The productivity gap

It should be good news, but it isn’t really. The gap between the most productive part of the UK – London – and the rest is narrowing. Unfortunately, this is only partly down to other regions improving and finally catching up with the capital.

It is in large part because productivity growth in London is slowing and slowing so much that it is the main thing holding productivity growth back in the UK as a whole.

According to the Office for National Statistics, output by hour in London between 2019 and 2022 fell by 2.7%, whereas it improved by 2.5% elsewhere. This is not to say that London is not miles ahead of the rest of the country, to a disturbing extent. It is 26.2% more productive than the national average, and when you compare it to places with terrible productivity like Wales it is out of sight. Some parts of London are 75% more productive than the national average.

But in 2007, the gap between London and the rest of the country was 40%. London has been hit hardest by the credit crunch which hurt financial services and also by Covid, which restricted international travel. Brexit, of course, has done huge economic damage – London has been haemorrhaging business to the continent and New York.

Narrowing the gap between the UK’s regions is a noble and very desirable thing to do – some of the richest and most productive parts of the whole of Europe are in London – but Britain also hs some of the poorest and least productive. The country as a whole is 20-30% less productive than its major rivals and London’s performance was one of the few factors keeping that gap as narrow as it is. Without strong growth in London we would be even further adrift.

The UK has also had stagnating productivity ever since the credit crunch. Covid did not help, but productivity growth in the UK has been utterly pathetic for years now and there are few signs of it improving and no real consensus as to why it is so bad.

It all highlights the crisis facing the next government – borrowing is high, investment is very low and productivity is awful. The standard method to increase productivity and therefore growth is to invest in training, infrastructure, technology, and industry. With higher growth comes higher tax revenues. It is a virtuous circle if you can get it going, but the UK seems stuck instead in a permanent state of sloth-like progress.

That leaves Labour scrambling around, promising to improve growth with policies that are cheap. Better planning, better regulated utilities, more apprentices and yes, high immigration will all help.

But the elephant in the room is pathetically inadequate investment both by the private sector and by the state. Despite historically high taxes and years of austerity we have nothing to show for it but low investment, low growth, and anaemic productivity.

And for that we have the Tory government to thank.