City of London Economic Research

‘Evidence-based policy making’ - oxymoron, fable or feasible?

This blog post is co-authored by Sabrina Basran, a former Research Officer at the City of London Corporation, and Gareth Reilly, who has recently joined the City of London Corporation as a graduate trainee.

Gareth Reilly:

The case for using well informed and well-rounded data within the policy process is, arguably, one of common sense, yet at times common sense doesn’t prevail. On many occasions data is used in the wrong way or insufficiently; not enough is taken into consideration for a proper informed policy to be formed.

Using data within policymaking can contribute to its efficacy in several ways: accurate information can help define the issue which the policy is trying to resolve and it allows the scope to be narrowed to focus on specific areas, which in turn allows targeted options to be formed on how best to take the policy forward. Robust and informed data is always likely to help policymakers make accurate predictions about what impact the changes will have once implemented as well as acting as a point of referral for future work, in order to evaluate a policy’s success or failure.

Accurate data can also help increase the longevity of a policy. Whilst numbers and statistics are constantly changing, research can, if well thought-out, be used to shape policy in such a way that it is effectual in the longer term. One prime example of this is the work which was carried out on Growing the Social Investment Market. Not only did the research assess the existing market, but it also carried out an economic impact assessment for the first time providing new, detailed baseline information on the market which has since helped act as guideline for policy considerations as well as contributing to the formation of the Social Investment Research Council.

As a recent graduate trainee joining the Economic Development Office I hope to be able to make a worthwhile contribution to the research process and potentially the policy making process. As such, it is paramount that I practice what I preach and ensure that the data I use is of the best quality and the most relevant to the topic at hand. 

Sabrina Basran:

It’s always exciting to have somebody new in a team, and to hear a fresh perspective on how research can be used, to help ensure that the Corporation’s programme remains relevant. It’s my personal view that it is essential for any practical initiative or public policy to be evidence-based, in order to be effective. Gareth’s comments echo this, though he also raises the important point that there needs to be careful consideration from the research side, to ensure the right data is used. 

The Corporation plays a key role in supporting and promoting London as a leading international financial and business centre and the encompassing aspects of this – from helping local communities to improving the City and London’s attractiveness to businesses and visitors, to enhancing the capital’s position as a cultural hub. It is paramount then for the Corporation to use a well-researched, factual and evidence-based approach to dealing with key policy decisions in order to best serve not only the City, but London more widely and the UK as a whole.

To enable us to do so, our economic research programme spans a variety and range of topics – competitiveness, the UK economy, the EU and regulation, infrastructure, corporate social responsibility (CSR) and London communities to name a few  – with each topic underpinning and helping to inform the Corporation’s policy priorities and strategic areas of focus.

There are a number of examples where we have used research to achieve policy objectives:

• A paper exploring the threats facing London’s trees in the form of new and emerging pests and diseases – this helped to secure £1.5 million in Government funding for a project to fight oak processionary moth.
• Identifying and assessing good practice examples of employee health and well-being programmes amongst large firms based in the Square Mile to act as a benchmark for companies looking to support their employees and be used as a basis for engagement with firms starting on their employee health journey, as reflected at the report’s launch at the ‘Business Healthy’ conference.
• Presenting a rationale and justification for a tax relief for investors in social enterprises – this report, co-commissioned with Big Society Capital, informed Chancellor George Osborne’s announcement of a social investment tax relief in the 2013 Budget.

While by no means perfect, these examples help to demonstrate the value that can be achieved, when we get the right information to the right people in the right way. If there’s one thing I hope to take away from my time at the Corporation, it is this.

Deprivation in London

By Sabrina Basran, Research Officer, City of London Corporation

‘Deprivation’ refers to the damaging lack of material benefits considered to be basic necessities in a society and is therefore a relative measure of wellbeing that can be assessed across a range of indicators.

A secondary research briefing paper published recently by the City of London Corporation explores deprivation in London through a review of official data sources and statistics such as those provided by the ONS and GLA.

A mixed picture in London

London is relatively affluent compared to UK regions and performs well across a number of measures of deprivation such as educational attainment, employment and life expectancy. However, London still experiences high levels of deprivation across the region by other measures.

• London has a higher rate of both primary and secondary pupils at state schools receiving free school meals than the average in England. For example the proportion of secondary school pupils claiming is 23.1% in London, compared to 15.7% in England overall.
• In all 32 London boroughs, fewer than 10% of available properties are affordable to a single person on average wages.
• London has the highest rate of child poverty of any English region - 37% of children in the capital are living below the poverty line. However, child poverty rates in London have fallen over the last ten years.
• More than 1 in 10 households (11.3%) in London are overcrowded according to 2011 Census data.
• The number of people sleeping rough for any one night in London has more than doubled over six years, and risen by almost a quarter in a year.

Deprivation is not equally distributed across London

There exist in some geographic areas ‘pockets’ of high deprivation, with some boroughs being notably worse off than others, and a number having areas of affluence alongside areas of deprivation within their boundaries.

The most recent Index of Multiple Deprivation (IMD 2010) highlights that spatially many of the inner London boroughs, particularly towards the north-east, east and southern parts of London, are within the 20% most deprived Super Output Areas across England.

Inner London overall tends to perform poorly across a number of indicators of deprivation when compared to outer London. For example:

• According to the 2010 IMD, Tower Hamlets, Hackney and Newham are the three most deprived local authorities in London.
• Islington has the highest proportion of pupils eligible for and claiming free school meals at nursery and primary school level, at around double the London average. 
• Southwark has the highest proportion of workless households of all the London boroughs.
• Outer London has around double the proportion of home ownership than inner London.

This is not to ignore the concentration of deprivation in other outer London boroughs: Barking and Dagenham, Brent and Greenwich for example, perform worst on some measures out of all the boroughs, including those in inner London.

What about changes over time?

The data presented in the paper suggests that there have been improvements in the performance of both inner and outer London against deprivation indicators over time.

Some suggest that there has been a shift in the spatial distribution of deprivation, with the outer London boroughs now performing worse than those in inner London. However looking at data, the baseline case remains that inner London overall and in absolute terms, continues to perform badly and compared with outer London.

What does this mean?

From the brief overview of data presented here, it is evident that deprivation is highly complex to understand and measure. It is also an area that is constantly evolving. This paper seeks to present to readers some of the key matters for consideration.

‘Deprivation in London: secondary research briefing paper’ was published in January 2015. The paper is available to download from the City of London Corporation’s Research webpage.

What does London contribute to the UK economy?

By Charles Davis, Director, Cebr

Understanding the budget deficit across the UK

It’s the burning question as we hit the six months to the UK general election: how will the budget deficit be reduced? While we don’t have the answers to this – that’s up to the politicians – we have assessed which parts of the UK contribute what to the public finances. The team I have led at the Centre for Economics and Business Research (Cebr) have crunched the numbers to understand how the changing shape of the economy affects the contribution of London, its boroughs and the rest of the regions and countries of the UK to generating taxes for the government as well as how much is spent in each respective area.

London leads UK economic bounce back

The results are fascinating: despite the financial crisis hitting the City hard, London has shown a remarkable ability to reinvent itself and a resilience to bounce back from a challenging economic environment and lead the UK economic recovery. Our research shows that London will be the fastest growing regional economy across the UK in 2014, driven by a fast-growing IT & communications sector and the UK capital’s strength in professional and business services, with a depth of expertise that few other cities around the world can come close to rivalling. The dynamic boroughs of Westminster and City of London generate almost £100 billion in economic output between them while the fastest growing boroughs over the last ten years have been Tower Hamlets, Islington and Southwark. While London is the fastest growing regional economy, the rest of the UK has also returned to economic health in 2014 and this has seen unemployment drop to its lowest level since before the financial crisis. What does this mean for the UK public finances across the UK?

Introducing a new approach to understanding public finances across the regions

Working this out is no easy task; while we (mostly!) have relatively clear information from HM Treasury on where public money is spent and on what around the country, for many elements of government revenue – which is mainly taxation – it is much harder to understand where the money comes from. Attacking this problem, the analysis we have produced is unique in that it allocates tax revenues according to our best estimate of where the respective economic activity takes place. Many previous studies have tended to look separately at approaches that are so-called ‘workplace-based’ i.e. allocating tax to where people work and ‘residence-based’ i.e. where they live. Neither of these is completely satisfactory. Our analysis attempts to allocate, line by line for each tax revenue, where the economic activity that generates the tax takes place.

London economy makes a £34 billion net positive contribution to UK public finances

The results are fascinating – especially in the context of further promises of devolution in Scotland and indeed around the rest of the UK – London is found to be making a major £34 billion positive net contribution to the UK public finances. The South East also makes a positive contribution – a £22 billion surplus – and the East of England is very slightly in positive territory at £181 million, but the rest of the UK’s 12 constituent countries and regions are in deficit. The largest estimated deficits are in the North West, Yorkshire and the Humber and Scotland. However, this is distorted by the size of the population; in relative terms the largest deficits are in Northern Ireland, Wales and the North East.

Looking forward, we expect London is expected to continue growing at a faster rate than the rest of the UK due to its dynamism and status as major global trading hub and financial centre. This is expected to see it make a major contribution to reducing the UK’s budget deficit over the coming years as it continues to generate tax revenues that support public spending right across the UK. You can explore in more detail by reading the report, London's Finances and Revenues. 

Growth in London and the UK looking up

Optimistic about growth

This quarter’s CBI/KPMG London Business Survey, released yesterday, is the latest contribution to a raft of surveys and data presenting a strong sense of optimism about London and the UK’s economic growth prospects. GDP revisions published by the ONS, to reflect European wide standards on national accounts, show the economy surpassed its pre-crisis economic peak by the third quarter of 2013, and grew 1% faster than previously thought over the period 2010 to 2012.

According to the survey, 59% of firms were optimistic about economic prospects over the next six months. This could reflect a mixed picture at the sectoral level, as reported by Markit/CIPS’ purchasing manager indices, with services industry activity accelerating at its fastest pace for 10 months, playing to London and the UK’s strength in services, and construction industry growth for the tenth consecutive month, partially offset by a 14 month low in manufacturing activity. Encouragingly, 66% of firms plan to expand their operations over the next year, with 62% planning to increase headcount over the next 6 months. Our Economic Outlook for London, found that 319,000 jobs will be created over the next decade, with 1 in every 8 new jobs being based in the Greater London area.

Threats to competitiveness and future growth

Businesses also gave their thoughts on potential threats to London’s future competitiveness – highlighting the cost of doing business (staffing and production costs, taxes), housing costs and transport (international, national and local). 43% of businesses saw airport capacity as a key priority for London looking ahead. Our research has evaluated the options considered by the Airports commission, and the importance of London’s status as a hub and connections to growth markets internationally.

Skill shortages in science and technology were also highlighted as an issue for businesses looking to recruit and retain highly-skilled staff, particularly as our Economic Outlook has forecasted an additional 49,000 jobs in the technology, media and telecommunications (TMT) sector across Central London by 2023, with large gains expected in computer programming and consultancy, publishing, and motion picture and sound recording sectors. The survey found over half of businesses (56%) want a reformed visa system to remove the barriers to hiring highly skilled individuals from overseas. Our research into access to global talent has previously considered the impact of migration policy changes on businesses, and the potential effect on the attractiveness of the City of London and the UK as places to do business.

Looking ahead, supporting businesses in recruiting and retaining highly-skilled staff, and improving aviation links with other markets, will increase trade and the UK’s long-run economic growth.

The outlook for London’s economy

By Mark Britton, Senior Economist at Oxford Economics

Mark Britton of Oxford Economics comments on the outlook for London's economy. Further information can be found in the recent reports ‘The Economic Outlook for Central London’ and ‘The Economic Outlook for the City of London’  commissioned by Central London Forward and the City of London Corporation.

London’s economy has consistently outperformed the UK over the past two decades and the polarisation in economic performance has become even more apparent over the past 5 years. Between 2008 and 2013, employment in the Greater London region increased by more than 400,000 jobs, in contrast to the UK (excluding London) which experienced a fall of nearly 250,000 jobs across the same period. A similar story of diverging trends was evident in terms of economic output. The performance of the City of London’s economy following the financial crisis has been particularly noteworthy, with growth far exceeding the Greater London and UK averages, highlighting the City’s importance as a key economic driver of the national economy.

London’s economy is expected to retain its growth premium over the UK in the short term as its dominant service sector is well positioned to benefit from both improving domestic demand and the strengthening Eurozone and global economies. In the short-term, the sectoral mix of job creation in Greater London will be similar to that witnessed in recent years. Professional services are expected to account for 47,000 of the 189,000 new jobs forecast in Greater London over the next 2 years. A further 45,000 are expected in administrative services and 19,000 from information and communications.

Over the medium to long term, growth in the UK economy will become increasingly dependent on the private services sector, especially for employment. UK employment is forecast to rise by 2.5 million jobs by 2023, with almost 1.7 million of these created in financial & business services and the information & communications sector. London will benefit from continued specialisation in these sectors, helping the capital maintain its position as the UK’s, and indeed one of Europe’s, fastest growing regions. GVA and employment growth in Greater London is forecast to average 3.4% and 1.2% per annum respectively between 2014 and 2023, faster than any other UK region on either measure. London will account for 1 in 4 of the jobs created across the UK over this period.

A key feature of London’s ability to consistently outperform the UK economy stems from its ability to attract highly skilled workers. Over the coming decade, Greater London’s working-age population is projected to expand by over 620,000, reaching almost 6.4 people. By contrast, the working-age population of the UK (excluding London) is projected to decline over the same period.

Download the 'Economic Outlook for London' from the City of London's website.

Is the “feel-good factor” returning to the City?

By Stephen Gifford, Director of Economics, CBI

The Financial Times recently reported that sales of luxury cars were booming, IPOs were returning, M&A activity was picking up and interest in more complex financing engineering was growing. The latest CBI/PwC financial services survey for the third quarter certainly suggests that UK financial services companies are feeling upbeat about their business situation. Asked whether they were feeling more or less optimistic than three months earlier, 59% of respondents said they were more hopeful, with only 6% feeling downbeat. A positive balance of +53% was the strongest since the mid-1990s and comes on top of a sustained recovery in confidence since December 2012, shared across all major sub-sectors of the industry.

The survey results were not uniformly positive, however. Aggregate volumes of business fell, dragged down by a poor performance in banking (which has a high weight in the survey). Banks’ weaker than expected industrial and commercial business was particularly disappointing, and underlines the fragility of the economic recovery. However, several other sub-sectors saw business volumes pick-up, such as building societies and insurance firms. There is also a widespread expectation that volumes will expand further over the coming quarter, including in banking. These forecasts no doubt reflect the broader improvement in the UK’s economic prospects, signs of more stable conditions in the euro zone and the hope that financial market conditions in general will improve.

Another factor underpinning rising optimism was a fairly broad-based increase in profitability over the summer months, on the back of which firms are looking to boost employment and step up investment, particularly in IT. The latest ONS data show that employment in financial & insurance activities fell by 15k in Q2 2013, to 1.13 million. Our survey suggests that financial services firms have since begun hiring again, with particularly strong increases among life insurers, who saw sharp declines earlier this year, and among building societies. And during Q4 2013, employment is expected to expand at its fastest rate since September 2007. The results point to an increase in employment of the order of 10k, to be followed by an expansion of headcount of around 2k in Q4.

Firms are also investing for growth and IT investment seems to be a key driver (see chart). This was particularly apparent among the banks, who cited the need to improve efficiency as the most important reason for investment. Although banks are looking to boost market shares, they continue to look inwards to deliver improvements to their core systems. For several sectors, the development of new products and services has also gained importance as a driver of investment and growth.

 

Finally, the overall improvement in the outlook for the financial services sector is reflected in a shift in the factors that firms expect to act as a brake on business expansion over the next year. For example, the proportion of firms citing uncertainty over the level of demand fell back to the lowest level since 2008. Some sectors pointed to the threat of stronger competition as demand recovers, notably building societies, who are probably wary of more aggressive moves by banks into the mortgage market. For the industry as a whole, regulation was cited as the leading potential barrier to growth and that the new “twin peaks” regulatory architecture is pushing up compliance costs – with this view being almost universally held among building societies and insurance firms.

Overall, it seems for the first time in a long time, pipelines are building, with preparations for IPOs being dusted down and plans for corporate transactions being developed, partly as private equity firms seek to exit from investments made during the crisis. There is a belief that the time is ripe to move and that fortune will favour the brave. 

More information on the survey is available from www.pwc.co.uk/cbisurvey  

For more about the City of London's economic research programme, please visit the City of London website.

The City in Europe Debate

Ahead of a potential referendum on the UK’s membership of the European Union, politicians and business leaders gathered in Guildhall this month to debate whether a UK exit would be beneficial or damaging for the City. Despite some claims that the UK’s EU membership is of little interest to the majority of voters, almost a thousand Londoners listened and contributed to the discussion, which considered an issue crucial to the UK’s economic and political future. A link to the full debate is available at the bottom of this post.

UK access to the Single Market was identified by the Lord Mayor as an important advantage for UK financial and professional services, and remained a key theme of the debate, with Vince Cable and Sir Martin Sorrell highlighting EU membership as a key determinant of the UK’s position as the third largest inward investment recipient, and 60% of senior decision-makers locating here to access this important market. The Japanese government’s submission to the UK’s Balance of Competences review made it clear that leaving the EU would put the 130,000 UK jobs created through Japanese FDI at risk.

Our EU membership also facilitates UK trade internationally; free trade agreements with over 37 countries, including important emerging markets like Mexico and South Korea, have reduced global barriers to trade, and the current negotiation of a US-EU trade deal could boost the UK economy by £10bn.

Of course there are two sides to every debate, and supporters of EU exit Jesse Norman MP and entrepreneur Luke Johnson argued London’s development as an international financial centre, attributed to factors like its time zone, talented labour pool and stable legal framework, has not been dependent on EU membership. Norway and Switzerland were cited as examples of countries which have prospered outside of the EU, although as our research into Switzerland’s engagement with the EU showed, the country achieves access to the Single Market through a complex set of bi-lateral trade agreements and significant financial contribution.

EU-level regulation does present challenges for the UK’s financial services industry and the wider economy, particularly bonus cap regulation and the financial transaction tax, with our latest research estimating the tax would increase the cost of finance for UK businesses, and create an additional cost on UK government borrowing of almost £4bn. Despite not signing up to the tax, non-participating Member States are likely to suffer higher costs than those 11 Member States who have signed up, and the legality of the tax’s extra-territorial impacts is currently being challenged by EU lawyers. We’re also looking at how the tax will affect households and consumers across the EU in upcoming research.

However as Vicky Pryce argued, in order to maintain the competitiveness of the financial services industry and its key contribution to the UK economy (valued at over £132bn or 9.8% of total GDP by our latest figures), it’s important the City and the UK continues to engage in EU policy-making, rather than seeking to withdraw altogether. Closing the debate, the Chairman of Policy and Resources Mark Boleat, reflected on the government’s continued success in seeking UK-appropriate implementation of EU directives, and this week the Treasury announced that it would challenge EU bonus caps in view of stringent pay rules already imposed by the Prudential Regulation Authority and the Financial Conduct Authority.

As a key voice in the debate around the UK’s engagement with the EU, the City of London plays an important role through working in partnership with organisations like the Evening Standard and Centre for London, and acting as a host for informed discussion on issues affecting the City and the UK’s financial and professional services.

We also commission independent research to inform and support our work on the EU and financial services regulation, as part of our wider research programme. If you’re interested in finding out more please visit the City of London's economic research page.

To watch the debate in full visit the ‘The City in Europe’ page.

The signs of economic recovery at the end of Q2 2013

As reports of the UK's economic recovery gain momentum, this infographic looks at some of the indicators of growth at the end of the second quarter  

For more information about our freely available research programme, please visit us at www.cityoflondon.gov.uk/researchpublications

The UK and the BRIC Economies

Despite the slowdowns reported in some high growth markets, the overall long-term picture for the BRIC economies remains one of steady and significant development.

In an ever more interconnected global market all indications are that these countries will remain hugely important as engines of world economic growth. Britain is already ahead in having well established business relationships with these economies, and they will continue to offer myriad opportunities for British companies - as sources of production, as substantial and growing bases of consumer demand, and as significant trading and investment partners.

Click on the infographic above to enlarge.

For more research on emerging economies and their relationship with the UK visit us at the City of London's website. 

London's future employment

By Dr Laura Davison, Head of Research, City of London

In my earlier blog post about London’s economy, I talked about London’s economic performance in terms of some of the headline statistics, and finished with the statistic that over the next five years, one in four of the UK’s new jobs are forecast to be created in London.

This time round, I’ll look at some of our research which looks in more detail at employment in London, including where these new jobs might be arising. As a reminder, the full set of accompanying slides are still available at my previous post.

Source the Economic Outlook for London, Oxford Economics for the City of London, April 2013

This first chart is taken from our most recent set of employment forecasts (April 2013), produced by Oxford Economics, and shows predicted changes by sector over the next few years, to 2016.  Looking forward in this relatively short term, the expectation is that business and professional services continue to perform very strongly and drive this growth.  At the other end of the chart, on-going restrictions in government spending suggest a more negative outlook for public administration, health and education.

The two charts on the following slide look at how this ties in with London’s current sectoral strengths, and patterns of growth over the longer term.  So, from the first chart you can see how London’s sectoral make-up compares with the rest of the UK, with the particular concentration of professional services, financial services, and information and communications.

The second table shows that for the ten years from 2002 – 2012, professional services jobs made up a third of new jobs created, and in line with the short-term forecasts are also expected to underpin longer term growth through to 2025. In combination with administrative services, information and communications, and real estate, these four sectors are anticipated to provide 80% of new jobs in London through to 2025. In essence then, London’s jobs growth is building on existing strengths, reflecting existing expertise, links to global markets – both emerging and established, and London’s prominence as a centre for leisure and business visitors.

Source London's Finances and Revenues, City of London, December 2012

Finally, I’ll just give you a snapshot of some more experimental work that Experian carried out for us, looking at how this picture of growth relates to SME businesses. Experian looked at the figures for high growth firms – businesses whose employment has grown by at least 73% (minimum seven new jobs) across a three year consecutive period.  They looked both at sectors with particularly high growth over the last three years, and modelled those anticipated to show such high growth in the future.

The next two slides pull out the sectors showing highest proportions of these firms in London - it is worth bearing in mind that this solely looks at proportions of high growth firms, and not, for example, company failures or growth averages. But you can see that, complementing the sectoral employment figures, professional services, financial services and computing feature strongly both recently and looking forward.  

In the presentation that these slides come from, I went on to talk more generally about London’s infrastructure and competitiveness, and I’ll post about them soon – but as ever, our published research reports can be found on our website if you’d like to read more before then.

Source Mapping SMEs in the City, City of London, July 2012

Download London's Finances and Revenues from the City of London website

Download The Economic Outlook for London series from the City of London website

Download Mapping SMEs in the City from the City of London Website