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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The writer is professor of economics at the London School of Economics and Political Science
Britain is stuck in a rut of stagnating productivity and economic growth. This is harming living standards and competitiveness. It is mainly due to a lack of investment.
The UK languishes at the bottom of the G7 league table for investment. Over the past 30 years, Britain’s gross fixed capital formation has averaged 18 per cent of GDP, 4.7 percentage points less than the average for the rest of the G7 over this period, and relatively low in both the public and private sectors.
Unfortunately, the current government seems to be intent on maintaining this path of low investment, low productivity and low growth. Public sector net investment will decline from 2.6 per cent of GDP in 2023-24 to 1.8 per cent in 2028-29, according to the analysis of the chancellor’s Autumn Statement by the Office for Budget Responsibility.
So the UK needs a strategy for reviving the economy through increased public and private investment. A programme of investment in the activities and technologies of the 21st century to tackle climate change, biodiversity loss and environmental degradation, including air and water pollution, would deliver a strong boost to both productivity and economic growth.
Analysis done with colleagues from the London School of Economics and the University of Cambridge found that an increase in annual public investment equivalent to 1 per cent of GDP, or £26bn at current prices, and a rise of 2 per cent in private investment, would put the UK on to a much more productive, dynamic and attractive path to growth.
A large part of this should be focused on speeding up the move away from fossil fuels, the reliance on which, as the cost of living crisis has revealed, creates insecurity and a drag on the economy.
The OBR calculated that the energy price cap and other measures introduced by the government to protect consumers from the rocketing price of natural gas resulted in a total subsidy of £78bn over the past two years.
It would have been far better if the UK had invested that money in more measures to promote energy efficiency and to reduce our exposure to the volatility of fossil fuel prices. Cutting our consumption of fossil fuels will bring significant savings to our economy, and improved energy efficiency will increase productivity.
Most private investors can see this logic and the potential opportunities, but their confidence has been undermined by recent shifts in government policy and the weakening of targets. The government has a misguided obsession with further unsustainable development of oil and gas fields in the North Sea, where operating costs remain relatively high compared with other hydrocarbon basins.
North Sea oil and gas is only really profitable if consumers in the UK and the rest of Europe continue to pay high prices for energy. But those prices will come down as the costs of renewables and electricity storage continue to fall.
The COP28 climate change summit in Dubai in December reached a decision, rightly supported by the UK, to speed up the transition away from fossil fuels. This will inevitably mean a drop in demand for oil, coal and gas, and a fall in international market prices. North Sea investments will quickly turn into stranded assets.
Whoever wins the next election should be focusing instead on ways of increasing investment in more sustainable areas of the economy, such as an agricultural system that promotes robust ecosystems and food security, cleaner air in our cities, and uncontaminated water in our rivers and along our beaches. Waste and pollution create significant additional costs and undermine the UK’s productivity.
While there are, of course, important fiscal constraints, and government consumption must be fully and securely financed, borrowing for strong and productive investment is fiscally responsible. It enhances productivity, creates growth and revenue, and generates additional private investment. It is much better for sustained growth than, for instance, cutting taxes to encourage more consumption, which would boost growth only in the short term.
The transition to a sustainable, inclusive and resilient economy is a genuine opportunity for the UK to drive innovation and competitiveness and rekindle productivity growth.
But it requires government to embrace a coherent, credible and targeted set of policies to unlock new, intelligent and sustainable forms of investment and growth.