Beyond Boosterism
The UK is a low investment nation. Low business investment is a big driver of this. Low investment is one reason behind the UK’s weak productivity growth, which in turn is the main reason behind the stagnation in UK living standards. Policy makers understand this and have made attempts to fix it. This paper, part of the Economy 2030 Inquiry, explains why this matters, why recent attempted fixes won’t cut it, and what to do about it, as part of a broader economic strategy for the UK.
This report finds that corporation tax cuts and a return to policy stability, while important, will not be sufficient to bring about the new investment ecosystem that the UK badly needs. Instead, wide-ranging reforms to the pension system and corporate governance are needed to focus firms’ managers on long-term value, boosting their willingness to invest. Fundamental changes to the UK’s restrictive planning regime are needed to improve firms’ ability to execute these new investment plans. Meanwhile, unlisted high-growth businesses should get more backing from the newly restructured pensions industry, a powered-up British Business Bank, and evidence-based business support policies.
- If UK business investment had matched the average of France, Germany and the US since 2008 – something that would have required just over 2 per cent of GDP additional investment each year – our GDP would be nearly 4 per cent higher today, enough to raise average wages by around £1,250 a year.
- GDP growth booms are nine times more likely if investment is also booming.
- Corporation tax has changed in almost every year since 2010, during which time the UK has had nine Business Secretaries, four versions of the government department responsible for businesses, and industrial strategies or growth plans too numerous to count.
- Our DC and DB pension funds in aggregate now allocate only 2 per cent of their assets to directly held UK equities. The result is UK firms having the lowest share in the OECD of ‘blockholder’ shareholders who are big enough to affect firm decisions on their own.
- UK firms are unusual in Europe in having no mandatory requirement for worker representation on corporate boards.
- The UK’s planning system is restrictive. developments can be refused even if they meet the specification of a local plan, and six out of every ten (61 per cent) of local authorities don’t even have an up-to-date plan.
- Around half of business investment is in buildings. But the UK has seen no increase in the amount of built-up land per capita since 1990, and if anything, a fall this century. This is in stark contrast to every other G7 economy, which not only have higher levels of built-up land per head, but have seen substantial increases decade-on-decade.
- The German development bank KfW’s investment in small businesses and startups is at least three times greater than the British Business Bank’s, even when the latter’s Covid support lending is taken into account.
- The Government should immediately make permanent the (currently temporary) full expensing of business plant and machinery. Broadening which investments can be fully expensed to all business capital is also desirable, if costly in the short-run. Any lasting costs should be defrayed by tightening the limits on the tax deductibility of interest, reducing the tax systems bias towards debt financing. More importantly, governments should commit to keeping the Corporation Tax regime – both its rate and allowances – stable over time.
- The Government should enact several measures to consolidate the pensions industry so that pension funds can acquire concentrated stakes in UK firms:
- For Defined-Benefit pension schemes, accounting for 70 per cent of the UK’s £2tn-plus pensions savings, facilitate consolidation by (1) completing the legislative regime around pension ‘superfunds’ and (2) expand the remit of the Pension Protection Fund to allow it to consolidate solvent schemes
- For Defined-Contribution schemes, set stringent value-for-money tests and mandate funds which fail them to transfer assets to a number of authorised multi-employer DC pension trusts, aiming to cut the number of funds by 90 per cent.
- The £300bn of Local Government Pension assets, currently spread over around 100 funds, should be consolidated into one.
- To further increase firms’ long-term focus, the Government should mandate the inclusion of worker representatives on the boards of larger firms.
- The Government should increase the supply of business structures with reforms to the planning system
- Development plans must exist and provide certainty that compliant developments will proceed.
- Plans and decision-making relating to commercial and business developments should be carried at the right level – which will almost certainly need to be across larger areas than current local planning authorities.
- Local authorities should have meaningful financial incentives for development, both commercial and residential.
- The British Business Bank should be allowed to borrow on the markets with a government guarantee, and offer a co-investment fund which would allow pension funds to invest as a limited partner alongside it, piggy-backing on its expertise.
- The Government should build on the existing £500m Help to Grow framework, expanding experimentation and evaluation within the continuity of the broad programme.
- To help finance higher investment, we recommend a phased increase in the minimum savings rate within auto-enrolment, specifically by levelling up the minimum contributions by both employers and employees to 6 percentage points.
- Finally, we propose a new Growth Act to establish an independent statutory body, the National Growth Board, with powers analogous to the Climate Change Committee
For all research queries about this report, please contact Greg Thwaites. For press queries, please contact the Resolution Foundation press office.
Greg Thwaites
Research Director,
Resolution Foundation
Email Greg