Recession, Recovery and Cuts - What does London need?

Bridget RosewellChief Economic Adviser GLA

Recession, Recovery and Cuts

Both banks and public spending are under attack

Banks are accused of creating crisis Public spending has also generated

structural deficits Which matters more? How is London’s economy most likely

to evolve?

London’s output has declined significantly

Source: London: Experian Economics (to Q1 2010)

UK: ONS (to Q3 2010)

FBS employment as a per cent of total employment in London in 2009

Source: Experian Economics

All sectors Financial and Business Services

20%

8%

22%

4%5%

7%

25%

9%

32%

Distribution, Hotels & Catering Employment Transport & Communications Employment

Other (mainly public) Services Employment Manufacturing Employment

Construction Employment Financial Services Employment

Business Services Employment Other Employment

FBS output as a per cent of total output in London in 2009

Source: Experian Economics

All Sectors Financial and Business Services

12%

8%

15%

4%

4%

16%

27%

14%

44%

Distribution, Hotels & Catering Output Transport & Communications Output

Other (mainly public) Services Output Manufacturing Output

Construction Output Financial Services Output

Business Services Output Other Output

I/O figures on purchases of other sectors from financial services in the UK

0

5,000

10,000

15,000

20,000

25,000

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Source: ONS

The financial sector bailout

As of September 2010 the total effect of the financial intervention on net debt was £109.1 billion

However, £99.5 billion of bank balance sheets had been transferred onto the national debt.

If we examine public sector net debt excluding the temporary interventions then net debt increased by:

£12.4 billion due to the equity injection in Lloyds and RBS

£1.4 billion due to the capital injection into Northern Rock

£2.7 billion due to depositor compensation relate to Bradford and Bingley

The structural component of the budget deficit (as a proportion of GDP)

Source: HM Treasury, Public Sector Finances Databank

The financial sector bailout continued

-40

-20

0

20

40

60

80

100

120

140

160

Q3 2009 Q4 2009 Q1 2010 Q2 2010 Q3 2010

Capital injection into Northern Rock

Depositor compensation: Bradford & Bingley

Equity injections into RBS and Lloyds

Public sector banks: transactions withGovernment

Special Liquidity Scheme / Asset Purchasefacility

Depositor compensation: Icelandic banks andDumfermline BS

Public sector banks balance sheet

Effect of financial interventions on PSND

£ bn

Source: ONS

The split in exports of Services in the UK between financial and non-financial services and between London and the rest of the UK

London Financial Services14%

Rest of UK Financial Services15%

London Non-Financial Services Exports

16%

Rest of UK Non-Financial Services Exports

55%

Source: Pink Book 2010 & GLA Economics Evidence Base

The financial sector bailout

At the end of August 2010 the effect of the financial intervention on net borrowing was £111.6billion

The value of the Government’s nearly 70% stake in RBS stands at over £18billion

The value of the Government’s over 40% stake in Lloyds Group stands at nearly £20billion

The value of the Government’s 100% stake in Northern Rock has yet to be estimated

The Asset Protection Agency’s central expectation is that there will be a net benefit to the taxpayer of at least £5 billion from the Asset Protection Scheme

Public Service employment as a per cent of total employment in London in 2009

All Sectors Other (mainly) Public Services

17%

6%4%5%

28%

4%

6%

8%

22%

27%

Distribution, Hotels & Catering Employment Transport & Communications EmploymentManufacturing Employment Construction EmploymentFinancial & Business Services Employment Public Administration & Defence EmploymentEducation Employment Health EmploymentOther Employment

Source: Experian Economics

Public Service output as a per cent of total output in London in 2009

Source: Experian Economics

All Sectors Other (mainly) Public Services

11%

8%

4%4%

39%

4%

5%

6% 19%

19%

Distribution, Hotels & Catering output Transport & Communications outputManufacturing output Construction outputFinancial & Business Services Output Public Administration & Defence Output Education Output Health Output Other output

Public sector employment as a per cent of total employed workforce (2008)

Government Office Region Per cent North East 32.2 North West 28.2 Yorkshire and The Humber 28.5 East Midlands 26.6 West Midlands 26.9 East 25.2 London 22.2 South East 25.4 South West 28.5 Wales 32.9 Scotland 30.0 Total 26.9 Source: ONS, Annual Business Inquiry

Public sector expenditure per region as a share of GDP (2008/09)

Source: CEBR

Change in share of public sector and growth

Rolling average growth and public sector

Total

479,655m

Publicexpenditureonmainservices, (2008/09)

EconomicAffairs(excludingTransport)

(£18,608m)

£1,376m(7.4%)

£17,232m

Education(£82,855m)

£12,451m(15.0%)

£70,404m

Health(£111,028m)

£15,475m(13.9%)

£95,553m

Housing(£15,290m)

£3,144m(20.6%)

£12,146m

PublicOrderandSafety(£33,599m)

£6,391m(19.0%)

£27,208m

Recreation,CultureandReligion(£13,827m)

£1,168m(8.4%)

£12,659m

Transport(£22,062m)

£6,298m(28.5%)

£15,764m

Social Protection(£201,152m)

£24,906m(12.4%)

£176,246m

ThePublicExpenditureStatistical Analyses(PESA) categoriesarebasedontheUNClassificationof theFunctionsof Government asdetailedat http:/ / unstats.un.org/ unsd/cr/ registry/ regcst.asp?Cl=4&Lg=1Environmental ProtectionandTotal datatakenfromfromthePESACountry&Regional Analysishttp:/ / www.hm-treasury.gov.uk/ pespub_country_regional_analysis.htmAll otherdatafromPublicSpendingPrioritiesinLondonseehttp:/ / www.london.gov.uk/ who-runs-london/ mayor/ publications/ business-and-economy/ public-spending-priorities"

Circlesizeindicativeof total spend

£72,113m(12.0%)

£530,241m

Total(£602,355m)

EnvironmentalProtection(£9,644m)

£1,153m(12.0%)

£8,490m

PESAcategory(total spend

£million)

Londonshare(£million)(&Londonspendasa%of totalspend)

Non-Londonshare(£million)

Employment Growth Projections

3500

3750

4000

4250

4500

4750

5000

5250

5500

5750

To

tal E

mp

loy

me

nt

(th

ou

sa

nd

s)

CE

EBS

OEF

GLA

Historical data 1982 - 2008

Forecasts/Projections 2009 - 2031

Employment forecasts for London by various forecasters and the GLA’s long-run employment projection to 2031

Source: GLA Economics based on information from EBS, CE and OE10

Risks

Bank finances and regulation Delivery of new models of public

services Innovation and confidence