I’m travelling down to London on the Avanti West Coast Line, reading a paper that’s been sent me from Perthshire by my friends. The paper’s called “Why Britain’s stagnated” and it’s written by Ben Southwell, Samuel Hughes and Sam Bowman.
My friends call it a “most important work” and it’s not hard to see why. “What oft’s been thought but ne’er so well expressed”
…the most important reason Britain sees underinvestment today is that the state bans the very investments that would be most valuable. If allowed, private investors would be rushing to build housing, transport infrastructure and energy infrastructure.
France’s thousands of miles of motorways were built, and are operated by, private companies. Britain’s roads, canals, and railways were originally built this way. If done today, this would show up as enormous amounts of capital investment in the national accounts. But as we will show, building these things is prohibited in the vast majority of cases in which it would be economically rational. If we change that, Britain would see an enormous construction boom as suppressed demand for these things was met, and the resulting capital assets would continue contributing to the economy indefinitely.
Improving the UK’s investment rate would bring great benefits: about half the shortfall in productivity growth since the financial crisis can be attributed to underinvestment in (tangible) capital, while much of the rest is likely to be due to the shortfall in intangible investments like R&D.
Investment is what makes us richer over time. Any successful economic plan will have to unleash it in order to succeed. But even as the need for higher investment becomes more widely accepted by Britain’s economic commentators, they tend to propose more quangos and subsidies to tackle the problem, because they miss two crucial points.
First: private investment is far more significant than government investment. Public investment can be extremely important, especially in areas that have large spillovers to the broad economy, but which do not always generate a private return. But more than 80 percent of investment in the UK and most other developed countries is done by the private sector. Public investment was 18.0 percent of the UK total in 2021, 17.6 percent in 2020, and 15.5 percent in 2019.
And second: apart from taxes on investment like corporation tax and capital gains tax, higher investment in the UK is mainly frustrated by systems that effectively ban private companies from doing it (like building houses, infrastructure, and energy generation), rather than being down to short-sightedness by these businesses, or a lack of generosity by government.
Commentators have searched far and wide for explanations of Britain’s investment problem. But the explanation was before our eyes all along. Buildings, energy and transport infrastructure are the investments that Britain most needs, and they are largely banned. In banning them, we have generated higher costs for a range of other investments too. There is no need to posit esoteric cultural problems among British businesspeople, no need for a dozen more government strategies, deals and consultations. We don’t need to pay businesses to invest more. We just need to stop banning them from doing so.
This theme reappears a few pages later , after we have had it explained why the French are so much richer than we are
private investment is blocked from going where it could generate the highest returns, meaning we have lower investment than all our peer economies; in particular we do not allow investment in the infrastructure we need to allow people to access prosperous areas, the houses they need to live there, and the offices, labs, factories, and warehouses they need to work there, which, together with our high and rising energy costs, stop the companies in those cities reaching their full potential.
Another of my Scottish friends me a separate article , this time in Portfolio Institutional
Fundamentally, in the U.K., what needs to change is the view that security (equals) investing in gilts,” or U.K. government bonds, said Benoit Hudon, CEO and president at Mercer U.K., and himself Canadian-born. “Indeed, when looking at the average funded status of pension schemes around the world, the U.K. compares unfavorably, and this is in large part driven by investment strategies which have too often ignored the benefits, over time, of investing in growth assets,” such as equities and infrastructure, he said.
This [new Labour] government has “enthusiastically embraced a couple of steps up in the ambition of this sector of the economy doing more win-win things,” Roger Urwin, co-founder of the Thinking Ahead Institute, added. “This is not taking anything from the pension sector — quite the reverse (in) trying to encourage its efficiency and streamlining — but doing it to benefit the U.K. economy as well. From that point of view, it is quite neat, particularly at a time where net zero and sustainability” are big focuses, he added.
It’s not the leaving of Liverpool that grieves me, but the opportunity lost,
