Levelling Down

Is London in crisis? As a Mayor election looms, the evidence mounts up that COVID (and to some extent Brexit) has impacted London much more than the rest of the UK. As I write 22% of Englands unemployed (520,000 people) reside in London. Over 20% of individuals still on Furlough again live in London and according to some data around 700,000 of the 1.2 million people that have left the UK, in the greatest emigration event in UK's history outside a world war, were from London.

The consensus of opinion is that this will be a temporary blip. That London will bounce back ( like the rest of the country) once lockdown finishes in the next few months. On the balance of probability they may be right but if the confidence in the "good times returning" is not to be misplaced then there are a number of things that should concern the consensus opinion.

• Working from Home is here to stay and in both the prevalence and London (especially central London), will be impacted the most. The average travel time to work in the rest of the UK is 15-18 minutes. In London it is 30-36 minutes and the travel unlike the rest of the country overwhelmingly takes place on public transport and not through the cocoon of a car. So by commuting in London you lose more time in the day, take more infection risk and overall is much more unpleasant. Consequently, as occurred last summer, for rational cost benefit reasons, we can expect less people will return to work in London's offices, then will be the case for the rest of the UK.
• International Tourism fuels the entertainment and creative economy that sustains a lot of employment in London. Is anyone expecting the international tourists to return to London before 2022? Maybe even later? Who is going to fill those Theatres, hotels and restaurants. How many Brits will we need to keep those luxury brand shops open, the theatres full, the hospitality venues heaving?
• Geographically distributed teams is the new norm. One of the few sectors that has "trading well" throughout the pandemic has been the tech sector. Now alongside Financial Services, one of London's biggest private sector employers and one that on the whole that sells its products throughout the world and not just to UK based customers. Through the pandemic venture backed tech startups and especially scaleups have continued to recruit new employees. the big difference is that the vast majority of this recruitment is hiring people outside London/outside of the UK. One of the break-out stars of the London Tech scene, Hopin, has revealed that in the past 6 months it has hired over 400 software developers mostly outside the UK. This pattern will persist and will have an impact, for instance the hybrid model of bringing staff into the office for 1 or 2 days a week for joint working goes out of the window if that staff is distributed around the world. In person team meetings will be rarer than people presently imagine.
• International immigration. It is one of the reasons for Brexit, that international migration especially from EU countries is set to fall. The policy is obviously working and combined with the factors mentioned above (such as Remote International Working) means less people will be coming to London and since London needs new-comers to offset the 500,000 in an average year of predominately older people leaving the capital, we can expect in the near future that the London population will decline. Maybe the forecast influx of Hong Kong Chinese will reverse some of this short/medium term population decline.

So I think there is a good case to predict that there will less people in London, less people visiting and working in central London and the data suggests that will persist for some time. The impact of agglomeration, that means business density in a place like London on its own creates more business opportunity and more growth, is no longer as strong. The negative externalities ( falling population, high unemployment) are also likely to negatively compound. So maybe the confidence in the consensus that London will bounce back as strong as before is now getting shaky. A few months back the Deputy Mayor Jules Piper stated that there research suggests that footfall in London's west end will need to return to 85% of the 2019 footfall figures for the business model of the retailers ( paying the countries highest rents and highest business rates) to be viable. In short the breakeven sales needed to keep the lights on is so high that unless rents and business rates or salary costs fall, then it is just not profitable. At the moment the government COVID measures like Business Rate defrayment and Furlough ( that end this summer) have meant that economic impacts on London have been to date muted. At present low interest rates means that Landlords and to some extent big business can borrow incredibly cheaply to offset their losses for the time being. But if the trillions being pumped into the USA economy by the Biden administration does ( as forecast) lead to higher inflation and higher interest rates not just in the USA but also here in the UK, then the servicing cost of the debt becomes a big issue. If rents and rates fall by 20%, 30% or 40%+ then businesses based on physical assets ( restaurants, hotels, co-working spaces, shops, theatres etc) could not only survive the substantial fall in traffic being experienced by London, but thrive. But who is going to pay for the losses incurred- Landlords, Tenants, the banks and pension funds that fuelled the 12 year asset bubble, employees and/or customers?

A smaller, less crowded London might be a better place to live. A big bout of "creative destruction" in the medium term might allow London to reinvent itself, for new business models to emerge and for new dynamic job creating businesses to replace those that will not survive. But this change will be painful, the pain will not be shared equally and it will take time.

For the Mayoral candidates the challenge will not only be to cope with a fall in their tax take ( I confidently predict a fall in both income from both Business Rates and Council tax) and a continuation in the fall in passenger income for Transport for London but the need for smart interventions to crowd in private sector investment that will lead to job creation. I think all Mayoral candidates know this but given that the ￡544m London COVID Recovery Plan (of which ￡499m is utility companies starting infrastructure investment earlier) is significantly less than being spent by much smaller UK cities such as the ￡860m to be invested on COVID recovery in Sheffield, I have serious doubts on whether the plans in the Capital are up to the challenge.

I would strongly recommend whoever becomes the next Mayor that they commit to re-investing in the London Co-Investment Fund. Between 2015-19 this Mayor of London fund invested in 150 companies that went on to create over 3000 new jobs for no net cost to the tax payer. I would also highly recommend that the next Mayor seeks to refund our own CAST programme that used less than ￡2m of public finance to co-funded over 10 tech startup accelerators in London between 2016-19. This programme subsequently enabled these tech startup accelerators to support 700+ tech startups to raise over ￡500,000,000 from private investors and create over 5000 new jobs. If the conclusion from the London LEAP in 2019 was that these initiatives were no longer needed in London, I think there is a strong case that they are needed now.

To date the generous government business support packages ( Furlough, CBIL's, Disruption Grants, Business Rate Holiday's etc) have been about preserving businesses until lockdowns end and we can return back to normal. I am suggesting, especially for London, the normal we will return too will be significantly different.

Therefore for the UK government, to continue with a policy of relying on taxes raised in London (Over 30% of UK tax revenue is paid by London businesses, employees and residents) to fund the country whilst pumping billions of economic stimulus into 100 priority towns outside London, might not work as well. Levelling up may be this governments most popular policy but given the impact of COVID and Brexit on London and the lack of direct measures from the UK government to support the economic recovery of London, the outcome is much more likely to be "level down".