Low investment blocking UK growth, says think tank

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Investment levels in the UK remain among the worst of the world’s richest nations and unless they improve it is hard to see how the economy will grow, a think tank has said.

The Institute for Public Policy Research (IPPR) said total investment in the UK is “significantly” behind the nearest competitor in the G7 group of wealthy nations.

However, the centre-left think tank said both the Conservatives and Labour plan to reduce government investment over the next parliamentary term.

It calls for government to commit to an industrial strategy and end the chopping and changing of policy in order to boost investment by private companies.

After years of sluggish growth, the question of how to improve productivity in the UK economy is one of the key battlegrounds in the run-up to the general election.

“If the economy is an engine, then investment is its fuel,” said Dr George Dibb, associate director for economic policy at the IPPR.

Spending by businesses on things like new factories, equipment and new technologies can help to boost productivity and economic output, which in turn can help to lift wages and living standards.

Governments also invest when they spend money on things such as new schools, the health service, and on new roads and railways.

However, the IPPR says that data from the Organisation of Economic Co-ordination and Development (OECD) shows that when measuring total investment – which covers both businesses and government – the UK has had the lowest level of investment in the G7 for 24 of the past 30 years.

It adds that the UK currently is not just bottom of the G7 investment table (with investment at 11.3% of national income), but “significantly” behind the next worst performer (the US with 21.2%).

“The UK’s dire productivity performance since the great financial crisis of 2008 is, to a large extent, the single biggest driver of our dire living standards,” the IPPR says.

“Without resources flowing into new investment, it’s hard to see how UK economic performance can improve,” Dr Dibb added.

The IPPR sets out several measures to try to lift investment across the economy. These include:

  • Committing to an industrial strategy. The government must implement a comprehensive strategy to remove barriers to growth, improve certainty for business and increase coordination across the economy
  • Ending policy “copy-and-change”. The IPPR says that since 2010 there have been 11 industrial strategies or plans for growth. “This chop-and-change of policy and objectives is confusing for businesses and undermines UK economic credibility and stability”
  • Review fiscal rules. The main restraint on government investment has been the self-imposed spending rules, it says

Business groups have pointed to a number of reasons as to why investment in the UK may have lagged over the long-term.

They have suggested that Brexit, political uncertainty in the country and stringent planning regulations could all play a part.

Dr Dibb pointed out that while the causes are not fully understood, some in particular “seem important”.

He said that public sector investment in all kinds of infrastructure projects had been low for many years, which in turn can lead to private sector investment.

Another reason could be an “over reliance” on the services sector in the UK economy, which includes everything from hospitality to hairdressing, and tends to invest at a lower rate, he said.

He suggested that to raise investment levels again, “we will need to revive our manufacturing industry, encouraging UK businesses to make more of the products needed to reach net zero”.

Previous analysis by the Institute for Fiscal Studies suggested that government spending plans would include a large cut to public investment over the rest of the decade.

But in the run-up to the general election, leading political parties have emphasised promises to grow the economy in a bid to win over voters.

Shadow Chancellor Rachel Reeves hosted a “British Infrastructure Council” meeting on Monday, with some of the biggest British and international investors.

Labour’s plans also include a £7.3bn National Wealth Fund to invest in steel, ports and electric cars.

The Conservatives point to the fact they have already given tax breaks to companies that invest and are ploughing £36bn from the altered HS2 high speed rail line into local road, rail and buses.

They also want to cut back on legacy European Union regulations that they say slow down infrastructure development.

The Liberal Democrats have promised a new industrial strategy to give businesses more “predictability” and confidence.

Reform has said it would abolish business rates payable on non-domestic properties altogether, paid for by a tax on big online retailers.

It has also proposed scrapping net zero pledges to encourage more oil and gas investment in the UK.

The Scottish National Party, meanwhile, is due to publish its manifesto on Wednesday, but a spokesperson said that it would offer “a route back to prosperity in the European Union.”



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