BROADER VIEW OF INVESTMENT NEEDED IN A SERVICE BASED ECONOMY, ECONOMISTS WARN

TheCityUK’s Independent Economist Group (IEG), chaired by Andrew Sentance, released a new report “Sustaining the UK recovery:  What is the role of business investment?” calling on the Government to reassess the data it uses to evaluate investment, saying the current measures are not suitable for the UK’s service-led economy.

The IEG has warned that the current data may be skewing policy decisions away from areas that are vital for a sustainable recovery. The report emphasises the importance of intangible assets such as human capital and R&D to drive economic growth.

Andrew Sentance, Chairman of the IEG, comments: “Although the UK’s economy is recovering, it’s vital that we continue to invest for our future growth. However, we need to make sure we are investing in the right areas.

“Decisions on allocating Government and private funds rely on data, so more work is needed to measure intangible assets accurately as an immediate first step. If the wrong things are being measured, or the right things are being measured poorly, it will be much harder to encourage the conditions needed to ensure vital investment is made. While steps are being taken to address this problem, we need swifter action.

“The concept of investment has not kept pace with the changing composition of our economy. Given that services account for nearly four fifths of UK GDP, intangible investment is arguably more important than traditional capital expenditure. The Government should consider approaching investment in education and skills, research and development and intellectual property in the same was as it has approached road and rail infrastructure in the past.”

Chris Cummings, Chief Executive of TheCityUK, comments: “Accurate measurement of investment in knowledge assets is vital, given the emphasis policy makers have placed on investment in gauging the strength of the recovery. This year will see the inclusion of research and development spending in the statistics for intangible assets when the ONS moves to introduce new global accounting standards in the autumn.

“TheCityUK welcomes this development but more needs to be done to ensure intangible investment is accurately measured in the official statistics. TheCityUK stands ready to work with ONS to ensure we develop the right metrics to measure investment in the future.”

The IEG report, ‘Sustaining the UK recovery: What is the role of business investment?’ highlighted that the 1.8% increase in GDP in 2013 is due to a rebound in household and Government consumption rather than new business investment. It found that business investment has been stable between 2009 and 2013 at £120-£125bn per year. However, business investment as a share of GDP has declined steadily over the past 15 years to an estimated 8.7% in 2013; since 2000 it has had no impact on growth.

The report also reveals that some of the structural factors commonly identified as causes of under investment in the UK may have been overstated. The UK economy’s heavy orientation towards services means less investment in machinery and other equipment is now required. In addition, the IT revolution has helped facilitate the transition to a less capital intensive era where computers and computerised supply chains have enhanced productivity at a lower cost.

Dr James Nixon, Chief Economist at TheCityUK, comments: “It is true that uncertainty about the economic recovery, concerns over access to finance, difficult credit conditions and high pension costs have constrained business investment in recent years. There has also been considerable pressure within the financial system for firms to deleverage. However, economic evidence indicates that constraints to investment are easing and the climate for businesses is becoming more attractive.

“The financial services sector has a key role to play in financing investment that will in turn create new jobs and stronger growth. This requires a regulatory framework that is effective and appropriate, keeping markets open and competitive while also ensuring stability.”

A copy of the IEG report ‘Sustaining the UK recovery: What is the role of business investment’ can be downloaded here: http://www.thecityuk.com/research/our-work/reports-list/independent-economists-group-ieg-quarterly-reports-2/