risks if they are not are acute.

Ultimately, the globally connected London economy is key to the UK’s continued economic recovery. The research carried out in this project, allied to the forecasts

from Oxford Economics’ models, suggests that London is likely to lead the UK’s economic recovery. Its unique blend of international businesses, specialist skills, entrepreneurial people and firms in sectors with strong growth prospects globally suggest a positive future. This in turn benefits the rest of the UK through supply chain effects, spending effects and the displacement of activity out of the region. In addition the region generates a fiscal surplus for the UK exchequer (the only region estimated to have done so in 2009/10) and the scale of this surplus is forecast to rise in the future after a potentially negative figure in 2010/11, reaching £27 billion by 2020. This tax revenue provides the ability to fund public services and invest in other regions where the public sector constraints in the short term and continued loss of jobs in a range of traditional sectors are leading to extremely challenging economic conditions.

Appendix A: Calculating the contribution to public finances

Regional distribution of public expenditure

(i) Sources and approach Calculation of public expenditure by region is based on Public Expenditure Statistical Analysis (PESA) 2010 which identifies expenditure on services where possible according to the region that benefits from spending, i.e. spending on a “for” basis. Around 83.5% of Total Managed Expenditure (TME) is allocated in this way, shown in Table A.1.

Table A-1: Total identifiable expenditure on services by region (2009/10)

Identifiable Identifiable spending (£ spending (% of Total spending billion) UK) (% of UK) North East 24.7 4.4 3.7 North West 64.0 11.5 9.6 Yorkshire & the Humber 44.3 7.9 6.6 East Midlands 35.4 6.3 5.3 West Midlands 46.9 8.4 7.0 Eastern 43.8 7.8 6.5 Greater London 77.8 13.9 11.6 South East 64.3 11.5 9.6 South West 42.4 7.6 6.3 Wales 28.8 5.2 4.3 Scotland 52.3 9.4 7.8 Northern Ireland 19.1 3.4 2.8 UK identifiable expenditure 543.7 97.3 81.2 Outside UK 15.1 2.7 2.3 Total identifiable expenditure 558.8 100.0 83.5 Non-identifiable expenditure 85.3 12.7 Total expenditure on services 644.0 96.2 Accounting adjustments 25.2 3.8 Total managed expenditure 669.3 100.0 Source: PESA 2010

Some of the expenditure on services that is not allocated to regions in this source is best regarded as not affecting regions in any way, such as that identified as being “outside the UK” and specifically of benefit to non-UK residents.

The remainder of non-identifiable spending on services, totalling some £85.3 billion (12.7% of TME), refers to services provided by the government that are of benefit to the UK as a whole, including in particular services such as defence, and central exchequer functions such as tax collection and economic policy. Such services are clearly of some benefit to all UK residents and we regard it as preferable to estimate a distribution across regions.

The PESA 2007 publication included analysis which allocated some of this other non- identifiable spending to regions, but only for that proportion of non-identifiable spending that is accounted for by pay. This is allocated across regions according to where staff are located. This technique gets around the problem of determining

who benefits from such central government functions by looking at direct regional impacts in terms of pay costs. Since then, HMT has not reproduced this ‘pay cost’ analysis and therefore this data is not included in the PESA 2010 tables.

In PESA 2007, the pay cost components that were distributed on this basis across regions only account for around a fifth of total non-identifiable expenditure. However, the remainder also benefits regions in the same way and the figures would be more meaningful if this were allocated across regions. This additional spending, along with £25.2 billion of accounting adjustments, is allocated to regions using three different techniques. No single estimate is definitive and instead we present a range of possible expenditure values for each region in Table A-2.

First, aiming for consistency with identified spending on services in the previous table, we distribute the entire £110.5 billion according to the shares of identified spending on a “for” basis. As already noted, PESA 2010 did not include detail of the ‘pay-cost’ component of total non-identifiable spend, thus we have used the information provided in PESA 2007 on non-identifiable spending to allocate shares of total spending on a pay basis. Finally, we share the £110.5 billion according to the regional population distribution, based upon the assumption that each member of society benefits equally from this spending on services.

Table A-2: Non-identifiable expenditure apportioned to regions (2009/10)

As identifiable Pay costs on Population Expenditure 'for' basis (£ 'in' basis (£ shares (£ range (£ billion) billion) billion) billion) North East 5.0 3.2 4.6 3.2 - 5 North West 13.0 5.2 12.3 5.2 - 13 Yorkshire & the Humber 9.0 6.1 9.4 6.1 - 9.4 East Midlands 7.2 4.7 8.0 4.7 - 8 West Midlands 9.5 4.6 9.7 4.6 - 9.7 Eastern 8.9 9.7 10.3 8.9 - 10.3 Greater London 15.8 18.9 13.9 13.9 - 18.9 South East 13.1 21.9 15.1 13.1 - 21.9 South West 8.6 21.3 9.4 8.6 - 21.3 Wales 5.8 2.9 5.4 2.9 - 5.8 Scotland 10.6 8.7 9.3 8.7 - 10.6 Northern Ireland 3.9 3.4 3.2 3.2 - 3.9 UK 110.5 110.5 110.5 Source: PESA 2010, Oxford Economics calculations

(ii) Relative spending by region Overall spending per head in London is higher than in any other region of the UK (Table A-3), but London is very different from other regions in terms of the difference between its daytime and resident populations, for example, with high levels of inward commuting, as well as tourism. Public spending in London per person in employment is lower than in most regions (Table A-4), and relative to GVA the level of spending is the lowest of all UK regions.

Table A-3: Total government expenditure by region (2009/10)

£ billion £ per capita Minimum Maximum Minimum Maximum North East 27.9 29.7 10,800 11,500 North West 69.2 77.0 10,000 11,200 Yorkshire & the Humber 50.3 53.7 9,600 10,200 East Midlands 40.1 43.3 9,000 9,700 West Midlands 51.4 56.6 9,500 10,400 Eastern 52.7 54.1 9,100 9,400 Greater London 91.7 96.7 11,800 12,500 South East 77.3 86.1 9,200 10,200 South West 51.0 63.6 9,700 12,200 Wales 31.6 34.6 10,500 11,500 Scotland 61.0 63.0 11,700 12,100 Northern Ireland 22.3 22.9 12,400 12,800 Memo: London, East & S. East 223.7 222.3 10,200 10,100 UK 669.3 669.3 10,179 10,179

Table A-4: Total government expenditure & wealth generated (2009/10)

Total Expediture relative to… expenditure (£ Employment (£ Income billion) per employed) GVA (UK=100) (UK=100) North East 29.0 24,700 132.9 122.9 North West 74.2 22,100 115.5 111.3 Yorkshire & the Humber 52.4 21,000 110.0 104.9 East Midlands 42.0 20,100 97.7 95.7 West Midlands 54.8 21,100 109.1 107.4 Eastern 53.5 19,000 81.8 83.0 Greater London 94.0 19,800 73.0 90.5 South East 80.9 18,800 76.6 78.8 South West 55.5 20,800 106.5 99.9 Wales 33.5 25,000 141.6 125.3 Scotland 61.9 24,200 114.6 120.8 Northern Ireland 22.6 27,000 149.9 143.5 UK 669.3 21,100 100.0 100.0

(iii) Spending by function PESA 2010 breaks regional expenditure down into several categories, including by COFOG function (Classification of the Functions of Government) which includes categories such as general public services, defence, health, education & training and social protection. It is also broken down by local authority spending and central government spending with a further capital and current spend derivation. Table A-5 shows the breakdown in total spending per capita by selected COFOG function.

Table A-5: Identifiable expenditure by function (2009/10)

£ per capita

Enterprise & Public order & employment Education & Social safety policies Transport Health training protection North East 549 237 259 2070 1556 4052 North West 563 183 328 2059 1426 3837 Yorkshire & the Humber 484 170 281 1887 1391 3512 East Midlands 429 136 258 1760 1350 3356 West Midlands 484 165 283 1897 1430 3686 Eastern 381 108 277 1710 1246 3201 Greater London 871 135 674 2128 1678 3527 South East 400 103 312 1753 1266 3118 South West 392 121 250 1817 1267 3482 Wales 541 246 324 1956 1430 4096 Scotland 541 223 581 2064 1510 3842 Northern Ireland 749 331 310 1881 1531 4262 UK 527 161 363 1913 1413 3569 Source: PESA 2010, Oxford Economics calculations

(iv) Forecasting expenditure by region PESA only provides an allocation of spending by region up to 2008/09 based on outturns, and for 2009/10 based on plans. We have made projections of the future split of spending by region, consistent with overall spending plans set out in the October Comprehensive Spending Review (CSR). We have not made a comprehensive review of the regional implications of those plans, but we have taken account of differences between broad spending categories.

So for the purposes of this report we have split spending into three broad groups: health, social protection and other - health and social security are amongst the biggest categories of spending, and also areas where the CSR has important implications, with health spending being broadly protected from spending cuts and reforms to social security being a key factor enabling the government to impose lower departmental spending cuts than originally envisaged. For each of these categories of spending, we have assumed changes over time consistent with the relevant spending limits set in the CSR, and assumed that each region sees the same proportionate change in its spending on that function.

Estimating and forecasting regional contributions to UK tax revenue The Treasury publishes UK tax revenues by type in its budget report, and we have used the totals published in June 2010 as a starting point. For the regional forecasts, we have assumed UK revenues for each tax grow in line with Oxford forecasts taken from our UK Macroeconomic Model, and used forecasts of appropriate economic indicators to project how much of the total for each tax will be contributed by London. The estimates for 2009/10 are summarised below, with more detailed figures for smaller individual taxes shown at the end of the Appendix in Table A-10.

Table A-6: Receipts summary - residence based (2009/10)

Income tax NICs V AT Other To t al £bn % UK £bn % UK £b n % UK £bn % UK £bn % UK

North East 4 .2 3.0 3.5 3. 6 2. 3 3 .2 6 .7 3.2 16.7 3.2 North W est 1 1.8 8.4 10. 1 10 .5 7. 3 10 .4 2 0.7 9.9 49.9 9.7 York shire & the Humb er 8 .6 6.2 6.8 7. 2 5. 1 7 .3 1 4.7 7.0 35.3 6.9 East Midlands 8 .4 6.0 6.5 6. 8 4. 6 6 .6 1 3.3 6.4 32.9 6.4 Wes t Midla nds 9.4 6.7 7.7 8. 1 5. 5 7 .9 1 6.1 7.7 38.8 7.5 Eastern 1 4.6 10.4 8.8 9. 2 6. 6 9 .4 1 9.1 9.1 49.1 9.5 Greater London 2 9.7 21.2 16. 1 16 .9 11 .2 15 .9 3 4.3 16.4 91.3 17. 7 South East 2 5.1 17.9 14. 8 15 .5 11 .2 16 .0 3 0.8 14.7 81.9 15. 9 South West 1 0.4 7.4 7.3 7. 6 5. 9 8 .4 1 6.5 7.9 40.1 7.8 Wales 4 .5 3.2 3.6 3. 8 2. 8 4 .0 8 .0 3.8 19.0 3.7 Scotland 1 0.5 7.5 8.3 8. 7 5. 9 8 .4 2 3.5 11.2 48.3 9.4 Northern Ireland 2 .7 1.9 1.9 2. 0 1. 7 2 .4 5 .1 2.5 11.5 2.2 UK 14 0.0 100.0 95. 6 100 .0 70 .1 10 0.0 20 9.0 100.0 514. 7 100 .0

Table A-7: Receipts summary – workplace based (2009/10)

Income tax NICs VAT Other Total £bn% UK£bn% UK£bn% UK£bn% UK£bn% UK

North East 4.3 3.1 3.5 3.7 2.4 3.4 6.7 3.2 17.0 3.3 North West 11.9 8.5 10.3 10.7 7.6 10.8 20.8 10.0 50.6 9.8 Yorkshire & the Humber 8.7 6.2 6.9 7.2 5.4 7.7 14.8 7.1 35.7 6.9 East Midlands 7.8 5.6 6.1 6.4 4.3 6.2 13.3 6.4 31.6 6.1 West Midlands 9.4 6.7 7.7 8.1 5.5 7.8 16.1 7.7 38.8 7.5 Eastern 13.5 9.7 8.1 8.5 6.5 9.2 18.7 8.9 46.8 9.1 Greater London 33.0 23.6 18.1 18.9 13.1 18.7 35.4 16.9 99.6 19.3 South East 23.7 16.9 14.1 14.8 9.9 14.1 30.1 14.4 77.8 15.1 South West 10.4 7.5 7.3 7.7 5.3 7.5 16.4 7.9 39.5 7.7 Wales 4.4 3.1 3.5 3.7 2.7 3.9 8.0 3.8 18.7 3.6 Scotland 10.1 7.2 8.0 8.4 5.3 7.5 23.4 11.2 46.8 9.1 Northern Ireland 2.6 1.9 1.9 2.0 2.2 3.2 5.2 2.5 12.0 2.3 UK 140.0 100.0 95.6 100.0 70.1 100.0 209.0 100.0 514.7 100.0

We have set out below for each type of revenue how we allocated the Treasury data across regions and how we forecast each one.

(i) Income Tax Income tax data on a residence basis are derived from the HM Revenue and Customs (HMRC) Survey of Personal Incomes (SPI). In 2007/08 (the latest year for which data are available), London had the highest contribution to total UK income tax revenue at 21.5% with the South East having the second highest contribution of 18%. This ratio can be applied to the UK total income tax for 2009/10 from the budget report to give total residence-based income tax payments in London and the South East of £29.7 billion and £25.1 billion respectively. Under the same methodology, the North East and Northern Ireland had the lowest residence based income tax contributions of £4.2 billion and £2.7 billion respectively.

The Annual Population Survey (APS) gives employment numbers on both a workforce and residential basis. Using this, ratios of resident employees and workplace employees were constructed and applied to the residence income tax estimates therefore accounting for commuters in each region. From this we estimate that London and the South East again have the highest contributions to UK total income tax with £33.0 billion and £23.7 billion respectively.

For the forecasts, we have assumed that income tax will grow in line with employment and wage growth. Resident employment comes from the APS and is forecast in our Regional Model where commuting patterns between regions are accounted for using Census 2001 commuting ratios. Resident based wages come from the ASHE and are grown at the rate of growth in total wages and salaries in our Regional Model. Based on this, we estimate that by 2015/16, both London and the South East resident based income tax contributions will have had the fastest growth with £42.5 billion and £34.4 billion respectively.

Workplace based income tax contributions are forecast using workplace employment growth rates from the Regional Model and growth in workplace wages. Similar to resident based income tax, our forecast suggests that London and the South East workplace based income tax will remain the largest contributors with £46.9 billion and £32.7 billion respectively.

(ii) National Insurance Contributions We use reported UK budget data and split this using shares of the UK total calculated from average weekly expenditure data taken from the Expenditure and Food Survey (EFS). This only looks at the household contribution share, but the employers’ contribution is expected to be symmetric. Using this, we estimate London’s NICs payments on a residence basis in 2009/10 to have been the highest amongst the regions at £16.4 billion followed by the South East at £15.0 billion. Northern Ireland had the lowest contribution of NICs with £2 billion and the North East was second lowest with £3.5 billion.

A similar adjustment to that for income tax using APS data can be performed to give national insurance contributions based on commuting in the regions. This suggests that London and the South East remain the highest contributors with their shares of the UK NICs rising from 16.9% on a residential basis to 18.9% on a workforce basis for London. The South East falls from 15.5% on a residential basis to 14.8% on a workforce basis due to those who commute to London for work.

To forecast NICs in each region we have adapted a similar method to that for income tax using growth rates in residence based employment and wages for residence based NICs and workplace based employment and wages for workplace based NICs. On both measures, both London and the South East are expected to make the largest contributions in terms of overall NICs. On a residence basis London’s contribution is forecast at £24.6 billion, whilst the South East’s contribution is £21.8 billion. On a workplace based London’s NICs contribution is forecast to increase to £27.3 billion, and the South East is expected to fall to £20.8 billion as we still expect a large volume of South East residents to commute into London for work.

(iii) VAT VAT represented around 14.9% of total tax receipts in 2009/10 and needs to be carefully split across regions to reflect different regional spending patterns. On a residence basis we use data on consumer spending by region from the Regional Accounts produced by ONS. However, this data on regional spending is only available up to 1999 and Oxford Economics regional consumer spending forecasts are used for later periods.

Consumer spending data by region reported by ONS and used as the basis for this calculation are derived from surveys of household spending. This share relates to the share of consumer spending and therefore the share of VAT on a residence basis. London and the South East have shares of 15.9% and 16.0% of total UK VAT around £11.2 billion each in 2009/10. .

Further calculation is undertaken based on shares of retail turnover in each region reported by the Annual Business Inquiry (ABI). This share relates to the amount of consumer spending that takes place by region, incurring VAT, regardless of where the person spending is resident. This business-based estimate of VAT is larger than the residence-based calculation for London at 18.5% of the total or £13.1 billion. In the South East, similar to income tax and NICs, the workforce or ‘business-based’ estimate is lower than the residence estimate at 14.1% of the UK total equating to £9.9 billion. This reflects the strength of the London economy in terms of attracting business and workers.

To forecast residence based levels of VAT, we have applied growth rates in consumer spending from the Oxford Economics Regional Model. By 2015/16, resident based VAT in London is forecast to rise to 16.5% of total UK VAT at £21.4 billion. Similarly, VAT in the South East is also forecast to rise to 16.2% of total UK VAT standing at £21.0 billion in 2015/16.

(iv) Council Tax Actual figures are available for London’s council tax revenues from Local Government Financial Statistics. In 2009/10 the South East had the highest contribution of £4.2 billion (16.8% of the UK total) with London having the second highest contribution of £3.1 billion (12.6% of the UK total). The North East and Wales had the lowest shares of the UK total (3.6% and 4.1% respectively). Figures for Northern Ireland, where domestic rates are still paid rather than council tax, are not directly comparable here. District rates are included here under this heading, but regional domestic rates are treated in the government accounts as negative public spending rather than tax receipts.

Council tax contributions are forecast in each region using growth rates from the Regional Model in the residential dwelling stock.

(v) Vehicle Excise Duty Vehicle Excise (VED) paid in London is only a small part of total taxes paid, but is calculated separately since London has a very different pattern of car usage from other regions. Driver and Vehicle Licensing Agency (DVLA) and Department for Transport (DfT) data are used to derive vehicle taxes based on average rates and the number of registered vehicles. The number of registered cars and other vehicles are available for all regions from DfT. Rates for different types of vehicles are available from the DVLA. Applying these rates gives total revenue from this stream. As before, this is calculated as a share of the UK total, and applied to UK total revenue as reported in the Budget.

London stands out since it actually pays less per capita on this form of tax than the UK average. The share of total UK VED paid is only 8.6% in 2009/10, compared with a population share of 12.5%, as car ownership is relatively low and public transport is used more widely. The largest level of VED paid in any region is estimated to be in the South East accounting for 15.9% of total UK VED in 2009/10.

To forecast the VED paid in each region we have projected the number of vehicles in each region. This in turn has been done by taking the number of vehicles per working age person in the previous year and applying this to the Oxford forecast of working age people in each region in the current year, and grown by the rate of growth of residents in employment. Therefore growth in the number of vehicles in each region is applied to last year’s level of VED. By 2015/16, London’s VED is expected to account for 9.2% of total UK VED although this remains the 6th highest amongst all regions, whilst the South East is forecast to remain the top contributor in terms of overall VED at £1.5 billion, or 16.4% of total UK VED.

(vi) Corporation tax Corporation tax is another large component of total UK tax receipts, which can be split across regions according to the number of firms within regions. The most straightforward method to calculate a region’s contribution is to use the Annual

Business Inquiry to calculate profits from both the region’s firms and the UK by subtracting purchasing and employment costs from turnover. The region’s percentage of the UK total is taken and applied to UK corporation tax take as reported in the Budget. Before allocating the UK total, however, we have subtracted an estimate of the corporation tax due to North Sea operations, derived from comparing HMT figures on the overall North Sea tax take with the amount being paid in petroleum revenue tax. North Sea taxes themselves have been attributed to Scotland, although this does not necessarily represent the fiscal position for Scotland that could be expected in the event of greater independence from the rest of the UK.

In 2009/10 London businesses contributed 23.0% of UK corporation tax, almost three fifths more than the South East, and more than twice as much as any other region. London’s share of UK corporation tax escalated in 2007/08 when ABI profit levels in London rose by 18% compared only 7.1% growth in the UK, in previous years London’s corporation tax accounted for between 20-21% of total UK corporation tax.

Corporation tax levels have been projected based on regional GVA growth rates from the Oxford Regional Model. As such, every region across the UK suffered a loss in corporation tax levels in 2009/10 ranging between 17-20%. By 2015/16, London’s corporation tax is forecast to remain the top contributor accounting for 23.5% of total corporation tax, or £10.2 billion. The South East remains the second highest contributor at £6.4 billion accounting for 14.7% of total.

(vii) Stamp duty Stamp duty paid is reported for regions by HMRC. Data for 2008/09 from HMRC showed that the amount of duty paid in all regions experienced a substantial fall in the amount of stamp duty collected reflecting the slowdown in the housing market and the increase in the stamp duty threshold. The UK stamp duty figures published in the budget report suggests a fall in stamp duty levels of 66% in that year and in 2009/10 stamp duty revenues remain low as the UK economy has not recovered its losses. Similarly, when the HMRC shares are allocated to the stamp duty total for the UK as reported in the budget report all regions have a similar fall with some performing marginally better than others.

In London, the share of UK stamp duty is estimated at 29.4% in 2009/10 to 29.1% in 2009/10. Stamp duty is forecast using house price growth rates projected in the Regional Model. By 2015/16, London’s stamp duty is projected to grow to 30.4% of total UK stamp duty, or £2.5 billion.

(viii) Excise duties The number of vehicle registrations is used to estimate each region’s contributions to fuel duty revenue, with growth rates in the number of vehicles per region used to forecast fuel duty revenue.

The ONS’ Expenditure and Food Survey (EFS) gives implied shares of UK spending on different types of goods accounted for by consumers living in each region which is then applied to relevant tax receipts to estimate the share contributed by the region. Growth rates in regional dwelling stock are used to forecast each of these revenues.

(ix) Business rates Business rates data, like council tax figures, are taken from Local Government Financial Statistics, and in 2009/10 London had the highest share with 22.4% of total business rates paid in the UK. We have applied GVA growth rates to the business rate estimates to obtain a forecast of this revenue.

(x) Other taxes and duties There are a variety of other taxes and duties that are individually generally less important than the above, but nevertheless provide a significant sum in total to the UK exchequer. Estimated regional shares in each case are based on a simple rule of thumb related to the region’s share of the UK’s population, GVA, household income or similar aggregate. Similarly, these are projected using the forecast from the Regional Model for each relevant variable.

Overall contributions to UK public finances

The regional calculations for spending and receipts are combined in table A-8, showing that London was the only region in 2009/10 making a positive contribution to the UK Exchequer.

The time series in Table A-9 shows that this could disappear in 2010/11, before London returns to making substantial net contributions to UK public finances.

Table A-8: Regional contributions to UK public finances (2009/10)

RevenueExpenditure Balance Residence W orkplace Residence (£ Workplace (£ Mid-point (£ (£bn) (£bn) (£ billion) billion) billion) billion) North East 16.7 17.0 29.0 -12.3 -12.0 -12.1 North West 49.9 50.6 74.2 -24.3 -23.6 -23.9 Yorkshire & the Humber 35.3 35.7 52.4 -17.1 -16.8 -16.9 East Midlands 32.9 31.6 42.0 -9.2 -10.4 -9.8 W est Midlands 38.8 38.8 54.8 -16.0 -16.0 -16.0 Eastern 49.1 46.8 53.5 -4.4 -6.7 -5.5 G reater London 91.3 99.6 94.0 -2.7 5.5 1.4 South East 81.9 77.8 80.9 1.0 -3.1 -1.0 South West 40.1 39.5 55.5 -15.3 -16.0 -15.6 W ales 19.0 18.7 33.5 -14.5 -14.8 -14.6 Scotland 48.3 46.8 61.9 -13.6 -15.1 -14.3 Northern Ireland 11.5 12.0 22.6 -11.1 -10.6 -10.9 UK 514.7 514.7 654.2 -139.5 - 139.5 -139.5 UK + exp outside UK 666.5 -151.8 - 151.8 -151.8

Table A-9: Summary of London contributions to public finances

Rev enue Revenue (resident (workplace Average based) ba sed ) revenue Expenditure Balance

£bn £bn £bn £bn £bn 2003/04 70.9 77.4 74.1 62.6 11.5 2004/05 79.8 86.8 83.3 68.9 14.3 2005/06 85.2 91.7 88.4 73.4 15.1 2006/07 92.6 99.5 96.0 77.2 18.9 2007/08 100.7 109.1 104.9 81.6 23.3 2008/09 94.5 103.0 98.8 88.8 10.0 2009/10 91.3 99.6 95.4 94.0 1.4 2010/11 90.4 98.5 94.4 97.7 -3.3 2011/12 98.2 107.1 102.7 98.3 4.4 2012/13 104.8 114.2 109.5 99.7 9.7 2013/14 111.1 121.0 116.0 101.3 14.7 2014/15 119.5 130.1 124.8 103.4 21.4 2015/16 127.1 138.2 132.7 105.6 27.1

Source: Oxford Economics calculations

Table A-10: Other taxes and duties, £ billion (2009/10)

Yorkshire North North & East West South South Northern United East West Humber Midlands Midlands Eastern London East West Wales Scotland Ireland Kingdom Council Tax 0.91 2.60 1.86 1.77 2.02 2.66 3.15 4.20 2.45 1.03 1.87 0.50 25.0 Vehicle Excise Duty 0.20 0.61 0.44 0.43 0.56 0.57 0.48 0.89 0.54 0.27 0.43 0.16 5.6 Corporation Tax 0.82 3.04 2.08 1.91 2.03 2.52 6.96 4.38 1.93 0.92 2.78 0.84 30.2 Stamp duty 0.07 0.25 0.18 0.17 0.22 0.49 1.44 1.13 0.49 0.09 0.31 0.06 4.9 Stamp taxes on shares 0.10 0.28 0.20 0.18 0.22 0.28 0.56 0.45 0.23 0.10 0.23 0.07 2.9 Fuel duty 0.94 2.87 2.06 2.01 2.54 2.67 2.26 4.13 2.57 1.32 2.05 0.78 26.2 Tobacco duty 0.37 1.11 0.74 0.63 0.88 0.66 0.94 0.97 0.63 0.50 0.98 0.39 8.8 Alcohol duties 0.36 1.12 0.72 0.60 0.78 0.86 1.03 1.29 0.79 0.43 0.80 0.22 9.0 Business rates 0.77 2.39 1.71 1.44 1.88 2.08 5.45 3.29 1.65 0.89 2.18 0.57 24.3 Inheritance tax 0.10 0.27 0.20 0.17 0.21 0.22 0.30 0.33 0.20 0.12 0.20 0.07 2.4 Air passenger duty 0.07 0.22 0.16 0.12 0.14 0.15 0.34 0.23 0.16 0.09 0.14 0.07 1.9 Temporary bank payroll 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.0 Bank levy 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.0 Other HMRC 0.20 0.63 0.44 0.38 0.47 0.55 0.96 0.90 0.49 0.24 0.50 0.14 5.9 VAT refunds 11.2 residence 0.36 1.16 0.82 0.74 0.88 1.05 1.78 1.79 0.94 0.45 0.95 0.27 workplace 0.38 1.21 0.86 0.69 0.88 1.03 2.09 1.58 0.84 0.44 0.84 0.35 Capital gains taxes 2.5 residence 0.08 0.24 0.18 0.16 0.19 0.24 0.48 0.39 0.20 0.09 0.20 0.06 workplace 0.08 0.24 0.18 0.16 0.19 0.22 0.53 0.36 0.20 0.09 0.20 0.06 Insurance premium 2.3 residence 0.08 0.22 0.16 0.14 0.17 0.22 0.44 0.36 0.18 0.08 0.19 0.05 workplace 0.08 0.22 0.16 0.14 0.17 0.21 0.48 0.33 0.18 0.08 0.19 0.05 Other taxes and royalties 4.5 residence 0.15 0.43 0.32 0.28 0.34 0.44 0.87 0.70 0.36 0.16 0.36 0.10 workplace 0.15 0.43 0.32 0.28 0.34 0.40 0.95 0.65 0.35 0.16 0.37 0.10 Other receipts 34.8 residence 1.15 3.31 2.45 2.19 2.60 3.39 6.71 5.40 2.75 1.24 2.82 0.79 workplace 1.16 3.35 2.47 2.18 2.60 3.12 7.33 4.99 2.73 1.25 2.83 0.79 North Sea Revenues (incl. PRT) 6.50 6.5 Congestion charge 0.10 0.1 Source: Oxford Economics calculations

Appendix B: Estimating the drivers of international FBS

This annex sets out in more detail more of the technical work done to assess the links between the global economy, London’s financial sector, and the London economy more widely. We referred to these results in Chapter 3, and elaborate some of the detail here.

The relationship illustrated in Chart 3.11 can be generalised in order to both test its statistical significance and to extend it to other cities. Table B.1 shows the results of an exercise that estimated the relationship between city level GVA in financial and business services and national GDP, national and world fixed investment (excluding China). As there is a lack of the kind of reliable detailed external and internal trade data at the city level by sector, this approach offers a practical alternative methodology for assessing the relative importance of national and international demand to financial and business services activity in major cities.

Table B.1: Drivers of Financial & Business Services

Dependent Variable: City level GVA in financial & business services

London New York Paris Milan Frankfurt Estimation period: 1985-2008 1991-2008 1985-2008 1985-2008 1992-2008 Estimated Coefficients City level GVA in financial & business services lagged 1 year 0.847 0.633 0.527 0.775 0.445 National GDP lagged 1 year 0.945 Change in National GDP 1.980 0.510 National Fixed Investment 0.097* 0.204 World Fixed Investment 0.255 0.582 0.267 0.137

Serial Correlation, χ2(2) 0.235 2.240 3.177 0.603 0.521 R2 0.998 0.995 0.997 0.991 0.991

Long run coefficient on world fixed in 1.666 1.583 0.564 0.608 0.000 all coefficients are statistically significant at the 5% level except * which are significant at the 10% level

The table the estimated impact of a change in the various variables listed in the first column on GVA in financial and business services. For example, a 10% increase in world investment increases GVA in London financial and business services by 2.55%. As GVA in the current also reacts to changes in GVA in the previous year, there will also be increases in GVA in subsequent years too. The row labelled “Long-run coefficient on world fixed investment” shows the total impact of a change in world fixed investment cumulated over a number of years. In this case the 2.55% increase in London GVA in financial and business services in year 1 becomes a 16.66% increase in the long-run. The R2 shows the proportion of the total variation in GVA in financial and business services that is explained by the variables in the model. The inclusion of GVA in the previous year tends to be high and makes the R2 less useful for distinguishing between the various equations. The “Serial Correlation” statistic is a test of the correlation between the residuals (i.e. GVA that is not explained by the equation)

over time. Serial correlation in the residuals invalidates some of the interpretations of the equation results, particularly the significance of the estimated relationships. A value of less than six, in this case, indicates that there are no serial correlation problems.

The main observations from Table B.1 are:

 National GDP is not usually a significant driver of city-level financial and business services. In the case of London, both current and lagged national GDP are significant but they have virtually equal but opposite signed coefficients. This means that there is no long- run link between UK GDP and London financial and business services.

 National fixed investment is not found to be a significant driver of financial and business services demand in London, although it is elsewhere.

 World fixed investment is significant for every city except Frankfurt. The short-term impact of world fixed investment is far bigger on New York than on any other city with Paris and London around half as sensitive. However, over the long term, the impact on financial and business services activity is greater in London than in any other city, including New York.

This analysis clearly established a statistical link between international economic activity and financial and business services activity in a number of large cities, with New York and London standing out as being more “global” than the rest. This supports the qualitative evidence presented in Chapter 3, which identified New York and London as the leading global financial centres. Further, their dependence on world fixed investment (which has outpaced domestic economic activity) in each case helps to explain why growth in both financial and business services and GDP in recent years has been so much more rapid in London and New York than in the other cities.

The models use world fixed investment excluding China as an explanatory variable rather than total world fixed investment. Using total world fixed investment (i.e. including China) also works, although the estimated t-statistics tend to be lower – indicating a less robust relationship. China was therefore omitted, partly because of this statistical result and partly because it was is likely that a considerable amount of fixed investment in China is infrastructure related or otherwise state driven. This type of investment may be expected to have less impact on international financial and business services demand.

The Link between Financial & Business Services and Total GDP in London Chart 3.13 and the analysis in Chapter 6 illustrate the links between financial and business services output and the rest of the London economy (excluding mainly public services21 - SIC L-N). This is explored further in Table B.2 below.

21 Hereafter referred to simply as public services for simplicity.

The equation shown in Table B.2 is an error correction mechanism estimated using a one-step technique. This splits the drivers of London’s GDP (excluding financial and business and public services) into short and long-run components. The short-run influences only have a transitory impact on the rest of the London economy while the long-run influences have a permanent affect. No statistically significant long-run impact of UK GDP or GVA in public services in London was found. In the short-run growth in both UK GDP and financial and business services in London affect growth in London’s economy (excluding financial and business, and public services).

In conjunction with the results shown in Table B.1, Table B.2 show how fluctuations on world investment not only have a direct impact on GVA in financial and business services in London but also have a major impact on the result of the London economy.

Table B.2: London Financial & Business Services & London GDP

Dependent variable: GDP in London exc. Financial and Business and Mainly Public Services

Estimation period: 1990-2008 Esimated Estimated t- Coefficient Statistic error correction term -0.506 -3.284

Long-Run Coefficients

GVA in financial & business services 0.499 40.025 constant 5.873 43.158

Short-Run Coefficients

GVA in financial & business services 0.305 2.963 UK GDP 1.120 4.734

Serial Correlation, χ2(2) 0.384 2 R 0.938

Appendix C: Additional data

This appendix contains more detailed tables supporting charts and tables in the report, which would risk getting in the way of the analysis if they were included in the main body of the text.

We have also produced a detailed data catalogue to accompany the report, providing background information on the data used and the underlying data series in spreadsheet form. This data manual is available from the City of London website.

Table C.1: Employment change, London Boroughs, 1998-2008, 2008-2010

Employment change (000s) 1998-08 2008-10 Barking and Dagenham -9.7 -1.8 Barnet 4.9 -2.3 Bexley 4.8 -2.2 Brent -1.4 -3.6 Bromley 19.2 -0.8 Camden 51.8 -7.1 City of London 32.8 -6.7 Croydon 7.5 -3.5 Ealing -5.9 -4.0 Enfield 1.0 -2.4 Greenwich 8.2 0.7 Hackney 0.9 0.2 Hammersmith and Fulham 38.4 -1.8 Haringey 4.3 -2.3 Harrow 5.7 -2.4 Havering 2.3 -2.2 Hillingdon 39.2 -9.1 Hounslow 1.3 -4.4 Islington 60.6 -1.6 Kensington and Chelsea 0.9 -3.4 Kingston-upon-Thames 3.5 -1.1 Lambeth 28.5 -0.4 Lew isham 5.4 -0.6 Merton 4.6 -2.2 Newham 10.3 4.1 Redbridge 8.1 -1.3 Richm ond-upon-Tham es -5.0 -1.6 Southw ark 37.7 -3.5 Sutton 12.7 -1.2 Tow er Ham lets 92.1 0.9 Waltham Forest 0.5 0.6 Wandsw orth 19.1 -1.5 Westminster, City of 78.5 -18.3 Greater London 562.6 -86.8 Source: Oxford Economics

Table C.2: Index of Multiple Deprivation (Rank with all other UK LA’s), London Boroughs, 2007

Rank Barking and Dagenham 22 Barnet 128 Bexley 194 Brent 53 Bromley 228 Camden 57 City of London 252 Croydon 125 Ealing 84 Enfield 74 Greenw ich 24 Hackney 2 Hammersmith and Fulham 59 Haringey 18 Harrow 205 Havering 200 Hillingdon 157 Hounslow 105 Islington 8 Kensington and Chelsea 101 Kingston upon Thames 245 Lambeth 19 Lew isham 39 Merton 222 Newham 6 Redbridge 143 Richmond upon Thames 309 Southw ark 26 Sutton 234 Tow er Ham lets 3 Waltham Forest 27 Wandsw orth 144 Westminster 72

Source: Communities and Local Government, Oxford Economics

Table C.3: Indicators of Local Conditions, London Boroughs, most recent data

Employment Unemployme Wages Rate nt rate Mean Median House Prices Barking and Dagenham 61.9 5.3 552 526 167100 Barnet 66.9 2.9 745 623 380900 Bexley 70.7 3.1 650 575 209500 Brent 67.7 5.3 586 525 322900 Brom ley 76.5 2.7 789 645 301800 Camden 67.8 3.2 927 702 601100 City of London 64.4 0.9 1196 773 453500 Croydon 71.7 4.2 654 567 234300 Ealing 64.5 4.0 675 557 330200 Enfield 62.9 4.8 635 546 266900 Greenw ich 66.5 4.9 708 601 264400 Hackney 68.5 6.6 680 573 314300 Hammersmith and Fulham 64.6 4.0 890 671 553400 Haringey 59.4 6.2 660 556 350600 Harrow 71.1 2.7 721 601 290400 Havering 71.0 3.3 632 580 224500 Hillingdon 73.6 3.1 629 540 256100 Hounslow 70.2 3.1 622 537 314100 Islington 67.1 5.0 858 632 415200 Kensington and Chelsea 61.9 2.9 1306 933 1036200 Kingston-upon-Thames 71.8 1.7 757 624 327600 Lambeth 74.1 5.2 710 602 337000 Lew isham 66.6 5.0 650 550 239800 Merton 73.0 2.6 788 614 365100 Newham 56.1 6.4 549 492 202800 Redbridge 64.4 3.8 722 608 256900 Richmond-upon-Thames 74.9 1.6 899 711 509300 Southw ark 67.5 4.7 790 618 339300 Sutton 78.4 2.6 687 573 240000 Tower Hamlets 59.4 6.0 809 654 333200 Waltham Forest 63.9 5.6 617 542 220300 Wandsworth 76.0 2.8 853 703 459300 Westminster, City of 63.8 2.7 1132 744 736700 Greater London 68.0 4.0 740 599 363000

Sources: Annual Population Survey (Q1 2010), Claimant Count (September 2010), Annual Survey of Hours and Earnings (2009), Residence based, Communities and Local Government (2009)

Table C.4: Employment forecasts by sector, population and GVA, London, selected years

1998 2008 2010 2015 2020 Employment (000s) Other production 18 17 16 14 13 Manufacturing 335 221 199 178 155 Construction 208 228 201 210 209 Distribution & retail 625 618 581 589 603 Hotels & restaurants 260 323 308 329 351 Transport & com m unications 329 350 322 345 355 Financial services 327 352 350 370 375 Business services 1001 1315 1308 1577 1744 Public adm in. 210 229 227 190 189 Education 254 317 318 308 311 Health 359 444 512 506 521 Other personal services 315 396 378 415 448 Total employment 4259 4821 4735 5042 5285 Population (000s) 7066 7668 7819 8130 8447 Total GVA (£ 2006 bn) 178650 248571 240714 283639 329097

Average annual % change 1990-98 1998-08 2008-10 2010-15 2015-20 Total employment 0.0 1.3 -0.9 1.3 0.9 Population 0.5 0.8 1.0 0.8 0.8 Total GVA 2.2 3.4 -1.5 3.3 3.0

Source: Oxford Economics

Table C.5: Occupational Structure, London and UK, Q1 2010 pp London UK difference Managers and senior officials 17.4 15.6 1.8 Professional occupations 18.2 13.6 4.6 Associate prof & tech occupations 19.0 14.7 4.3 Adm inistrative and secretarial occupations 11.0 11.2 -0.2 Skilled trades occupations 7.3 10.5 -3.2 Personal service occupations 7.1 8.7 -1.6 Sales and customer service occupations 6.1 7.4 -1.3 Process, plant and m achine operatives 4.5 6.7 -2.2 Elem entary occupations 8.7 11.1 -2.4

Source: Annual Population Survey, residence based, Jan-Mar 2010

Table C.6: Employment change by sector, selected London Boroughs, 1998-2008

Richmond

Barking and upon Dagenham Brent Eailing Th a m es AB - Agriculture -884 -56 38 -99 CC - Extraction -60-8-533-6 D A - Food, drinks & tobacco 150 961 1990 382 DB - Textiles -62 -627 -376 -96 D D - W ood products -105 11 -5 -8

DE - Pulp, paper & printing -270 -2341 -622 -674 DF - Coke, oil refining & nuclear fuel 0 -4 -11 0 DG - Chemicals & man-made fibres -766 -135 -448 1 D H - Rubber & plastic products -140 -1124 -498 -299 DI - Other non-metallic mineral produc 45 69 75 -67 D J - Metals -182 -235 -656 -12 DK - Machinery & equipment -79 -47 -695 2

D L - Electri cal optical equipm ent -784 -559 -1835 -389 DM - Transport equipment -7301 43 -88 -269 D N - Other m anufacturing 10 -867 -85 -192 EE - Electricity, gas & w ater supply 4 18 16 -286 FF - Constructi on 41 -485 -6534 1770 G - Distribution 1144 -3449 548 3 H - Hotels -364 805 1241 1503

II - Transport & Communications -1866 2069 801 137 J - Financial Services -270 -866 -329 90 K - Business services -171 920 -1152 -11284 LL - Public adm in & defence -559 29 785 -542 M - E ducat io n 1136 1617 1233 1742 N - Health 1429 1842 753 1239 OO - Other personal services 318 1154 650 2496

T otal -9681 -1431 -5936 -4975

Table C.7: Percentage point difference of economic activity by skill, 2007-2010, London

Degree or GCE A Level GCSE grades Other No equivalent Higher edu c or e quiv A-C or equiv qualifications qualification Employed 4.7 -0.2 -0.1 -0.3 -2.3 -2.0 Unemployed 6.5 1.9 2.2 -2.3 -3.4 -4.4 Inact ive: of which 1. 7 0. 6 0.0 -0. 1 0. 5 -3.1 Seek ing a job 7. 2 0.8 -2.8 1.7 -7.6 -1.8 Long term sick -0.2 -0.4 -0.1 4.0 0.4 -5.2 Looking after family / home3.0-0.4-2.3-1.73.8-2.8 Other 8.3 -0.9 2.2 2.3 0.2 -13.1 Student 3.1 1.1 0.0 -3.1 1.7 -2.8 Retired -11.4 2.9 -7.1 3.6 5.3 6.3 Total 2. 7 0.0 0.1 -0.1 -1.4 -1. 5

Source: Oxford Economics’ analysis of the LFS

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Table C.8: London specialisation, 1998

Specialisation Conventional Index LQ Employe es Radio and television activities 13.0 3.8 31722 Business and management consultancy activities 7.2 2.2 52552 Non-life insurance 6.1 1.4 21185 Publishing of newspapers 4.4 1.9 13348 Activities auxiliary to insurance and pension funding 4.3 1.9 39064 Other business activities nec 3.9 2.1 83691 Telecommunications 3.5 1.8 53532 Activities of travel agencies and tour operators; tourist assistance activities nec 3.5 1.8 30597 Legal activities 3.5 2.2 76632 Development and selling of real estate 3.2 1.7 21926 Other monetary intermediation 3.1 2.0 145315 Other scheduled passenger land transport 3.0 1.9 38015 Real estate agencies 3.0 1.4 17796 Labour recruitment and provision of personnel 2.9 1.5 142840 Wholesale of other household goods 2.8 1.2 18544 Accounting, book-keeping and auditing activities; tax consultancy 2.8 1.9 52594 Investigation and security activities 2.6 1.6 31200 Courier activities other than national post activities 2.6 1.4 13367 Ot he r who les ale 2.6 1.2 20514 Letting of own property 2.5 1.5 23467 Life insurance 2.4 1.0 18657 Gambling and betting activities 2.4 1.3 13621 Justice and judicial activities 2.3 1.3 15562 Other credit granting 2.2 1.1 8248 Fire service activities 2.1 0.7 6412 Defence activities 2.1 0.6 12016 Source: Oxford Economics analysis of the ABI

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Table C.9: London specialisation, 2008

Specialisation Conventional Index LQ Employe es Business and management consultancy activities 5.0 1.9 100177 Research and experimental development on natural sciences and engineering 4.3 1.0 16809 Other software consultancy and supply 4.2 1.5 88719 Publishing of newspapers 3.8 1.7 11597 Other monetary intermediation 3.8 1.9 141047 Activities auxiliary to financia l inter mediation nec 3.7 2.1 29 398 Non-life insurance 3.6 1.1 15849 Activities auxiliary to insurance and pension funding 3.5 1.7 44158 Other scheduled passenger land transport 3.4 2.1 42623 Real estate agencies 3.4 1.7 27170 Legal activities 3.3 2.0 86011 Accounting, book-keeping and auditing activities; tax consultancy 3.2 1.8 61972 Other computer related activities 3.1 1.5 20635 Management of real estate on a fee or contract basis 3.1 1.4 29875 Activities of religious organisations 3.0 1.7 12957 Management activities of holding companies 3.0 1.2 22768 Museum activities and preservation of historical sites and buildings 2.9 1.6 8578 Investigation and security activities 2.9 1.9 50823 Gambling and betting activities 2.8 1.4 21831 Telecommunications 2.8 1.4 43234 Other business activities nec 2.7 1.5 81057 Wholesale of other household goods 2.6 1.0 16027 Activities of travel agencies and tour operators; tourist assistance activities nec 2.6 1.6 23795 Industrial cleaning 2.4 1.6 110239 Other credit granting 2.3 0.6 4254 Ot he r who les ale 2.2 0.9 11345 Compulsory social security activities 2.1 0.6 6578 Catering 2.1 1.4 53512 Other service activities nec 2.0 1.0 21320 Source: Oxford Economics analysis of the ABI

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Table C.10: London share of UK export potential, 2008

Jobs above "minimum share" % of GB Other scheduled passenger land transport 30133 57.3 Investigation and security activities 33205 56.9 Activities auxiliary to financial intermediation nec 21420 55.7 Legal activities 59716 54.7 Accounting, book-keeping and auditing activities; tax consultancy 42659 44.4 Other monetary intermediation 103756 44.1 Industrial cleaning 65165 40.7 Activities of religious organisations 8668 38.1 Activities of travel agencies and tour operators; tourist assistance activities nec 14528 38.0 Business and management consultancy activities 80237 37.8 Publishing of newspapers 8553 37.2 Real estate agencies 19124 36.5 Activities auxiliary to insurance and pension funding 31554 36.5 Catering 28015 35.2 Other business activities nec 51008 34.6

Museum activities and preservation of historical sites and buildings 5609 34.5 Other computer related activities 13968 29.4 Gambling and betting activities 14099 29.3 Other software consultancy and supply 67655 29.2 Telecommunications 27911 27.9 Management of real estate on a fee or contract basis 20104 27.0 Management activities of holding companies 15136 22.3 Non-life insurance 11485 18.6 Wholesale of other household goods 9794 16.7 Other service activities nec 10739 16.1 Research and experimental development on natural sciences and engineering 12894 15.6 Other wholesale 6148 13.4 Compulsory social security activities 3501 7.7 Other credit granting 2382 7.6

Source: Oxford Economics analysis of the ABI

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