A low level of capital to support workers is a key cause of the UK’s low labour productivity. We estimate that for each hour worked, people in the UK benefit from a third less capital than workers in higher-productivity peer countries (the US, Germany, France, and the Netherlands).
In absolute terms, the UK’s capital gap in 2019 was around £2 trillion. This estimate varies depending on the assets in scope and the data used, demonstrating the significant challenges associated with estimating internationally comparable productive capital stocks per hour worked. Nevertheless, we are confident that the UK’s capital gap is measured in the trillions of pounds. 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.
Marginal increases to public investment combined with minor initiatives to encourage private investment are a distraction, and do not constitute a strategic take on the issue. A clear, credible and coordinated push is necessary to dislodge the UK from its low productivity/low capital stock equilibrium.
Authors Tera Allas CBE, Dimitri Zenghelis