Has chronic underinvestment left our infrastructure crumbling?

Economic growth matters. The material improvement in living standards, as measured by the increase in the production of goods and services, has been an artefact of the modern world. Britain has previously been characterised as the first industrial nation. With a sustained period of economic growth, it reached a peak in 1900 of 9.4% of world output.

This fraction has declined with the increasing growth of emerging parts of the world but also because Britain’s relative performance has tended to deteriorate. At present, the UK is at some 2.3% of world GDP and seems likely to fall to 2% or less over the next 20 years.

The UK’s productivity performance over the long run across countries is examined by Jagjit Chadha and Issam Samiri in a research paper from The Productivity Institute. The paper examines:

• The UK’s recent and long-term productivity trends in contrast to trends in comparable economies
• The application of modern growth accounting techniques to the recent productivity slowdown in the UK
• How UK labour demographics and investment dynamics inform the debate on lower rates of economic growth
• The puzzle of why the UK economy suffers from chronic under-investment despite real interest rates trending down for decades
• The scope of economic policy to improve productivity growth through long-term policy commitments

The role of public investment

A recent column by ?Will Hutton in the Observer notes that the UK’s investment share of GDP has been significantly lower than the ratios in France, Germany, and the US for most years since 1965 and continuously since the early 1990s. He wrote:

“Between 1949 and 1978, according to an important paper by Jagjit Chadha and Issam Samiri for The Productivity Institute, net public sector investment averaged 4.5% of GDP. It then fell precipitately in the Thatcher years to zero, before climbing under New Labour from those depths to nearly 3% of GDP in 2010. Austerity prompted another steep fall, since when it has bumped along at about 2% of GDP.

“Overall, the rate of public sector investment from 1979 to 2021 has run at less than half the rate of the previous 30 post-war years. Cumulatively (even allowing for privatisation), that means the evisceration of our public services – from schools that are unusable to weak backup systems at (air traffic management system) Nats.”

• Read the full paper Macroeconomic Perspectives on Productivity on our website

Public investment and productivity

There is a pressing need for increased public investment in various sectors to boost productivity, address regional inequalities, and facilitate the transition to a green economy. This was the conclusion of a July evidence session conducted by the UK Productivity Commission , which is facilitated by The Productivity Institute and National Institute of Economic and Social Research (NIESR) .

The session focused on four key areas:

1. Sizing public investment There is an urgent need for public investment in several critical areas, including research and development (R&D), skills development, housing (particularly heat pumps), and technology (such as batteries for electric vehicles). The primary priorities identified were energy security and the green transition.
2. Public investment in priority regions and sectors There is a requirement for targeted and substantial public investment in regions and sectors currently trapped in low-skilled, low-productivity equilibriums. To reduce regional and sectoral inequalities, consistent policies should be implemented. Successful policies should also focus on interconnectivity between energy systems and promote labour mobility through measures like wage subsidies or tax credits for research and development.
3. Public infrastructure investment While infrastructure investment is not a silver bullet, it will play a crucial role in achieving Net Zero emissions and reducing regional inequalities. Public investment in infrastructure should strike a balance between financial returns and demonstrating additionality and the ability to attract private investment.
4. Improving public investment To address the UK’s productivity and competitiveness challenges, increasing public investment and improving policy coordination is crucial. The witnesses at the Productivity Evidence session advocated for a coordinated policy framework similar to countries like South Korea, which successfully transitioned to a new economic model.

Watch the Productivity Commission Evidence Session on the role of public investment in growth on NIESR's YouTube channel or read the summary .

?The Productivity Institut e is a UK-wide research organisation exploring what productivity means for business, for workers and for communities - how it is measured and how it truly contributes to increased living standards and well-being. It is funded by the ESRC: Economic and Social Research Council .