The Elephant in the Room for the UK Economy

Since the resignation of Boris Johnson as prime minister, the debate amongst Conservatives about the future of the economy centres on growth, tax cuts, tax rises and inflation. Discussion about investment plays second fiddle. It is mentioned, but has not got the primary focus that it needs. Rishi Sunak, in his summer debates with Liz Truss argued about whether the rate of corporation tax had any direct relationship with the rate of investment. In other words, that reducing corporation tax is unlikely to result in increases in investment to assist growth in productivity. In part this maybe because manufacturing industry is a much smaller part of the UK economy than services. What this debate overlooks more fundamentally is the disastrous impact of Brexit and the COVID-19 pandemic on business investment as cited in an important Bank of England report.

Some key statistics reported are:
– Growth in investment plateaued after 2016, because of Brexit, instead of continuing with its trend average of about 6% growth.
– In 2022, the pandemic hit business investment in the UK economy causing a 20% reduction.

The UK Economy has a long record of directing investment into housing and by implication away from productive investment in innovative manufacturing and services. This is reflected in persistent house price inflation and purchasers needing to borrow more capital to buy property as researched by the organisation Positive Money. Of course, much of this lending chases property on the secondary market, rather than new build. This is not an overall stable and productive use of credit as shown in a research paper by Muller and Verner published in 2021. The UK needs to look urgently at how other nations do better at directing credit into real innovation. The climate crisis makes this even more urgent, given the need for rapid growth in carbon neutral energy.

Philip Haynes