Investment Levels in the UK At Rock Bottom

This comprehensive article delves into the chronic underinvestment in the UK, highlighting its impact on productivity and economic growth. It examines the causes behind low investment levels, the sectors most affected, and policy recommendations to address these challenges.

Investment Levels in the UK At Rock Bottom

The UK's investment levels remain alarmingly low compared to other advanced economies, particularly within the G7 and OECD. This chronic underinvestment is a significant barrier to productivity growth and economic prosperity.

According to a recent report by the Institute for Public Policy Research (IPPR), the UK's total investment as a percentage of GDP has been the lowest among G7 countries for 24 of the past 30 years. In 2022, the UK's investment level stood at 18.3% of GDP, significantly lower than the next lowest G7 country, the US, at 21.2%.

Impact on Productivity and Economic Growth

The IPPR report highlights that the UK's poor productivity performance since the 2008 financial crisis is largely due to these persistently low investment levels. Productivity growth has been stagnant, which has had a cascading effect on economic growth and living standards.

If the UK had maintained the G7 median level of investment since 1990, it would have seen an additional £1.9 trillion in investment, significantly boosting productivity, advancing the green transition, and improving economic output.

This underinvestment affects various sectors, with infrastructure, technology, and manufacturing particularly hard-hit. Infrastructure projects such as transport networks, energy systems, and digital communications facilitate economic activity and growth. However, the lack of sustained investment has resulted in deteriorating infrastructure that struggles to support modern economic demands.

Public and Private Investment Deficits

Both public and private sectors in the UK are underinvesting. Public investment has never been above the OECD average and remains below average for both the G7 and OECD countries. This lack of investment is compounded by volatility and short-termism in government spending, which undermines long-term economic planning.

For example, government investments in healthcare, education, and transportation have seen frequent policy shifts and budget cuts, destabilising long-term projects and deterring private sector participation. Additionally, private sector investment is critically low.

The UK ranks 28th out of 31 OECD countries for business investment, with only Greece, Luxembourg, and Poland performing worse. Business investment as a share of GDP dropped from around 12% in the late 1980s to 9% by the late 2010s. This decline in investment is a significant contributor to the UK's sluggish productivity and economic growth.

Causes of Low Investment

Several factors contribute to the UK's low investment levels:

  • Short-termism: Both businesses and governments prioritize short-term gains over long-term investments. Quarterly financial reporting requirements, political election cycles, and a focus on immediate returns drive this mindset.
  • Sectoral Composition: The UK economy relies on low-investment services sectors like finance and real estate over high-investment manufacturing and technology sectors. This shift has reduced the overall level of capital investment in productive assets.
  • Policy Inconsistency: Frequent changes in industrial policy create uncertainty, discouraging long-term investment. Since 2010, multiple industrial strategies have been developed, each with different priorities and focus areas.
  • Financial Constraints: Businesses, particularly high-growth firms, have limited access to long-term "patient" capital. This issue is exacerbated by banks' conservative lending practices and the risk-averse nature of UK investors.

Policy Recommendations

To address these challenges, the IPPR report outlines several policy recommendations:

Commit to a Long-Term Industrial Strategy

The government should adopt a comprehensive and consistent industrial strategy to provide certainty for businesses and encourage investment. This strategy should focus on removing barriers to growth, improving policy stability, and increasing coordination across the economy.

Ending the frequent "chopping and changing" of industrial policies is crucial for building business confidence. Strategic sectors like manufacturing, technology, and net-zero industries should be targeted to revive investment in productive capital assets.

Increase Public Investment

A substantial boost in public investment in infrastructure, such as transport, energy, housing, and digital networks, is essential. Public investment can crowd private investment and form a foundation for equitable growth.

The current fiscal rules constraining public investment spending should be reviewed to allow for higher public investment while ensuring fiscal sustainability. Investment in green infrastructure projects can also support the transition to a low-carbon economy, creating jobs and fostering innovation.

Enhance Access to Finance

Expand programs by the British Business Bank to improve access to long-term capital for high-growth firms. Enhancing and permanentizing tax incentives, such as full expensing of capital investments, is also recommended.

Introducing investment allowances and financing support for strategic areas like net zero can further incentivize private investment. Additionally, creating public-private investment funds can leverage private capital for public projects, reducing the burden on government finances.

Strengthen Institutional Frameworks

Creating a central unit to provide expertise on blended finance models and establishing a public investment watchdog to monitor investment quality and transparency can improve the institutional framework.

Mandating investment consultants to uphold fiduciary standards in pension fund investments can also help. These reforms can ensure that investment decisions are made in the public interest and that funds are allocated efficiently.

Address Regional Inequalities

Addressing regional disparities in investment is crucial, particularly in the North of England, which has some of the lowest investment levels among OECD countries.

Regional investment strategies tailored to local needs can help bridge these gaps. Establishing regional investment banks or development agencies can support local businesses and infrastructure projects, fostering economic growth outside London and the South East.

Political Context and Future Projections

Both major political parties, the Conservatives and Labour, plan to cut public investment over the next parliamentary term, which the IPPR argues will put future growth at risk. Although Labour has pledged to invest an additional £23.7 billion per annum as part of its Green Prosperity Plan, this may not be sufficient to reverse the trend of declining public investment.

Moreover, the political landscape is characterized by uncertainty and short-termism, with frequent changes in policy direction undermining long-term planning. To address these issues, the IPPR calls for a cross-party consensus on the importance of investment, ensuring that strategic investments are protected from political cycles.


The IPPR emphasizes that without significant public and private investment increases, the UK will continue to struggle with low productivity and economic growth. Implementing the recommended policies can create a stable environment that encourages long-term investment, ultimately reviving the UK's economic prospects.

The path to sustained economic growth and improved living standards lies in a comprehensive and consistent approach to boosting investment across all sectors of the economy.

The full report can be accessed for more detailed analysis and data on the IPPR website.