By Zara Taylor
What will the lasting legacy of fourteen years of Conservative power be? Some may look back to austerity and the effects of the Cameron government, others might point to the train of discredited prime ministers in recent years, or to the dishonesty of Boris Johnson through the pandemic. Overall, however, one issue that has emerged over the past two decades but received less attention is the UK’s lack of investment, which may flatten future economic growth rates if left unaddressed. The UK is now in a key transition period under its new Labour government, which promises to depart from the damaging investment policies of the Torys but also leaves more to do.
To end their tenure in government, over the summer, Britain held the honour of possessing the lowest levels of investment in the G7 for the third consecutive year. Compared to our European neighbours, UK investment trails behind both France and Germany. As a share of Gross Domestic Product (GDP), investment in Britain has persisted at around 17% over the last 20 years. For other G7 nations, it has ranged from 20-25%, consistently remaining above UK levels. Both public and private sector investment in the UK is falling, with UK public investment as a proportion of GDP in 2019 being a third of what it was in 1949. The ramifications of this are evident. When investment levels are low businesses face significant challenges to grow or even maintain the same levels of production, given their lack of capital.
One consequence of underinvestment can be exemplified through the decline of Research and Development (R&D) expenditure. R&D expenditure can be characterised as a broad process that may take the form of many different initiatives yet the common goal between them is to improve the production process. Unlike other business activities, R&D is future-oriented – it may not result in an increase in profitability immediately and is costly. Between 2021-2022, R&D expenditure decreased by 0.4% and as a proportion of GDP, it has been falling for quite some time, amounting to below 2% of GDP. In comparison, Germany spends approximately 2.8% of its GDP. Investment into R&D is critical as without the innovation it creates, long run competitiveness and productivity are threatened. In an increasingly competitive global market, the need for R&D is even more heightened.
Some have also pointed to productivity growth, which has remained a difficult issue in the UK, as another area in which underinvestment has prevented growth. Productivity is a depiction of how efficiently our inputs, for example the labour of a worker, produce goods and services (our outputs). Productivity growth is important because it means that more can be produced per unit of worker, boosting output and having a number of beneficial impacts on the economy. According to the Office for National Statistics (ONS), productivity would be 16% greater if it had followed its trending direction pre-2007 crisis. In other words, standard of living, real wages, and all the other benefits that come from increased productivity could have been significantly heightened without this drop in productivity growth. Both of these issues show that the UK’s chronic underinvestment problem has hindered the country’s growth for far too long.
Although a combination of complex factors have contributed to underinvestment, it seems a key issue at the root of this problem, is a lack of foresight or ‘short-termism’ in policy making. Flashy policies focused on short term benefits (and on re-election bids) have characterised the past several governments and have resulted in a myopic lens on policy decisions. As one leading think tank observed, the back and forth on issues such as adult social care reform, NHS integrated care systems and education have been “erratic and unpredictable” showing how the government’s priorities have been neither focused nor consistent. One policy which underdelivered in critical aspects was the Tory’s Help to Buy (HtB) scheme which research has shown failed to generate substantial levels of housing production in the areas where it was needed most, one of its key aims. Not only did it fail in this regard, but analysts have also found that it drove housing prices upwards, contributing to the unaffordable house prices consumers face today. The severity of this issue should not be underestimated – in twenty years a household with the median income has gone from being able to purchase “an average-priced house” to just the “cheapest 10% of properties,” a staggering decline. Some have also alluded to how the policy was used line the pockets of homebuilders, rather than to reduce prices for homebuyers, suggesting that the policy was also an inefficient use of government expenditure. As the preeminent house-building strategy for more than a decade, it is relevant to this discussion as an example of poor and short-sighted policy construction; a theme which has been too prevalent in Britain. When it comes to investment, a stale approach by the government can diminish private sector investment. As the Institute for Public Policy Research (IPPR) reports, literature has shown that a strong foundation of public investment can ‘crowd in’ investment from the private sector, meaning that the actions and policy decisions of the government have both a direct and indirect effect on public and private investment respectively.
Taking into consideration both promises during the election campaign and the announcements of the Autumn budget, it seems that Starmer’s government is very committed to furthering long-term investment goals. Not only do they look to move away from the last fourteen years, but their plans promise even to see the greatest aggregate levels of public investment since the 1970s and increase GDP by a purported £14 billion. Additionally, with the announcement of £20.4 billion in investment for UK R&D, the Starmer government is clearly aiming at increasing those productivity numbers. Although this signifies a step in the right direction, inefficient public investment may also act as drag on productivity as resources get diverted to projects that are bad value for money, as reports from the Institute for Government have suggested. Despite attempts by the government to provide reassurance, through means such as their ten-year infrastructure plan, there is clearly much to consider and achieve by the Starmer government.
The views expressed in this article are the author’s own, and may not reflect the opinions of The St Andrews Economist.
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