There is little more to be said about Jeremy Hunt’s Autumn Statement. In a way, there was little to be said about it anyway. In the bigger scheme of things, it is an irrelevance. It does nothing to address the challenges the UK faces; the challenges that, if met, would make UK-based companies a better home for investment capital. Then again, it was never likely to do so. Arguably, what confronts the UK are factors bigger than can be addressed by government alone, and certainly not in a single statement of running repairs.
To get a glimpse of the reasons why, let’s focus on the chart. This takes data covering 11 substantial economies plus the average for the European Union for the 24 years 1997 to 2021 and shows the effect of capital spending on growth in per capita output (GDP); and this, by the way, is ‘real’ growth with the effect of inflation stripped out. In simple terms, the higher the level of a country’s capital spending – both state and private sector – the higher the level of growth in output per person. Or put even more simply, the higher a country’s capital spending, the wealthier its people become.
Granted, that previous sentence is border line oversimplification. Per capita GDP is not a straight measure of wealth, but a measure of output per head with the double counting stripped out. Even so, it correlates pretty well with wealth. And the chart’s message is very clear. Clustered neatly around the trend line, are dots – some of them labelled – showing that, as a nation’s capital spending rises as a proportion of its GDP (going from left to right), then per-capita GDP – plotted on the vertical axis – also rises.
Sitting around the bottom end of the trend line is the UK, where capital spending has averaged 17.4 per cent of GDP over 1997 to 2021 and the rise in GDP per person has averaged 3.3 per cent a year. Meanwhile, predictably – and not altogether comparable with the UK – China sits at the top of the line, with average cap-ex to GDP of 41.3 per cent correlating with per capita GDP rising by 9.4 per cent a year.
Obviously, China is not comparable because it has risen from a state of poverty, with the help of a wonderful demographic dividend (now largely worked out). Meanwhile, the UK started the period under review from a state of wealth, so adding to it has been an especial challenge, particularly as much of its infrastructure – like its population – is ageing.
The better comparison is with nations that are more like the UK. Mostly, that means its big, wealthy neighbours – France and Germany – and perhaps the EU as a whole. The performance of those three bunches around the trend line a short way above the UK’s. In comparison to the UK, all three do more capital spending in relation to GDP; though within the sample that’s almost a given – only Brazil, Canada, Italy and Japan do less. All three have produced slightly more per capita GDP growth.
To the extent that the fit between cap-ex and GDP growth is a neat one – and based solely on the sample –we can suggest that each percentage point increase in capital spending would generate a quarter point rise in GDP growth. For the UK, that would be well worth having. Say its capital spending ratio was the EU’s average (22 per cent of GDP), that would have been enough to raise its GDP growth rate from 3.3 per cent a year to 4.5 per cent. That would have put its growth ahead of Australia’s and close to South Korea’s, making it the envy of the EU’s big players.
Meanwhile, the fear is that the UK’s future will lie closer to Japan’s than to the EU’s average. Japan is the outlier at the foot of the chart. It does lots of capital spending. At almost 26 per cent of GDP, only China, South Korea, and Australia do more. But that seems to have little impact on its GDP growth, which – at 2.2 per cent – is the lowest in the sample.
The biggest factor behind this may well be Japan’s demographics. With a median age of almost 47, Japan is the world’s oldest country (assuming we ignore Monaco) but it is also rich, with per capita GDP of about $49,000. So Japan does not have to grow, but nor can it grow – or so it seems. As a result, its fall down the list of the world’s wealthiest nations has been precipitous. As recently as 2010, its per capita GDP was almost the same as the USA’s; now it is 35 per cent less. Eventually, that may have serious consequences as Japan struggles to pay its welfare bills or worse. No affluent nation, the UK obviously included, wants to be in a similar position.
Perversely, Japan’s experience also prompts the thought, what’s the point of the UK raising its ratio of cap-ex to GDP? It will only be money wasted, spent on projects for which the UK’s doddery population will have little demand. Besides, the UK already gets a decent bang per buck from its cap-ex. Its growth in per capita GDP, while below the sample average, is above the trend line, so throwing more capital at the problem may solve little.
Sure, in that context it is also fair to say there is more to economic success than capital spending, which almost wholly relates to building physical stuff. In particular, there is what might be labelled ‘soft cap-ex’, which is about creating the intangible assets on which so much of the developed world’s continuing affluence rests. Much of this spending is not charged against a capital account, but against revenue. Its best known component is spending on research and development (R&D), which most companies itemise in their accounts, especially those that do a lot of it.
Even here the UK appears to fall short. Using data that is a bit patchy, the UK’s spending on R&D averaged 1.6 per cent of GDP for 1997 to 2020 (the latest year available). That’s more than China’s average (1.5 per cent), though its R&D spending is on a rising trend and is now consistently over 2 per cent, while the UK’s is static. More important, the UK’s spend was well below that of its biggest European rivals, Germany (2.7 per cent of GDP on average) and France (2.2 per cent). Meanwhile, the technology-rich US economy, which might be expected to spend copiously on R&D, recorded an average of 2.7 per cent on a rising trend.
It is an exaggeration to say these factors fully explain both the poor performance of UK listed equities these past few years and – related to that – the declining popularity of the UK as a place for investment capital. The latter was quantified in a study this week from investment manager Invesco into the investing intentions of the managers of sovereign wealth funds. It found that the UK has dropped from being the managers’ first choice as an investment destination in 2014 to their fourth choice. True, the UK’s decline was not solitary. France and Germany also lost popularity as Euro-centric factors – energy and war in Ukraine – had their effect. But the additional factor of Brexit meant that the UK dropped the furthest.
Depressing findings such as these turn up increasingly frequently when a nation is in decline and the performance of UK share indices these past few years relays the clear message that it is not just sovereign wealth fund managers who find the UK a less attractive place for investment. The actions of other investors, both domestic and overseas, say much the same.
In a short essay about the post-Brexit outlook for the UK written in 2020, the hugely prolific Canadian academic Vaclav Smil – Bill Gates’s favourite author, apparently – said the UK had become “an ageing nation; a de-industrialised and worn-out country whose per capita GDP is now half of the Irish mean, something that Swift, Gladstone and Churchill would find utterly unfathomable”.
Sure, one could quibble that none of those three would have the slightest notion what GDP is anyway. More important, per capita GDP is not a good measure of average wealth in the Irish Republic. That measure is so high because so many foreign companies use its low tax regime to pass through revenue, meaning that Ireland has more in common with, say, Liechtenstein than the UK.
Be that as it may, Smil’s point was well made. Ultimately economic growth – and on a per capita basis – matters hugely because almost certainly it is the same as improved productivity and, as another star academic, Paul Krugman, famously remarked, “productivity isn’t everything, but in the long run it’s almost everything”. A nation won’t get that with the rag-bag of uncosted giveaways that did for Messrs Truss and Kwarteng. But neither will it get it with the Sunak/Hunt version of austerity partly postponed. In one way or another, to get richer, a nation needs capital to be deployed up-front and for the long term, something that the UK – both private and public sector – has been unwilling to do in sufficient quantity for at least 70 years.
bearbull@ft.com
