The widening North-South divide (or probably more accurately London vs. rest of the UK gap) is acknowledged as a long-term problem. The latest solution outlined by the Chancellor of the Exchequer, George Osborne, in March 2014 is the creation of the ‘Northern Powerhouse’ through investment in key infrastructure projects and devolution of selected powers to the regions.
The intention of the Northern Powerhouse is to collectively empower the cities and towns across the North to attract businesses and compete with the London for private sector investment. Representing almost 10 per cent of GDP and contributing over £63bn in tax to the exchequer in 2011-12, the financial services sector should be a key target of the Northern Powerhouse.
Below we critically examine some of the key enablers of the Northern Powerhouse growth and development:
Lower operating costs
Generally, firms can benefit from significantly lower operating costs in the North, particularly when compared to the premium paid for premises, transport and wages in London. But this is not new – financial services have long sought opportunities to reduce costs through decentralisation of operational functions (e.g. call centres) either regionally or offshore, and there are also well established regional players such as Coop based in the North.
So far, this is where it ends, and the biggest banks have not followed suit in moving their head offices away from the capital. This might be set to change, however, as a number of banks have indicated their intentions to explore relocation to key sites outside the M25. The most recent and significant of these is HSBC, who have committed to moving their UK ring-fenced bank to Birmingham.
Investment in infrastructure
Driving the Northern Powerhouse vision is the commitment to greater investment in key infrastructure projects. These are intended to improve links with the rest of the UK and global economy, either directly via improved transport links, or digitally, for example through super-fast broadband. The rollout of High-Speed 2 (HS2) between London and the North-West has been credited as contributing to HSBC’s move to Birmingham, and Manchester is looking to establish itself as the nation’s digital heartland. The premise is that these investments will both support business and also enable more talent to remain in, or move to, the North, reducing the “talent drain” into London. However, with many plans still under development, some firms may still be waiting to understand whether the services can effectively support their business operations.
Accompanying the creation of the Northern Powerhouse is devolution of selected powers to regional administrations, headed up by an elected mayor. These powers include control over spending on transport, housing, planning and policing, but do not extend to lowering corporate taxation and rates. Mayors will have power to raise (but not lower) business rates to make investments in infrastructure. This may be double-edged, however, with firms with an eye on short-term savings potentially dis-incentivised from locating in the regions.
So, will these key enablers drive financial services firms to exit London in favour of the Northern Powerhouse?
The combination of investment and devolution bodes well for the establishment of the Northern Powerhouse as a genuine centre of growth, particularly in more innovative industries. As far as the financial services sector is concerned, London still offers a number of significant benefits including access to talent (at least in the short term), infrastructure and connections to the global economy which the Northern Powerhouse will never truly challenge. But while London will remain at the heart of the sector, we wait with interest to see what the Northern Powerhouse can offer.
Mr Osborne, the jury is still out on this one…