Duncan’s Economic Blog

An Investment Target?

Posted in Uncategorized by duncanseconomicblog on February 11, 2011

In an excellent article in today’s FT Martin Wolf lambastes the government’s approach to growth.

Will has summarised the key points over at Left Foot Forward.

Wolf rightly notes the ‘frighteningly low level’ of investment as % of GDP, just 15% – down 2% from the ‘pitiful’ average of the past 30 years and identifies this as a major challenge for policy makers.

This is a point I’ve repeatedly made myself.

He argues that:

The government should have used – it still could use – the current exceptionally low costs of borrowing as an opportunity to promote a much enlarged programme of investment in infrastructure.

 Again, I agree.

I’m wondering though – should the government announce an investment as a share of GDP target? Maybe 18% to begin with?

The government could then commit itself to increasing public investment to hit this target if private investment failed to materialise.



18 Responses

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  1. Neil Wilson said, on February 11, 2011 at 12:20 pm

    The corporation tax rate cut is a complete farce. Who are they trying to impress with that? Don’t they think accountants can add up or something?

  2. Tim Worstall said, on February 11, 2011 at 12:58 pm


    Increase the share of GDP going in returns to capital and thus increase the incentives to invest perhaps?

    Ooops! No, we can’t do that can we. You want to increase the share of GDP going to wages, don’t you?

    • duncanseconomicblog said, on February 11, 2011 at 1:02 pm

      Increasing investment will increase wages.

      Chris neatly did the maths on this the other week:


      Let’s start from the basic national accounts identity. This says that GDP is the sum of consumer spending (C), investment (I), government spending (G) and net trade (X – M). But GDP is also equal to the sum of wages (W), profits (P) and taxes (T). This gives us:

      C + I + G + ( X – M) = W + P + T.

      Some trivial rearranging gives us:

      W = C + (I – P) + (G – T) + (X – M)

      I stress that this is an accounting identity, not a theory. If we think of all these as shares of GDP, then the share of wages in GDP depends upon four things:

      – Consumer spending. Obviously, strong consumer spending creates jobs, and this demand for labour raises wages. Less obviously – but importantly – high wages, in aggregate, do not destroy jobs as long as workers give them back to employers in the form of higher demand*.

      – The gap between investment and profits. High investment creates a demand for workers to use the new equipment and staff the new shops and offices.

      – Government borrowing. High public spending raises employment and wages (unless it crowds out investment or consumer spending). High taxes reduce them.

      – Net exports. Higher exports create jobs and raise wages. But higher imports reduce them. This is true in either volume terms or price terms. It’s in this sense that Mr King was correct to say that wages have been squeezed by higher import prices.

      This tells us why wages have been squeezed recently. In recent years – before the crisis as well as after – firms invested less than they made in profits. I – P was negative. This tended to depress wages, by creating unemployment. And after the crisis, consumer spending fell partly because easy credit was no longer available. That too created unemployment. These factors, though, were mitigated by government borrowing, G – T (personally, I think it’s just silly to believe that public spending in 2008-10 had any serious crowding out effect.) It was the rise in the latter that raised the share of wages in GDP in 2009.

  3. Dave Holden said, on February 11, 2011 at 1:13 pm

    Take away points:-

    “On land, the biggest issue is restrictive planning controls”

    “On labour, the most important objective is to make it easy for people to work longer.”

    “Enhancing competitive pressure is vital. So must be sustaining support for scientific training and research.”

    “Finally, the government should focus on the structure of the tax system, which has become over-complex, arbitrary and inefficient. A vigorous pruning is necessary. “

    • duncanseconomicblog said, on February 11, 2011 at 1:32 pm

      All important points Dave.

  4. Luis Enrique said, on February 11, 2011 at 1:20 pm

    the danger – obviously – is that your target is too high, and that for some reasons you don’t understand low investment is actually optimal and forcing it higher would destroy resources.

    possible reasons for this might be that the nature of economic activity carried out in this country has changed, so that what’s captured by “investment” data isn’t what actually counts. How well is investment in human capital captured by that data, for example? Increase the proportion of economic activity in which human rather than physical capital matters, the optimal level of investment falls.

    Tim does have a point – remember those Germans crowded in investment by pushing down wages.

    Do you think the government has the ability to direct investment towards positive return (not necessarily private return) projects that the private sector is either unable to identify or unable to coordinate?

    I suppose tax breaks and other supports for investment (Wolf mentions investment allowances) can do it without assuming special knowledge on anyone’s part

    • duncanseconomicblog said, on February 11, 2011 at 1:32 pm

      I agree that’s the danger.

      Of course public investment can also crowd in private investment.

      I think there is a finace problem at the route of much of this (see Chris Dillow today on co-ordination problems and the corporate surplus). And I wonder how much of the (historical) investment/finance problem in Britain is driven by our strange property market and the manner in which banks have usually been willing to finance property speculation rather than productive capacity.

      • Luis Enrique said, on February 11, 2011 at 3:33 pm

        yes, he talks about bank credit being scarce. I wish I knew what he based that on.

        I have seen anecdotal reports of firms with “good prospects” suddenly finding themselves turned away – but there’s a terrible risk of a selection effect – bad, atypical decisions being presented as representative.

        another shout for LPB – corporations could park their funds in mutuals that loan to SMEs etc.

  5. […] This post was mentioned on Twitter by Juan Carlos Mejía, Duncan Weldon. Duncan Weldon said: A quick post in which I float an idea: an investment target. http://wp.me/pt0AC-l8 Very curious for thoughts. […]

  6. Tim Worstall said, on February 11, 2011 at 1:36 pm

    But the Anglo Saxon system doesn’t use bank loans to finance productive capacity. We use markets: paper, bond and equity to do that.

    Might be a good or a bad idea but that is what is done. Hutton like whining that banks won’t finance industry is simply nonsensical: as is Hutton of course.

    • duncanseconomicblog said, on February 11, 2011 at 1:41 pm

      Which is a problem for SMEs… One reason I liked Brown’s idea of a National Investment Corporation on the model of the post-war ICFC.

      Table 1, page 23 of this is useful on comparative financial systems:


      The Uk has a huge equity market (but much of that is foriegn/commodity companies), a tiny private bond market and a highly concentrated banking sector.

      • Chris Cook said, on February 12, 2011 at 2:46 pm


        If only we did use equity and bond markets to finance new productive capacity.

        The stock market is to all intents and purposes a casino, pumped up by QE, while the markets that Tim lauds have been almost entirely dedicated to re-engineering existing productive assets rather than creating new ones.

        As you infer, the SME sector – which actually represents a lot of votes – is scandalously neglected by a system serving solely the interests of big corporates generally, and almost entirely parasitic financial corporates in particular.

        Any party which can create and implement policies which address this constituency, and facilitate the creation of new micro-enterprises, is on to a political winner, I think.

        Interestingly, I think that the Coalition’s Big Society and Localism agenda may facilitate this in a way which they do not intend.

  7. George Irvin said, on February 13, 2011 at 12:59 pm

    But the Treausury already has an ‘investment target’! See my piece based on Sawyer:


    Crucially, it will be seen that investment is assumed to rise by 44% between 2011 and 2015. UK gross Investment (including public investment) at present in slightly less that 14% of GDP: the Treasury assumed that it will reach over 19% of GDP by 2015. This is higher than at any time in the past decade, and is to be achieved despite cuts in public sector investment. The resulting annual GDP growth rate forecast for the period 2011-2015 is 2.7%, higher than the underlying trend growth rate in the past decade.

    In summary, if private investment does not growth as rapidly as forecast, if export growth does not quickly outpace that of imports and if domestic savings do not fall enough, it will not be possible to balance the budget. This is not a matter of conjecture but of national accounting definitions. Moreover, as Sawyer’s piece rightly argues, since the probability of each of the above outcomes is not high, the probability of their joint occurrence is remote.

  8. stephen said, on February 15, 2011 at 1:21 pm

    It is one thing to set an investment target it is another thing to actually achieve it.

    There are an awful lot of cultural barriers and practices that exist in the UK and in particular the City that has meant that investment is more interested in short term returns. Investment managers are far too close to other parts of the City which worship short term returns, and aim to get their money up front from profitable issues, restructurings, asset strippings, taking advantage of tax perks (e.g. through private equity/offshore structures). There own remuneration They are quite frankly not always the sharpest individuals in the City and have formed a pretty stultifying old boy network. Harold Wilson correctly identified the same problem but in the end didn’t achieve much success in addressing it.

    I don’t actually think that it is sensible/possible to replace the current investment managers with civil servants who know better – although there may be some areas where it would be difficult for them to do worse. I suspect the answer lies in using the tax structure to encourage longer term investment and returns, using the regulatory capital structure to do the same and discourage short termism, and a real attack on their corporate governance and remuneration practices. However, this will never happen under the Tories – there are too many vested interests at stake. Remember Cameron’s family were stock brokers and most of his key backers are into hedge funds and private equity.

  9. stephen said, on February 15, 2011 at 1:33 pm

    Duncan’s point about the willingness of banks to lend on property rather than on long term investment projects which actually boost the economy is interesting. Which is the riskier course of action for the economy? So why if bank capital is there to cover risk – was the risk weighting on property lending half of that for most corporate lending under Basel 1 for many years. And now under Basel 2 we really have handed over the keys of the asylum to the lunatics – since the banks can determine their own capital requirements based on their own risk models (which of course have had such an impressive recent track record when it comes to pricing residential property risk). Surely time to stand up to the banks and say boo i’m afraid.

  10. […] the future is uncertain it makes more sense to wait and see. The preponderance of finance and the UK’s low rate of investment may be […]

  11. […] preponderance of finance and the UK’s low rate of investment may be […]

  12. […] boosting investment a core pillar of his economic strategy – something I entirely agree with. I have written at length on the need to boost business investment and also on the problem of the corporate […]

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