Britain has the weakest investment performance in the G7. The challenge is not new. But today’s Times headlines on new figures that show in the last quarter the situation has not improved, with business groups warning things may get worse as costs rise in April. So what does the Government need to do to fix this? How do ministers re-energise the nation’s ‘animal spirits’?

A year’s work by the Business and Trade Committee points to clear lessons. The truth is public investment is now rising, fiscal rules have been reset, and macroeconomic calm has largely returned. Credibility with bond markets has been restored. But the test now is not credibility – but capability. What matters in the year ahead is no longer reassurance, but results: can the British state turn spending plans into projects, projects into productivity, and investment into higher living standards?

To defeat this, the Government has to rebuild a wealth-owning democracy. Key to this is remaking the economic institutions which help our economy work and share the prosperity we create. As Nobel prize winner, Daron Acemoglu and his co-authors James Robinson argue, in the long run, it’s institutions that matter. If we want to build a civic capitalism which both foster growth and diffuse power, opportunity, and wealth, then we will need to reform new and reformed economic institutions.

A year’s work chairing the Business & Trade Committee in this parliament has given me a clear sense of where the government has made progress – and where it must invest its energies in the year ahead.

From credibility to capability

For a generation, Britain has worked hard to rebuild economic credibility.

We restored fiscal discipline after successive crises. We respected independent institutions. We sought stability after volatility. And that has helped keep both inflation and interest rates down, with six successive cuts since 2024.

But the question for the decade ahead is no longer whether Britain can be trusted to behave responsibly. It is whether the British state can mobilise the capability to deliver growth, productivity and rising living standards and defeat a well diagnosed malady which our Committee’s Inquiries – on industrial strategy, small business, financing the real economy, and economic security – have all confirmed.

Britain does not lack ideas, ambition or capital. We lack strong, coherent institutions that turn ambition into prosperity – and prosperity that is fairly shared.

The long shadow of weak growth

Britain’s poor growth record is rooted in productivity growth that has lagged our peers – especially the US – for over a decade. Why? Because business investment has been persistently weak. Real wages have stagnated. Evidence to my Committee – reinforced by international assessments from bodies such as the International Monetary Fund — points to familiar causes:

• chronic under-investment

• weak diffusion of innovation

• fragmented skills provision

• regulatory incoherence

• and poor coordination between economic institutions

For years the UK has suffered from an economic muddle when we needed a new economic model. The new government has set about fixing this, beginning with a shift in economic philosophy: from the demand-side incentives which have dominated the last 15 years – monetary stimulus, temporary fiscal support, tax cuts to encourage investment – toward a modern supply-side strategy focused on rebuilding productive capacity.

That means:

• investment
• infrastructure
• innovation
• skills
• and the strategies and institutions to connect them

This is not a return to laissez-faire. It is an acknowledgement that markets do not function well when the systems beneath them are broken. Supply-side reform today is not about deregulation. It is about capacity, coordination and certainty. And as the new institutional economics writers explain, progress relies on us fixing or reforming our economic institutions.

Rebuilding the investment engine – and restoring certainty

The single most important task to raise the investment rate. Under-investment is the original sin of the British economy. We have the lowest investment rate in the G7 and in particular, the collapse of intangible investment is deeply damaging to our productivity growth. Four reforms are imperative…

• Raise public investment – and delivering fiscal predictability. The Chancellor’s first Budgets delivered substantially higher levels of public investment – public sector net investment (PSNI) rises from £74bn in 2024-25 to £91.7bn by 2029-30 – but the uncertainty about tax rises over the last year has chilled business investment. Wisely, the Chancellor has now shifted to a once-a-year assessment of the fiscal rules and substantially increased the budget headroom.
• Transform our pension funds’ domestic investment. The government’s pensions bill is somewhat unheralded. Today, far too little of the UK’s £3 trillion of pension savings is invested domestically. In fact, that investment has collapsed over the last 20 years. Consolidating pension funds (and reforming fiduciary duty, as my amendment to the Pensions Bill proposed) is a big step forward. Together with the Mansion House/ Sterling 20 accords, these changes will make a difference. But not quickly. Yet in due course scale will improve the availability of patient capital, step-up private business investment (not that the OBR has yet scored this), and rejuvenate the London Stock Exchange.
• Dramatically expand the British Business Bank and the National Wealth Fund. Here too the Government has made some important changes – expanding capacity significantly – but the truth is we are left with UK policy banks that are minnows compared to the firepower available to our competitors. Nor is the National Wealth Fund investing at the pace that is needed. And while BBB has a ‘regional presence’, we still lack anything resembling the German Landesbanken.
• Fix Planning. The fourth piece of the puzzle is planning reform. When our Committee first set off round the country in late 2024 as a Committee, this loomed large in the conversations we had. Now the Planning & Infrastructure Bill is now an Act, uncertainty should diminish. But I suspect the nation’s hollowed out local planning departments are now going to be growing issue.

Amongst this list, two institutional failures now matter more than all others: (1) the weakness of Britain’s domestic capital market, and (2) the inadequate size of policy banks which lack the scale and mandate to invest for the long term.

Policy banks compared: the Brits Are Minnows

*The financial capacity of the British Business Bank has been boosted to some £25bn – but our policy banks remain small compared to others.

But these are not the only failures. Persistent weaknesses in the diffusion of research and development, the alignment of skills and labour markets, the strategic use of public procurement, the broken energy markets, the depth of devolution, the coherence of regulation, our trading relationship with the European Union and other partners, and the effectiveness of export support services continue to hold back growth. Each requires deliberate reform.

(3). R&D: scale achieved, diffusion unresolved

Public investment in research and development has risen substantially. Over the current Spending Review period, more than £55 billion will be committed, with year-on-year increases bringing the United Kingdom closer to international norms as a share of GDP.

This matters. Frontier science remains a core national strength. But the Committee’s work exposes a persistent institutional failure: weak diffusion. Despite billions spent on R&D tax credits, too much innovation remains concentrated in a narrow set of firms and regions, while links to small and medium-sized enterprises, skills systems, procurement and finance remain underdeveloped. Excellence at the frontier does not, by itself, translate into economy-wide productivity.

There are examples of what works. In cities such as Newcastle, Sheffield, Warwick and Edinburgh, I have admired the stronger links between universities, local firms and skills systems which are closing the gap between research and application. But these remain exceptions rather than the rule.

This is not a funding problem. It is an institutional one. Unlike Germany, which built a national applied research system through the Fraunhofer institutes to serve its Mittelstand, the United Kingdom still lacks a coherent national architecture for diffusion. The Fraunhofer boast they are the Mittelstand’s R&D department. Who would claim that honour in Britain? We have strong institutions in parts; what we do not yet have is a system.

(4). Labour, skills and the productivity imperative

Policy has deliberately raised returns to labour through higher minimum wages and stronger employment rights. This has improved fairness. After a prolonged period of decline, labour’s share of national income has, at least over the past year, stabilised and begun to rise. The creation of the Fair Work Agency will further strengthen enforcement.

But combined with higher National Insurance, labour costs have risen. Productivity growth is therefore no longer optional; it is essential.

The Labour Share of National Income (%) – A Rise After the Fall

The Committee’s evidence is unambiguous. The skills system remains fragmented, poorly aligned with employer demand, and insufficiently focused on growth sectors. If firms are to invest in people, the system must offer predictable returns on that investment.

Skills reform is now an economic necessity. While recent Budget measures move in the right direction, the current settlement remains overly centralised. A far greater share of skills funding should be devolved to mayoral areas, where labour markets are better understood and training can be aligned to local growth.

(5). Procurement and (6) Energy

Across inquiries, the Committee reaches the same conclusion. Public procurement is underused as an economic lever while Energy markets deliver high and volatile prices that deter investment.

Procurement is quite obviously one of the single most important levers ministers have to helping drive economic growth. It is around £1 in £6 of the British economy. It is a huge chunk of demand. But most of the evidence we’ve taken about the lack of grip in using procurement to help small firms or to foster sovereign capabilities we need, has frankly shocked us.

Ministers need to quickly now define the sovereign capabilities we need as a country – as was promised in the Defence Industrial Strategy – and set ambitious targets of, say, 30% of government procurement going to SME’s. If we couple this with hard spending plans for scaling up defence spending and join the new allied Defence, Security and Resilience Bank then we will at last start using tax payers money more effectively to accelerate domestic growth.

This must be accompanied by a hard-headed reassessment of the targets and instruments used to decarbonise the economy. There is growing evidence that the current approach risks imposing unnecessary costs on industry without delivering commensurate gains.

Warnings from economists such as Dieter Helm should be taken seriously. But the central task is not debate; it is delivery. Government must set out a credible plan to bring industrial energy costs down rapidly, while reducing dependence on overseas capital in critical energy infrastructure. We cannot carry on with industrial energy costs at such a premium to our competitors.

(7). Whitehall, regulators and red tape

One of the clearest messages from business is also the most frequently misunderstood. The problem is not regulation itself; it is regulatory incoherence.

Firms face overlapping regulators, conflicting guidance and no effective mechanism for resolving collisions between rules. The consequence is uncertainty — and uncertainty functions as a tax on investment.

Effective economic statecraft therefore requires a centre capable of troubleshooting, resolving blockages and ensuring that regulation supports growth rather than undermines it. In principle, this is the role the new Industrial Strategy Council should perform. In practice, its remit, capacity and authority remain ill-defined.

That is a risk. Without sufficient institutional weight, the Council will be unable to arbitrate between regulators or impose coherence across the system.

More broadly, Whitehall lacks a standing mechanism — a clearing house — to resolve regulatory conflicts as they arise. The Committee proposed an expanded Regulatory Innovation Office to perform this function. That recommendation was rejected. The absence of an alternative leaves a gap at the centre of government that continues to deter investment.

(8). Devolution

Where we can agree is that devolution is a significant part of the answer. When regions like Greater Manchester are now boasting rates of growth well ahead of the UK average, the case makes itself. The Government’s devolution bill is now at its Lord’s Committee Stage. Once through it will standardise the structures of English devolution. But if this is to deliver progress, the task will be not to admire the new mayoralties we have created, but to use them by endowing them with the power and resources currently locked up and balkanised across Whitehall departments which persist in the age old struggle of defending their own turn and which struggle therefore to coordinate at the speed with which business decisions are made.

(9). The EU and trade partners – and (10) our export support services

The United Kingdom’s recent trade agreements have widened opportunity and diversified risk. But Committee evidence is clear: they do not compensate for the loss of frictionless access to the European Union. Not least because non-tariff barriers, services restrictions and regulatory divergence continue to impose a measurable drag on growth.

The pace of the EU reset is therefore economically inadequate. As the costs of delay have become clearer, so it has become obvious that the present approach is no longer sustainable. A renewed political initiative is required to accelerate regulatory alignment and reduce trade frictions.

A customs union would meet that test. If that is not pursued, an alternative framework – an Economic Security Union – should be developed to align regulation across sectors where the UK and EU share a direct interest in resilient supply chains, strategic autonomy and risk reduction.

The future trajectory of the UK–US relationship is less certain. The ambition behind the Technology Prosperity Deal is sound and reflects genuine UK strengths within the emerging global AI ecosystem. But uncertainty, sown tweet by tweet, remains as to how far that framework will translate into durable market access.

Alongside this, the Government has been successful in concluding a series of free-trade agreements. Accession to CPTPP, agreements with India and South Korea, and progress towards a deal with the Gulf states leave the UK among the most connected advanced economies in the Indo-Pacific. Combined with defence partnerships such as AUKUS and GCAP, this creates significant strategic trade space.

This will help us deepen partnerships in the fastest growing market on earth. In East Asia – notably with Japan and South Korea – the UK is well positioned to build complementary alliances especially in defence, AI – and across all that goes into the AI stack. We host Europe’s largest AI sector, rank among the world’s leaders in AI research, and benefit from a strong venture capital base supporting both frontier and applied firms. The UK has particular strengths in model design, regulated-sector AI, systems integration, and global leadership on safety, standards and assurance.

But theoretical access to markets alone is not enough. Export capability must now catch up with trade ambition. Cuts to the Department for Business and Trade have weakened the state’s capacity to support firms entering new markets. There is a strong case for rebuilding export services by working systematically with the nationwide network of Chambers of Commerce – an institution capable of providing the scale, reach and continuity that exporters require.

Together these reforms are important for the health and wealth of British business – none more so than for small business, especially small business on the High Street. For they sit at the sharp end of rising labour costs, expensive energy costs, lack of access to finance, the snares of red tape, skills shortages – along with an organised crime wave, and of course rising business rates.

Conclusion: From capability to purpose: a richer civic capitalism

There is much at stake in the UK getting this right and helping the world’s community of free-trading democracies provide there is a middle way between the paths chosen by China and America.

China has used the revolution in trade and technology to build formidable state capacity, but to reinforce party control. Growth has been real – but at some cost to individual freedoms and inequality. It is capability without liberty.

The American model by contrast has delivered extraordinary innovation, but with growing concentration of economic and political power. Technopolies dominate key markets. Campaign finance rules have allowed money to flood politics. Innovation thrives, but when even writers on the right like Patrick Deenen and Sohrab Ahmari are declaring that liberalism has failed and writing books that warn how ‘Private Power Crushed American Liberty’, you can see the problem. It is concentration that threatens liberty.

There is a third path – and this is the path that Britain, Europe and our free-trading allies should claim: a civic capitalism that

• harnesses technology without surrendering control to monopolies

• uses trade to spread opportunity rather than dependency

• deploys state capacity to enable individual freedom, not replace it

• insists markets remain open, competitive and accountable

This is not anti-market. It is pro-freedom. Indeed our frame for this new economic statecraft ought to be a clear account of how freedom can be enlarged in hard times – not freedom as slogan or abstraction, but freedom as something people recognise in their own lives: in their work, their choices, their agency and their control over the future.

As I’ve written elsewhere, the Left has lost its grip on this tradition sometime in the 1970s. Yet for the great progressive leaders of the mid-twentieth century, liberty was the lodestar – advanced, not by slashing back the state but through collective action.

For leaders like Attlee, Franklin Roosevelt or Lyndon Johnson,* freedom was never merely the absence of restraint; it was the presence of opportunity, power and security. Progressives understand that unfreedom is not merely created by the tyranny of dire states – it is created too by the tyranny of dire straits.

Economic statecraft should be the means by which technology and trade serve citizens rather than dominate them, delivering growth but diffusing gains. When the state works, markets work better. When markets work better, freedom expands. That is the vision that should guide Labour’s next steps.

*A few illustrative quotes serve to make the point: Clement Attlee placed Labour in the long constitutional struggle for freedom when he told the United States Congress that the party stood “in line with those who fought for Magna Carta, habeas corpus, and the Declaration of Independence.” Franklin Roosevelt gave the principle its economic expression, arguing that “true individual freedom cannot exist without economic security and independence.” Lyndon Johnson supplied its moral clarity: “It is not enough just to open the gates of opportunity. All our citizens must have the ability to walk through those gates.”