The capital takes the strain in times of austerity

For all its reliance on financial services, London’s economy has shown remarkable strength in the years following the banking crisis. It has put more distance between itself and the other regions of the UK in terms of output, and extended its lead against the national average in household income, employment rates and productivity. With a broad-based economy and highly skilled labour force, the capital has cemented its status as the engine of the UK economy.

This has not left it unaffected by cuts in government spending designed to reduce a daunting budget deficit. But the impact has revealed itself in ways that reinforce the contrasts between the capital’s economy and that of the regions. This has led to calls for London to be treated differently by national policy makers – not least from its Conservative mayor, Boris Johnson.

If deficit reduction has exacerbated the tensions in London politics, friction has been greatest between boroughs and the government. Cuts to local authority budgets have left councillors facing invidious choices on funding, including that for activities they are statutorily obliged to provide, such as rubbish collection and adult social care.

London Councils, the umbrella organisation for the city’s 33 local authorities, says a funding gap of £907m will open by 2018 because of the rising cost of adult care. One-third of councils’ funds are spent on adult social care, and this is expected to grow as the population ages during the next decade. The organisation has also warned that the capital’s local authorities would face further costs of £877m by 2019-20 to accommodate government reforms to the care system. Under the plans, any care costs above a lifetime limit of £72,000 are expected to be carried by councils.

But the costs of residential care are highest in the capital. This means the proportion of people paying for residential care in London could reach 27 per cent, compared with 3 per cent in areas of the UK where it is far cheaper, the report said.

Ravi Govindia, London Councils’ executive member for adult services, says: “While we support the [Care] Bill, we are concerned that councils will have to pick up the tab if it goes ahead as planned without first taking into account London’s circumstances – particularly the high cost of residential care.”

The application of UK-wide policies to London’s distinctive economy creates other difficulties. The government is introducing changes to the benefits system, capping the total amount that a household can receive at £500 a week. Londoners pay about £1,400 a month for a two-bed property, against a national average of £665, so more capital dwellers will be caught by the cap.

Concerns have surfaced that the policy is pushing low-income groups out of central London to the outer boroughs, which in turn puts pressure on their provision of essential services. Islington, Camden, Kensington & Chelsea and Westminster have seen the number of housing benefit claimants decline since April 2011. But Barnet’s claimant levels went up by 45 per cent, and Newham and Haringey showed rises of 41 per cent and 21 per cent.

Private rented property has become more expensive over the period, and research by the Centre for London think-tank shows that rental costs as a proportion of household income have increased from 21 per cent in 2001-02 to 27 per cent in 2010-11. The proportion of people renting privately in the capital has risen to 25 per cent, up from 18 per cent two years ago.

The government says that London’s local authorities received an extra £50m to help those affected by the housing benefit cap. But the councils would like to see the capital treated as a special case, with a higher cap to offset its greater housing costs.

While councils have largely directed their criticism of public spending cuts at central government rather than City Hall, Mr Johnson has not escaped the effects of tighter funding.

Local authorities have attacked the mayor over his plan to cut £28.8m from the fire service budget over two years, with the closure of 10 fire stations and the loss of 14 fire engines and 552 firefighting jobs in the capital.

Eight Labour-led councils have written to Eric Pickles, communities secretary, to try to overturn it, and said they would seek a judicial review if the decision went ahead. It has even prompted objections from Tory-run councils, such as Westminster and Kensington & Chelsea, where fire stations are to close.

Londoners are not behind Mr Johnson: a YouGov poll in July showed 61 per cent against the cuts, and 69 per cent believed they would threaten public safety.

On infrastructure and spending – City Hall’s biggest budgetary responsibility – the mayor has fared better. In its comprehensive spending review in June, the government cut Transport for London’s grant by 12.5 per cent, to £1.6bn in 2015-16. But fears of threats to Tube upgrades, road safety improvements and an ambitious cycle scheme proved false after ministers pledged to hold capital investment at £1bn a year in 2015-21.

Tony Travers, a local government expert at the London School of Economics, says: “Transport has not been subject to anything like the pressures imposed on local government.”

These questions will be brought to the fore in two big tests of public opinion for London politics over the next two years: borough elections in 2014 and the general election in 2015.

Mr Travers says the Labour party was likely to make “small gains” in the borough elections, but questioned the view that London was a city that habitually votes Labour in national polls. The party has seen big increases in its London vote share since 1997. But the “London Labour lead” is relatively new in historic terms, and by no means guaranteed. “The big challenge for Labour in 2015 is to hold on to those people,” he says.

Tensions over spending – and arguments over the capital as a “special case” – are unlikely to recede soon from London’s political debate.