Monday, 3 March 2014

Mind the Gap

[Posted by Prof Henry G. Overman]

On the Today programme this morning talking cities with Ed Cox (IPPR North) and Evan Davis - whose two part series Mind the Gap: London v's the Rest starts tonight on BBC 2.

You can listen to the debate here [about 2h 53m in].

The starting point - on which we all agreed - is that the geographic concentration of economic activity in London and the South East offers fantastic opportunities in terms of both work and play (as a result of 'agglomeration economies' arising from the benefits of physical proximity).

The points of disagreement relate to the extent to which this is sustainable and whether it would be possible to generate similar opportunities elsewhere.

On sustainability, Ed Cox specifically raises concerns about infrastructure - and points to IPPR North's numbers which suggest we are set to spend £5,000 per person on infrastructure in London but only £250 per person in the North East. These figures are certainly striking, but they should be interpreted with considerable caution because they are far out of line with actual expenditure. Actual expenditure is reported in the Treasury's Public Expenditure Statistical Analysis Tables. According to those tables, in 2010-11 London received £800 per head (compared to an English average - including London - of around £400). But the second ranked region was the North West with £337 per head. These headline figures are complicated by a number of factors. Many people from outside London use London infrastructure on a daily basis (because so much employment is based here). Also, more of London's spending is funded out of fares paid by people using the London transport system. For example, about 80% of the funding for railway services in London and the South East comes from fare payers, compared to only 40% for regional railway services. This document from the Scrutiny Unit provides further discussion. In short, there may come a point where the costs of London's infrastructure requirements become excessive relative to revenues (fares plus taxes) but it doesn't seem we are there yet.

Our second point of disagreement concerned the extent to which it would be possible to replicate London's success elsewhere in the UK. Crucial to answering this question is the role that scale and physical proximity play in driving London's success. The evidence suggests that these are pretty important - strong market forces, working via agglomeration economies explain London's success, and this is much more important than any bias on behalf of government. Don't get me wrong, I'm not arguing that there is no bias - England is a very centralised economy and that may distort the overall balance of expenditure. But we need to realise that strong market forces, rather than biases in public expenditure, are the driver of London's economic success.

Once we recognise this, it has fundamental implications for what a more balanced UK economy might need to look like. If creating similar opportunities to London requires similar scale and physical proximity, could we get anywhere near this by 'joining' up our Northern cities through greater infrastructure investment? I remain sceptical - not least because our work estimating the impact of quite substantial reductions in travel times between Manchester and Leeds suggests only modest economic gains. Joining up our Northern cities would help, but it would be expensive (remember those subsidy figures above) and it's unlikely that it would be enough to provide an effective counterbalance to London.

If balancing the effect of London requires somewhere 'big and Northern' that raises the very difficult question of where that place might be? Politics being what it is, I can see why many people (myself included) would prefer to dodge that particular question.