Britain misses out on £143 billion in lost economic output a year because of the unwillingness of investors to spend on critical areas of the modern economy such as software, research and patents.
A study, co-authored by Jonathan Haskel, the Bank of England rate-setter, and Stian Westlake, of the Royal Statistical Society, found that the UK’s inability to invest equivalent amounts to those of the United States in the “intangible economy” from 2007 to 2019 had resulted in the loss of £2,144 per household, or 0.5 percentage points of GDP a year.
The research shines a light on chronically weak capital investment in Britain, where business spending is stuck at more than a third lower than pre-Brexit trends, according to the Office for National Statistics.
The findings, which will be published tomorrow, focus on the investment gap for intangible assets that generate long-term value for companies, such as licences, intellectual property and software, rather than traditional physical assets, such as machinery and equipment.
This could be attributed to investors’ “aversion” to capital spending in these areas, the authors said. “The UK is missing out on economic growth due to a collective failure to invest in intangible capital over the past 15 years. This loss has also hit many UK retail investors and pensioners. Funds that favoured low-intangible stocks returned 2.7 times less to customers than the smaller number of funds in intangible capital-intensive businesses.”
British underinvestment contrasts with America, home to the world’s largest technology groups, where capital investment has averaged 4.4 per cent per year since 2000. The UK’s intangible spending fell from a high of 3.2 per cent in 2007 to 2.3 per cent over the last 15 years, the report’s authors said.
“Tech companies in the US have seen enormous global growth . . . As society becomes richer, most business investment goes into things you can’t touch, like research and organisational development, branding, and software.
“Slower economic growth doesn’t just lead to consumers having less money, it contributes to a lower likelihood of pay rises, reduced cash in pension pots, diminished investment for public services and less scope to tackle long-term challenges, such as climate change and investing in infrastructure.”
Business investment fell by 0.5 per cent at the start of the year despite the government’s introduction of a super-deduction tax break to stimulate capital spending and boost productivity.
Higher interest rates, rising energy costs and uncertainty caused by the war in Ukraine risk dampening investment further. The authors recommend policy incentives to plug the investment gap. “The government needs to enable greater access to risk capital . . . ensuring . . . equity investment in all kinds of companies, including startups, through financial regulation and the taxation system,” they said.
•The government should encourage investment in clean technologies, such as tidal power and carbon capture, to boost lagging productivity in some of the worst-performing regions, a study says (Mehreen Khan writes). The London School of Economics and the Resolution Foundation say the government’s commitment to hit net zero by 2050 could boost areas such as Tees Valley, Durham, Derbyshire and Nottinghamshire, which have the highest share of green patents. Hitting the emissions target will require green investment of upwards of £50 billion by 2030, up from the present £13.5 billion, according to the Climate Change Committee.
