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Business investment plays a crucial role in economic growth and prosperity of any nation. It signifies confidence in the economy, drives innovation, creates jobs, and ultimately contributes to long-term productivity gains. However, recent data has shown that the UK lags behind its G7 counterparts in terms of business investment. In this article, we delve into the factors contributing to this phenomenon and explore potential implications for the UK economy.
According to recent reports, the UK's business investment levels are notably lower compared to other G7 nations. This concerning trend has persisted despite the country's efforts to foster an environment conducive to investment. In 2023, the UK's business investment stood at around 15.5% of GDP, below the G7 average of approximately 20-25%. Several factors contribute to the comparatively lower business investment in the UK. Firstly, political uncertainty, particularly surrounding Brexit negotiations and subsequent trade agreements, has been a significant deterrent for businesses considering investment in the UK. There is further uncertainty regarding regulations and tariffs. Access to markets has led many companies to adopt a wait-and-see approach, consequently delaying or scaling back investment plans. While the UK government has aimed to streamline regulations and create a business-friendly environment, complexities persist. In sectors such as finance, energy, and construction, regulatory burdens exist, and coupled with concerns over future policy changes, this can discourage investment, especially from smaller businesses with insufficient resources to navigate regulatory requirements. Thirdly, the UK has long grappled with productivity issues- it lags behind its G7 counterparts in terms of output per hour worked (the UK averages 76.7 points compared to G7’s 80.9, or the US’ 91.5 per the OECD). Low productivity levels can deter investment as businesses may perceive it as a sign of inefficiency, indicating reduced potential for higher returns on investment. Low productivity levels can be a reflection of skill deficiencies or outdated technology, which can raise operational costs and reduce a business’s competitiveness. Lastly, businesses now have several options when considering investment opportunities (due to the interconnectedness of the world). The UK remains an attractive destination for investment due to its skilled workforce, stable legal system, and access to international markets, but competition from emerging economies and other developed nations has intensified. Many countries offer much more favourable tax rates and incentives (UK general corporate tax rate is 25%), as well as lower operational costs that may discourage investment into the UK.
Lower levels of business investment in the UK have had several consequences for the economy. A lack of investment can hinder productivity improvements, innovation, and the adoption of new technologies, which ultimately leads to lower economic growth (0.1% in 2023). Persistent underinvestment erodes the UK’s competitiveness relative to other countries around the world, including the G7. Businesses in countries with higher levels of investment gain a competitive edge through innovation, efficiency gains and wage growth. On the contrary, the UK can, and has, been impacted with lower job creation, reflected in high levels of structural unemployment, and wage growth (the UK had the weakest wage growth of any G7 country since the financial crisis in 2008, per the OECD). Low business investment may also exacerbate regional inequalities. Productivity is around £7 lower per hour worked in the North of the UK, and hourly pay is also £1.60 lower than the South. The UK government has already identified the ‘North-South Divide' and has approved a £4.8 billion ‘Levelling Up Fund,’ which includes strategies aimed at attracting more investment into the North. Provided that the UK doesn’t improve its business investment levels, the divide between the two regions can be amplified.
To address the challenge of lower business investment, efforts are required from both the public and private sectors. The UK government must provide clarity and stability in policy frameworks to alleviate political uncertainty for businesses. Clear and consistent policies regarding trade, regulations, taxation, and infrastructure development can instil confidence and encourage investment from companies that are postponing or scaling back. Furthermore, introducing targeted incentives such as tax breaks, grants, and subsidies can incentivise businesses to invest in key areas aligned with national priorities, such as research and development, green technologies, and infrastructure projects. The government has recently announced £4.5 billion in funding for the manufacturing sector in the UK, which aims to provide long-term certainty for all businesses. Investing in education and skills development is essential to enhance the UK's workforce productivity and competitiveness. Providing training programs, apprenticeships, and initiatives to up-skill workers can ensure businesses have access to the talent pool they need to drive growth, removing doubts about reduced return on investments (the UK government already spends around £54 billion to support state-provided education). Investment in infrastructure, including transportation, digital connectivity, and renewable energy, is vital for generating business investment – there is a plan to invest £164 billion into infrastructure projects between 2023-2025.
Lower levels of business investment in the UK compared to its G7 counterparts pose significant challenges for the economy, impacting growth, competitiveness, and long-term sustainability. Addressing the underlying factors contributing to this trend requires coordinated efforts from policymakers, businesses, and other stakeholders. The UK government has already implemented multiple policies aimed at combating underperformance, but more action is needed to reduce uncertainty around investment in the UK, as well as making the country an overall more attractive place for business investment by, for example, cutting corporate tax rates.
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