UK investment: high, low, rising, falling?

The Chancellor of the Exchequer claimed in his recent Budget speech that "business investment ... as a share of our economy" is "over 14 per cent, higher than at any time in forty years". An IFS briefing note released today, Wednesday 11th April, points out that, in fact, the share of GDP that was spent on business investment in 2000 was 12.3 per cent, up a little on the level of 11.5 per cent in 1997, but well down on the level of 14.1 per cent in 1989.

The Chancellor's 14 per cent figure is the correct answer to a hypothetical question: "what share of GDP would the business sector have needed to spend on investment in order to buy the capital goods that were purchased last year, if firms had been obliged to buy those capital goods at their real price in 1995?"

Just as the real price of computers has fallen, so the real price of capital goods bought by business was substantially higher back in 1995. But firms did not buy capital last year at 1995 prices, and they did not actually invest the higher notional amount indicated by this calculation. Nor is it likely that they would have purchased the same capital goods if they had in fact faced higher prices. This may not be the most transparent way of presenting figures for business investment as a share of GDP.

The Treasury have also recently published a graph that appears to show business investment as a share of GDP to be higher now in the UK than in the USA, Germany or France (Chart 2.3, Productivity in the UK, November 2000). This chart presents a series for UK business investment as a share of GDP that is higher than those published by the Office for National Statistics, or by the OECD in their Economic Outlook. The Treasury chart also presents comparisons based on 1995 real prices, although the same publication points out that the national investment goods price deflators used to construct these constant price series are not measured in a consistent way across countries.

OECD Economic Outlook data for the shares of GDP actually spent on business investment show the UK share to be level with that in Germany and lower than that in the USA. Broader measures of investment, which do not exclude investment by general government or investment in housing, continue to show a comparatively low level of total investment spending as a share of GDP in the UK. The 'business sector' investment comparisons emphasised in recent government publications exclude two major categories of investment - general government and housing - in which UK spending as a share of GDP happens to be low.

Ends

Notes to editors

1. For more details, see IFS Briefing Note No. 18 UK Investment: High, Low, Rising, Falling? by Nick Bloom and Steve Bond can be downloaded on-line.
2. If you would like an advance press copy, please contact Emma Hyman in the IFS press office (telephone 020 7291 4850).