 Hello, we're here to talk about investment. This is a key issue facing the UK economy over many years of under-investment, both in public and private sectors. My name is Anna Valero. I'm the Director of the Growth Programme at Centre for Economic Performance at ELSE. I'm James Smith. I'm Research Director at the Resolution Foundation. So James, tell us why investment is so important for the growth prospects and living standards of the UK economy. I think the thing people really have to keep in mind is investment is all about spending money on goods that help produce more goods and services in the future. And most investment spending is done by businesses, so £2 in every three that spend on investment in the UK is spent by businesses. You can think of for this as things like machines that are used in manufacturing or the computers that are used in service industry. So they're a really key part of how we actually produce goods and services in the UK. But public investment and spending by the government is also really important as well. So that's about £1 in every five that spend on investment. And it's really important because it enables growth, so things like roads, help businesses produce their output, but also helps with our social infrastructure, things like hospitals, and also meeting really big challenges like levelling up across regions and hitting the net zero targets that we've set out in terms of the transition path for the decarbonisation. And by spending money by the private sector and by the government, that coming together to help us produce more, that's really key to how living standards increase over time. And that's what allows wages to go up, living standards and prosperity to improve. Joanna, tell me about what are records like on investment? Well, our record on investment is pretty weak when we compare ourselves to other advanced economies. If you look at our total gross fits capital formation, which comes all those things you talked about, plant machinery, business structures, also things like research and development, expenditures of innovation, expenditure and investment. And what we see is that that has lagged other economies for some time, but this underinvestment has been both in the public sector and in the private sector. So as you pointed out, both of them matter as do their interaction. So take the public sector first. If you look at OEC countries, since the turn of the century, the average investment rate on a comparable basis was about 3.7% of GDP, whereas the UK was around 2.5% of GDP. So over 1% underinvestment compared to some of our main kids. This is low, but another issue with our public sector investment is that it's been volatile. So as volatility is particularly high versus that same group of countries over an extended period, say looking back over 60 years, particularly volatile. And what this means is stop-start nature of projects of programs needs a lot of money is wasted and a significant undersend. And as you say, this matters not only because those projects are needed in the economy, because they shape the investment environment for firms too. So when we look at business investment, that also has lagged our comparatives for some time. Our business investment rates are falling actually in the late 90s, early 2000s. It was both a hit in the financial crisis while we were recovering for a while. We then kind of saw another hit at the time of the Brexit referendum. And still today, despite some recovery since COVID, we've seen that our investment rate lags, say France, Germany, the US, core comparative countries of the order of around 2% of points of GDP. This really matters because when we've looked at our gap in productivity with those countries, both in levels and in terms of growth over time, this investment seems to be quite a contributing factor. So how much difference could higher business investment actually make? Would it materially affect living standards? Well, a simple calculation implies that if UK business investment had matched the average of US, France and Germany, so around 2% of points of GDP higher over time, we would have actually expected to see GDP now being around 4% higher and wages per annum being around £1,250 higher. So a material difference to living standards. So what can we do, James, to improve our performance on public section investment? So as you were saying, public investment is not just too low, it's also too volatile. So the key thing here is this is about the politics and it's about the process of public investment. So it's very easy for politicians to cut an investment project that people haven't ever heard of rather than cut funding to the NHS, for example. So there's a really short political incentive to cut investments. We're not going to change that, but it's also about the process of how public investments decide on. In the UK, public investment decisions are very, very centralised. So they're in the hands of largely the Chancellor, central government, and the fiscal rules that we have really incentivise cutting public investment when we need to retrench on the public finances. So what we need to do is reduce those incentives, so ideally change the fiscal rules so that they don't incentivise cutting public investment when we need to improve the public finance outlook. But also to, if we can't do that, to really strengthen the consensus to have a sustained increase in public investment. And that's really important because in recent years, we saw a rise in public investment following the 2019 election to the government's credit. They had plans to push public investment up to around 3% of GDP, but in recent fiscal events, they've actually cut public investment once again. And the reason is the same, the public finances needed to improve, and that was the first thing that we reached for. So here, the thing we can do is to improve the process of public investment planning. So get a strong cross-party consensus and to really make it harder for governments to cut back on public investment. So put more public investment plans in the hands of local government, have longer planning horizons and strengthen legislation to stop governments cutting back public investment. So what about business investment? What can we do there? Well, when it comes to business investment, it's not that there aren't opportunities for growth and investment here in the UK. When you look at returns on aggregate, returns on investments, they're not bad in the UK versus other countries. We know that there are lots of underlying strengths in the UK economy in growing areas where we look at comparative advantage in trade, in patenting, which gives us an indication on innovation. You can see that we have comparative advantage in high growth areas such as finance, professional services, the creative sectors, areas of advanced manufacturing, and also clean technology. But there are a number of barriers that hold back investment in the UK. A key one that I've often discussed is policy uncertainty or instability. We've had a pretty unstable macroeconomic environment, but also within that quite a lot of instability when it comes to business policies and growth strategies with many different strategies each of which was meant to be for the long term in recent years. And if you remember, that business investment rate actually started falling in a more stable time in the late 90s and 2000s. So one part of it is including stability, that includes in corporate tax, so keeping incentives for investments stable over time. And one proposal would be to have an independent institution that advises government on growth policies for the long term and monitors government progress. But there are a number of other long standing barriers to investment in the UK. One of them is to do with some of the incentives on management to think about long term value creation. And within large companies, this relates to the ownership of so if you look at our listed companies, a really, really small share of those companies are owned by blockholder engaged shareholders who focus on that long term value of a company compared to other advanced economies. And one plausible route towards improving that engaged ownership, as well as increasing flows of finance into high growth potential projects in the UK is thinking about pensions reform. And of course, there is quite a lot of policy momentum on this area thinking about consolidating fragmented parts of the pensions landscape to allow that scale to then crowd investment into equities and unlisted assets too. Another key barrier is, you know, even if firms want to make investments, they can't always make those investments due to our very restrictive planning system. And that prevents housing being built, which prevents productive place of growing. It prevents infrastructure being built so people can move around and crucial net zero infrastructure too. So a number of ways we could improve that at the local level, we need local areas to have plans, those plans kind of need to be enforceable. We need plans for economic infrastructure to be done at the right level of aggregation, reflecting a functional economic area. And ideally local areas would see some of the financial benefits of that development, not simply bearing from the political costs. So summary, it's a combination of improved stability, sense of direction clarity on growth policies and business policies. It's enabling management to have the incentive for long term investment through things like pension reform. And it's also enabling management to actually undertake the investments they want to make through things like planning reform. So there's no route back to higher growth that doesn't go through higher investment. So ending stagnation really involves boosting our investment prospects. But there's more to boosting growth than just boosting investment. So for a full list of policy recommendations and all the things that will help us boost growth and bring down inequality, you can see ending stagnation, the final report of the economy 2030 inquiry.