Mind the capital gap: British citizens are poorer because UK workers are denied capital

By Tera Allas and Dimitri Zenghelis

Striking new analysis by Tera Allas and Dimitri Zenghelis shows that British workers are operating with a third less capital per hour worked than their counterparts abroad.

Britain’s productivity malaise has been chewed over by economists for years. Output per hour worked in the UK is estimated at 15 percent below Germany and the US and 10 percent below France. This underperformance has translated directly into stagnant incomes. From 1970 to 2007, real wages grew on average by 33% per decade. Since the global financial crisis of 2008, they have flatlined. Flagging incomes generate weak growth in tax revenues and fiscal pressure. This constrains the government’s ability to reduce poverty, improve the health and wellbeing of British citizens and invest in core assets. Increased defence, pensions and social care requirements are layered on top.

UK public and private investment has long lagged its peers, providing the root cause of the country’s weak productivity performance. From 1993 to 2024, UK investment averaged just under 18% of GDP. In France and Germany, it was over 22%. That difference, compounded year after year, has left Britain miles behind.

Measuring the shortfall

Unlike conventional investment figures (which focus on flows), we use harmonised international data to look at stocks—what workers actually have to work with. In addition to buildings and machines, we include software, databases, R&D, as well as training, design, and brand development, which traditional statistics often ignore. The best firms combine these assets into productive engines. But the UK has underinvested for decades—across the board, in both tangible and intangible assets. Give people fewer tools, and they’ll produce less. And because these capitals are complementary, a shortfall in one leads to constraints on the others.

Compared to workers in the US, Germany, France, and the Netherlands, people in the UK have access to a third less capital per hour worked. Less software. Fewer machines. Outdated systems. Insufficient training. Too little R&D and organisational capacity. The result? Lower productivity, lower wages, lower living standards.

In monetary terms, the gap is striking: a £2 trillion capital shortfall. That’s what it would take to bring the UK up to the level of its more productive peers. In this context, the government’s current level of ambition for raising UK investment—which frequently talks about tens of billions—is far too low. Even if the UK was able to step up its investment rate by about 4%-points of GDP, it would take almost a century to catch up with the capital intensity of higher-productivity peer countries.

Measuring internationally comparable productive capital stocks—the tools workers can productively use to make things or provide a service—is tricky. Definitions, depreciation methods, and exchange rates all vary. We ran 16 sensitivity analyses to check robustness, and the gap remains yawning, measured in the trillions of pounds.

Stimulating investment

So, why has UK investment been so weak? Some answers are familiar: policy uncertainty, underinvestment in public infrastructure, poor management practices, including short-termism, exacerbated by fragmented ownership structures and a lack of access to long term capital (e.g., from pension funds).”

Digging deeper reveals more complexity and a diversity of perspectives. For instance, we still lack a clear explanation for the UK’s weaker management quality, or why creative destruction fails to reallocate more resources faster toward the best-run firms. British firms often underinvest even when returns look promising.

Making the UK more attractive to global investors, in terms of expected risk adjusted returns, is a pre-requisite to generating inflows of global capital. This is particularly true in the carbon-constrained and digital markets of the future.

Yet the current outlook offers little hope of such a shift. Business confidence remains weak, while public sector gross investment is forecast to stay flat, as the government responds to mounting fiscal pressures, themselves born of enduring UK productivity weakness. Indeed, net investment is set to decrease from 2.7 per cent of GDP in 2024–25 to 2.4 per cent by 2029–30.

Public investment in depleted core infrastructure is necessary to enhance the returns to private investment. This investment must be rigorously assessed and subject to tough criteria but should be funded by public borrowing and implemented quickly.

The government’s recent decision to adjust fiscal rules to account for net investment and the preservation of net worth is a welcome step. But investment must also be calibrated to macroeconomic conditions to avoid higher for longer interest rates. This requires boosting UK savings.

A call to action

The UK is trapped in a low-capital, low-productivity equilibrium. The challenge is far greater than suggested by simply comparing past investment rates. The capital shortfall is a decades-in-the-making crisis that will take decades to fix. Every year of underinvestment deepens the rut. Marginal increases to public investment, combined with minor policy initiatives to encourage private investment, are a distraction. Fiscal and macroeconomic strategy, as well as specific business policies, must recognise this.

This is not a call for ‘more investment of any kind at any cost’. It is a call for the government to prioritise strategic reform to boost the UK’s investment performance as the fundamental driver of its economic and fiscal performance. An ambitious, credible and coordinated push is necessary to dislodge the UK from its low productivity/low capital stock equilibrium.

The government can play a catalytic role: crowding in private investment, reducing risk, creating future-ready markets, and investing in enabling infrastructure, especially for green and digital transitions. The payoff would be transformational: higher productivity, stronger growth, and a path to fiscal sustainability.

Britain is not doomed to stagnation. Britain’s workers are well-educated and capable. The country’s science base leads the world. But the tools they need—the capital to be productive—simply aren’t there. Fix that, and productivity, wages, and prosperity can soar. Ignore it, and stagnation will remain the UK’s defining economic condition.

To find out more, read the full paper The UK’s capital gap: a short-fall in the trillions of pounds that will take decades to bridge by Tera Allas and Dimitri Zenghelis