Firms need pressure from above and below to tackle the UK’s chronically low business investment

Firms need more pressure from above via investors, and from below via their workers, to invest for the long term and address the UK’s record of chronically bad business investment that has reduced the size of the economy by four per cent – and wages by £1,300 a year – according to new research published today (Thursday) by the Resolution Foundation.

Beyond Boosterism – the 38^th report of The Economy 2030 Inquiry, funded by the Nuffield Foundation – notes that the UK has long been an international laggard on investment, featuring in the bottom ten per cent of OECD countries in almost every year this century.

Weak corporate investment – which accounts for two-thirds of total investment – lies at the heart of this poor performance. Firms in France, Germany and the US have invested 20 per cent more on average since 2005 – a gap that has cost the UK economy 4 per cent of GDP, and workers £1,300 in lost wages.

Britain’s recent political and economic instability has undoubtedly damaged business investment since 2016. However, politicians will need to go further than simply promising more stability than the previous prime minister or government, given that Britain was also a low investment nation during the relatively stable 2000s.

The authors argue that the right corporate tax regime is important, but repeated change risks causing more harm than good. The UK’s tax regime has changed in every single year since 2010 – undermining the stability that firms need. Instead, the government should make its temporary full expensing scheme permanent, commit to keeping the tax regime stable, and move on to wider reforms.

The authors add that access to finance or low returns on investment in the UK are widely cited as a barrier to investment. But in fact the data shows that most firms can access finance if they want to invest, and that returns have been higher in the UK than in comparable economies in recent years.

Instead the focus for policy makers should be on major reforms to increase the pressure on management to invest for the long term and the certainty that firms wanting to invest will be able to do so.

A key challenge to overcome is that too few British firms have large shareholders with a clear incentive and ability to hold management to account for having a long-term growth strategy. Ownership of UK-listed businesses has become more remote and dispersed, leaving the country with the lowest ownership concentration in the OECD.

The only plausible route to more concentrated ownership in Britain is the £2.2 trillion of pension funds. However, the bulk of Defined Benefit (DB) scheme assets are invested in bonds, while higher equity exposure for Defined Contribution (DC) schemes is overwhelmingly held indirectly and passively in funds tracking stock markets as a whole. The result is UK pension funds now allocate only two per cent of their assets to directly-held UK equities.

To address this, the reports calls for a series of reforms to create a smaller number of large funds that are able to act as direct block shareholders of UK firms.

This requires action on legacy DB funds by offering alternatives to insurance buyouts which will lock in the focus on holding bonds, including through expanding the remit of the £40 billion UK Pension Protection Fund (PPF).

For DC funds and Local Government Pensions Schemes, this involves turbocharging the Government’s existing policies for consolidation, to create scale and investor clout in the active pensions market. The Government should target reducing the number of non-micro DC schemes from 2,000 to fewer than 250, and reducing the number of local government schemes from around 100 to just one.

Pressure to invest should come from within firms too, with senior managers encouraged to focus more on long-term improvements, rather than simply a firms’ immediate share price and the bonuses that they are often linked to.

To do this, the report calls for the introduction of mandatory inclusion of worker representatives at the board level in larger firms – a corporate governance reform that is already well-established across Europe, and that evidence from Finland and Germany suggests can boost investment.

As well as doing more to encourage firms to invest, the Government also needs to ensure that those firms who do want to invest can do so easily.

Half of all business investment is in buildings, but the UK’s bureaucratic and costly planning regime too often acts as a major barrier to firms wanting to expand. As a result, the UK has seen no increase in the amount of built-up land it has per person since 1990, in stark contrast to the growth seen across all other G7 countries.

Addressing this requires wholesale changes to the UK’s planning system – including ensuring that local authorities have development plans (six-in-ten currently have no plans at all), and are not able to block developments in line with those plans. Major business developments also need to be taken out of local authorities’ hands and decided at a higher level, for example a city region, that matches the economic geography of such plans.

Finally, the Government needs to expand support for small firms by powering up the British Business Bank and building on the Help to Grow scheme.

Greg Thwaites, Research Director at the Resolution Foundation, said:

“Britain’s longstanding failure to invest in its future has left the economy four per cent smaller, and wages around £1,300 lower than they should be.

“We need to do far more to encourage firms to invest, creating pressure from above via investors, and pressure from below via their workforces. Politicians also need to get real about the scale of the challenge we face. We need to move away from endless tinkering with the tax system, and focus instead on overhauling our planning system so that it’s more attuned to our economic needs.

“We shouldn’t pretend that such changes are easy, but they are needed to shake Britain out of its decades-long investment slump.”