The UK under many metrics ranks rather favourable among its fellow G7 nations, however, a recently identified alarming trend has revealed a major shortfall.
In recent analysis conducted by the Institute for Public Policy Research (IPPR), a prominent progressive think tank, it was found that among G7 countries, the UK fares particularly poorly in certain key areas.
IPPR has found the UK lags behind much of the G7 in both business investment and manufacturing, a fact which it claims requires quick and effective policy intervention.
Lagging in investment and manufacturing
According to IPPR’s research, among G7 countries, the UK has the second lowest levels of business investment by private companies, only ahead of Canada.
It found that UK companies invest the equivalent of 11.1% of GDP, trailing France and Germany at around 12% and far behind Japan at 18.2%.
Underinvestment has been identified as a core driver behind the UK’s economic stagnation and was even featured as an action area in the government’s industrial strategy.
Further analysis from the think tank identified a 38% “capital gap” compared with peer countries.
This lack of investment leads to real issues. IPPR has pointed out that British workers have access to far fewer tools, equipment, software and infrastructure needed to turn their time into output.
“Since the 1980s the UK increasingly became a destination for corporate HQs, holding companies and capital-light software businesses,” said Pranesh Narayanan, a senior research fellow at IPPR.
“The financial sector was given free rein to maximise short-term returns over long-term capital formation. Public infrastructure and assets were sold off to private investors who then did very little to upgrade or improve them for decades.”
IPPR’s research noted that in manufacturing, the gap is even wider, with the UK’s capital intensity in the sector averaging 47% lower than in peer countries such as the US, Germany and France.
The impact of energy costs
The report warned that the chronic underinvestment that it has identified and is already holding back productivity and growth, could worsen amid rising energy costs.
In the case of manufacturing, investments in improving productivity often involve new forms of automation and digitisation, a shift that increases the consumption of electricity that can seriously drive up costs in a challenging energy environment.
“If British industry does not keep up, it will require a constant lifeline from UK taxpayers to stay alive,” said IPPR.
The government has similarly identified the issue of rising energy costs acting as a discouragement for certain types of businesses to invest in new technologies.
Last year it released the British Industrial Competitiveness Scheme (BICS) which included an ambition to cut electricity costs by up to 25% for thousands of manufacturing businesses in support of the UK’s wider industrial strategy.
While IPPR supports the idea, it has warned the policy should not just aim to keep businesses afloat but rather encourage long-term growth and private investment.
It has therefore called for the eligibility of reduced energy costs to be adjusted to prioritise sectors where lower electricity bills will unlock new investment.
It is important to note that certain businesses will need short-term action to lower costs in the name of simply staying alive, and IPPR has suggested that other policy options are available, including the British Industrial Supercharger, which provides electricity discounts for the most energy-intensive industries and a revived version of the Energy Bills Discount Scheme used during the Ukraine crisis that could offer broader, temporary support.
BICS, however, must be reserved for the core purpose of supporting long-term industrial investments.
There is no one big thing that government can do to increase business investment, instead policy decisions, like the choice of which sectors to prioritise for energy support, should be informed by an assessment of how and where they are likely to impact investment,” added Narayanan.
“For some businesses, lower energy costs would simply boost margins; for others, they would improve the return on investment on new products or production lines. Support should be targeted to the latter to drive new investment.”
