Why investment is necessary to prevent the economy from 'withering’

Given that the economy is one of the world’s largest financial centers, it is little wonder that lack of investment is widely regarded as the most important factor inhibiting economic growth.

Report after report has found that the UK invests too little as a share of national income, often lagging behind other rich economies. So boosting investment is a key part of Labour’s pitch to make the UK the fastest growing economy in the G7.

There are two sides to the investment puzzle. On the one hand, investment by the private sector and on the other by the state. Britain fares poorly in both.

National Institute of Economic and Social Research (NIESR) Director Jagjit Sada said City AM Boosting public and private investment is key to stopping the UK economy from „withering”.

Political uncertainty, Brexit and tougher regulations are all cited as reasons why companies are not investing, but regional weaknesses in the financial sector are an often overlooked reason, said Sada.

„This is an important part of the problem,” he said.

Many small businesses, particularly those outside London and the South East, struggle to access the finance they need to invest. Sometimes this is put down to SMEs’ lack of ambition, but Sada doubts this explanation.

„We’re talking to businesses who say the administrative burden of getting loans is too high. They’re usually being asked to put their business up as collateral, and it seems like they have to provide a lot of reporting if they take out a loan,” he said.

„All of this shows an information asymmetry where it’s very difficult for smaller companies to raise money if the financial sector doesn’t know enough about the company,” he said.

This problem has been increasing in recent years. According to the Impact Investing Institute, the success rate of SME applications for bank loans has dropped from 80 percent in 2018 to 50 percent in 2023.

These information problems arise because of the concentration of the financial sector in London. „Once you get outside of London the domestic financial sector is not liquid enough,” Sada said.

„There is some evidence that there is a kind of 90-minute limit: if the company is more than 90 miles from London, it is more difficult to raise money, which further embeds diversity or regional problems”.

British cities outside London Their European equivalents do lessAnd why is this lack of regional capital.

The Resolution Foundation estimates that closing the productivity gap of Manchester and Birmingham compared to London and Lyon and Toulouse to Paris would increase gross value added (GVA) by £20bn a year.

Labour’s first pledge as part of its policy plan for the financial sector was a promise to increase „regional financial centres”. But Sada argued that real progress in regional development requires government investment, particularly in infrastructure.

„If we have better infrastructure to move around the country, the lack of regional efficiency in the country will be addressed, which has not really been addressed,” he said.

All the changes in public investment since 2010 – best seen in the debate over HS2 – have been a key issue for businesses. Why do businesses invest based on government programs that never pay off?

„A large, sustained and credible commitment to public infrastructure, on the order of four percent of GDP each year, is the best way to crowd in private investment,” he argued.

Recent figures suggest that public sector investment will be 2.4 per cent of GDP by 2024-25.

Labor has promised to introduce a national wealth fund to encourage private sector investment. It will invest £7.3bn to accelerate the green transition. And for every £1 invested, a minimum of £3 must be raised from the private sector.

But Sada worried that it might not be big enough to make a difference. „If it was another small bank like a British merchant bank or a UK investment bank, it wouldn’t be a big enough company to make an international difference and make a real difference,” he said.