Three ideas to fix the North-South divide in Britain

Forty years ago London was struggling - but it's hard to identify the reasons for its turnaround. Plus, the continuing puzzle of the equities market

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London has more tower cranes at work than the rest of the UK put together. This little-detailed statistic tells you about what is really happening, rather than what economists say they think might be happening; and it exemplifies the gap between the London commuter region and the rest of the country. Indeed, if you add in the South-east and East Anglia, you have nearly 80 per cent of the cranes in the country. By contrast, these figures collected by the Health and Safety Executive show that in the past three years there were only three licences for cranes in Northern Ireland.

Now, as with all statistics, you have to aim off a little. Land values in London are higher so you tend to build up, not sideways. Much of the building is to meet global demand rather than UK demand. Still, it gives a fascinating and troubling picture of the way London and the Home Counties differ from the rest of the country.

It leads to two broad questions. Why is it happening? And what might be done about it? On the first, we can see some obvious points. A globalising world economy needs an English-speaking hub in this time zone. So London has become a magnet for wealth and talent, reinforcing its hub status. More people fly into its airports than into any other place on earth. There are more non-national professionals living in the commuter region than any other, more international phone calls, more cross-border money managed – the litany goes on. Recently its status, or at least its property, has been bolstered by the UK’s role as a “safe haven” for eurozone money seeking a home, and its young people seeking a job.

But to say all that is more to observe what is happening than to explain why. You can say that success breeds success, that we are in a winner-take-all world, and London currently has critical mass in that amorphous mix of money, style, creativity, intellect, whatever. But things did not look like that 40 years ago when its population was falling and it seemed locked into inexorable, if gradual, decline.

If it is hard to identify the reasons behind the success, it becomes impossible to replicate them elsewhere. The response of the previous government was to boost public spending in the rest of the country, partly by increasing transfer payments, and partly by moving jobs out and by investing in infrastructure. In the short-run, that seemed to have some success.

But a boom in public spending on the scale of the past 15 years (going from 39 per cent of GDP in 1998 to 49 per cent in 2012) had never occurred before in peacetime and, whatever the government says, it will inevitably be reversed. You could argue, too, that it was a policy dealing with symptoms rather than substance. So what is to be done? There is no magic wand but here are three ideas.

First, remove roadblocks. There would be more cranes outside London if local authorities used planning powers to attract more construction. Less crowded areas can sensibly use looser controls to attract business.

Second, look to education. There are great universities outside the South-east, for example in Manchester, and there is a strong case for using education as a way of narrowing the gap in economic performance: universities spawn businesses, too.

Third, work outwards from existing “hot spots”, rather than trying to transplant activity in. There are areas of great success in the North and West (just as there are areas of deep difficulty in the South and East) and they already exist as a magnet for all the qualities that have driven the London boom.

A Spring rally

The puzzle continues: are equity markets signalling economic recovery, or are they climbing just because the central banks have created shed-loads of money and it has to go somewhere? It must be a bit of both but we don’t know the balance between them.

It is a familiar story but, in the past few weeks, there have been some new twists. One is that European shares are now at a five-year high, notwithstanding the continuing stream of pretty adverse news from the eurozone, which now seems set for a second year of decline. So is the response more in reaction to the evidence that the European Central Bank will push growth further up the pecking order of its priorities? Probably, yes.

Another twist is the growing stream of central banks buying equities for national reserves because they, too, are suffering from the very low yields on government debt, a situation that they collectively have created. That also supports the negative “has to go somewhere” argument, rather than the positive one, though it is an interesting thought that equity markets may be becoming a major channel by which the central banks are seeking to boost the economy.

But the evidence of recovery outside Europe is also mounting, pretty clearly in the US, less clearly here (though our car registrations last month were up nearly 15 per cent), and decently enough in Japan. If the pace of growth eases in China, that may actually help demand in the developed world by taking pressure off commodity prices. Meanwhile, note that though the FTSE 100 index is also at a five-year high, it is still some way off its all-time peak of 6,930, reached on 31 December 1999. How long ago the Millennium seems now, and not only for investors.