Did London benefit disproportionately from COVID-19 interventions?
Pandemic-related economic policies were not designed to benefit London, but they served to preserve a London-centred economic model
In a recent paper in the Cambridge Journal of Regions, Economy and Society (co-authored with Daniel Bailey, David Beel and Nick O’Donovan), I examined the claim that economic policy interventions undertaken in 2020 as a result of the COVID-19 pandemic disproportionately benefited London.
It is a claim that has some merit – therefore undermining the notion that the UK would ‘build back better’ or ‘level up’ as it recovered from the pandemic.
But this is not to suggest that interventions were strategically planned to produce this outcome. Policies were designed primarily to restore the ‘before’ economy; as such, a London-centred economic model gave rise to a London-biased bailout.
Policy bias
The core characteristic of pandemic-related interventions was that the public sector substituted for economic activities that would previously have been privately organised, primarily by replacing private sources of credit and revenue with public funds.
Our analysis found several ways in which economic activity in London was disproportionately supported by the public sector. First, some interventions were designed in a way which were most accessible to London-based firms (essentially because the largest firms tend to be headquartered in the capital).
Second, London (and other large cities, to a lesser extent) has a concentration of industries most affected by lockdown measures, such as hospitality.
It would be reasonable to argue that these are understandable, or even justifiable, biases. However, there were elements of policy design that are less defensible.
First, the main fiscal measures were only implemented when the national economy was deemed in jeopardy – local outbreaks of COVID-19 did not trigger economic policy action. This was most evident in late 2020, after the first ‘furlough’ scheme was being wound down despite the introduction of multiple local lockdowns. The scheme was only saved when the second national lockdown was introduced.
Second, national policy was invariably made without the involvement of local authorities, whose role, in some instances, was only to administer centrally determined interventions. And there was little attempt to boost the capacity of local authorities in this regard.
Furlough
The main furlough scheme allowed businesses to retain employees on their payroll who were unable to work due to the pandemic, with state-subsidised wages. Its estimated cost as of October 2021 was £70 billion.
As the chart below shows, the regional distribution of furlough expenditure was not impacted by the proliferation of local lockdowns in the North and Midlands in summer and autumn 2020. Instead, take-up of the furlough scheme was consistently higher in London than elsewhere. There was a similar pattern in take-up of the income support scheme for self-employed workers.
And while London does have above average employment levels in highly furloughed industries such as hospitality and the arts, it also has above average employment in industries such as ICT and finance, which were much less likely to be furloughed. Our analysis shows that workers in most industries were more likely to be furloughed in London than their counterparts in the same industries elsewhere in the country.
We found that the bias to London is a city effect, related to a sharper fall in demand across diverse sectors than in other regions as commuters and local residents remained at home, and the supply-side challenges of operating in a densely-populated area while still observing social-distancing restrictions. The same effect is evident in other cities – but of course no other UK city is large enough to be classified as a region too!
To pre-empt an obvious objection: we are not arguing that everybody in London benefited equally from these policies. London has far more wealth than any other UK city, but also far more poverty. By salvaging a pre-crisis economic model, this inequality was reproduced too.
Business support
Our analysis also included the main business support programmes, the Bounce Back Loan Scheme (BBLS), the Covid Business Interruption Loan Scheme (CBILS) and the Future Fund. Together these policies cost around £75 billion.
The spatial distribution of BBLS and CBILS loans was roughly proportionate to the regional location of all companies, albeit with London again (slightly) over-represented. London has 19% of the UK business population, but London-based firms were awarded 22% of the total value of BBLS and CBILS loans awarded.
6% of the value of the schemes was allocated to real estate companies, which make up only 2% of the business population. We do not know whether London-based real estate firms were more likely than those based elsewhere to take up the loans, but we do know that real estate is more important to London’s economy than other cities, as well as intertwined with the business model of the London-centred financial services industry.
The regional distribution of Future Fund investments was very heavily weighted towards London. 60% of the total value has been awarded to companies based in London, despite Rishi Sunak’s argument that it would ‘enable innovative businesses in every corner of the UK to access the finance they need to scale up’.
The government has not officially disclosed the names of Future Fund recipients, but Financial Times analysis of the companies that have been identified paints a remarkable picture. Almost half of companies were based within 5 miles of Whitehall, 38% were based within London’s ‘zone 1’, and 18% were in the same parliamentary constituency as the Treasury.
It is also worth noting that the bias to London was evident in the Bank of England’s contribution to the COVID-19 bailout. In addition to accelerating its quantitative easing programme, the Bank introduced the Covid Corporate Financing Facility (CCFF), for firms making ‘a material contribution to economic activity in the UK’ and possessing ‘a credit quality that is considered investment grade’.
Of the 94 companies benefitting from the CCFF (well, the ones we know about – not all the data has been published), 61 were headquartered in the South of England, mainly London. Football fans will be interested to know recipients included both Arsenal and Tottenham Hotspur. There were actually more recipients among firms based overseas than in the North of England, Wales, Scotland or Northern Ireland combined.
A version of CBILS was also available to larger firms with turnover above £45 million. Around 700 loans were made, valued at around £5 billion. But the government has not released any data on the regional distribution of these loans. (Another caveat: we do of course recognise that many firms based in London will have operations, and employ people, throughout the UK.)
Preserve
There is little evidence of an explicit intent by policy-makers to preserve geographical inequalities, rather an accumulation regime that centres financial services, privileges housing wealth and related forms of rent extraction, and relies upon low-wage service industries for mass employment. For better or worse, the London economy is at the heart of this national economic model.
Accordingly, the industrial and spatial foundations of the UK model cannot be easily untangled. As noted above, the furlough scheme, for example, was available nationally – with no targeted elements – but take-up was significantly higher in the London region because of a clear city effect, more intense in the capital than elsewhere.
London did not benefit disproportionately just because it is London, in any simple sense, but because of London’s economic weight and importance within the national economy. As with the 2008 financial crisis, the notion that state power and resources should be used to transform the economy rather than replicate the model in need of bailing out – perhaps even to make cities like London less vulnerable to similar shocks – did not feature in policy thinking.
This is a key point: the pandemic has been construed as a crisis for the national economy rather than of the UK’s nationally constituted accumulation regime. The economy had to be protected, not reformed.
And the pandemic was construed as temporary, and caused by an exogenous shock, rather than as a foreseeable event that exposed longstanding and endogenous economic weaknesses that could recur in future.
Finally, and ironically, the pandemic was often depicted as a localised phenomenon, as evidenced by the shambolic attempts to introduce a geographical tiering system, with local lockdowns for areas in the highest tiers. But this does not mean these areas qualified for additional support in terms of economic interventions, or greater policy autonomy for the relevant local authorities.
Instead, the intention of this discourse was to justify protection of the national economy from the danger posed by localities. The national economy itself was essentially still understood in place-blind terms – which means national interventions benefit London, as the economy’s spatial core, without this dynamic ever being explicitly acknowledged.
‘Build back before: fiscal and monetary support for the economy in Britain amid the COVID-19 crisis’ by Craig Berry, Daniel Bailey, David Beel and Nick O’Donovan is available here (open access).