Mind the gap: what’s driving Britain’s capital and productivity gaps, and how do we fix it?
Senior economists open oral evidence in new BTC inquiry on financing the real economy for growth
Meeting details
Britain has a shortage of investment capital leading to challenges in growing the economy. In 2019, the nation was estimated to have a capital gap measured at over $2 trillion, with the UK sitting around 33% below its peer countries in the amount of capital stock per hour worked.
The UK’s capital gap means that the UK invests less in productive assets than the G7 average. This is believed to be a factor in levels of labour productivity growth in the United Kingdom, which slowed from an annual average of 1.9% between 1993 and 2008 to 0.4% between 2008 and 2023.
To attempt to address this challenge, in its first budget in October 2024 the Government announced £100 billion of additional capital investment over the next five years, raised in-part through increased taxes and borrowing.
This approach has been described as a ‘gamble’, relying on the assumptions that increased public spending would be sufficient to improve the performance of public services, raise the confidence of investors to invest in the United Kingdom, and yield returns in excess of the increased costs of borrowing.
Have these decisions placed the UK on the path towards achieving the Government’s ambition of the fastest sustained growth in the G7?
In this first hearing of the Committee’s inquiry into financing the real economy, senior economists will give their analysis on how best to achieve impact against the UK’s growth ambition and measure that progress.
Rt Hon Liam Byrne MP, Chair of the Committee, said: “For too long, we’ve expected Britain to build a world-class economy with second-class investment. We now struggle with a third less capital per worker than our competitors and now we’re cursed with productivity that’s barely grown since the great financial crash. That not only undermines growth, it slows progress in raising living standards - and may be about to create a new black hole in the nation’s finances.
“We can’t go on like this. Our inquiry will dig into why the money isn’t flowing into the real economy - into the plants, the people, and the places that drive prosperity - and how we fix what could be a £2 trillion capital gap in British business investment. Our goal is simple: to show how we give Britain the tools to do the job, so growth is faster and fairer.”