INSIGHTS

The UK’s economy is suffering from

investment imbalance - Capital Vs Human

At 10.4%, inflation in the UK is currently the highest in the G7. As energy costs come out of the year-on-
year price comparison and the bank rate stabilises, inflation is expected to fall later this year. Although,
this does not mean it will bring prices down. Therefore household budgets will continue to be squeezed.
This will weaken demand, putting pressure on businesses’ budgets resulting in weaker investment - a
key tool for boosting long-term economic growth.

The Office for Budget Responsibility (OBR) expects record falls in living standards this year and next. It
has also lowered long-term economic growth forecasts and expects the economy to contract this year,
despite the measures announced by the Chancellor in the budget.

CHART 1: UK’s Potential growth in output falls over the forecast period
Growth in Potential Output (annual % change)

5%

4%

Total Factor
Productivity
3%

Capital Deepening

2%
Average Hours

1% Employment Rate

0% Adult Population

2022 2023 2024 2025 2026 2027

-1%

SOURCES: OBR

CHART 2: The share of human contribution to the UK’s potential growth

weakens over the next 5 years.
Share of Contribution of components to potential growth (%)

60%

50%

40%

30%

20%

10%

0%

Adult Population Employment Rate Average Hours Capital Deepening Total Factor
-10% Productivity

-20%

2022 2023 2024 2025 2026 2027

SOURCES: CMI Research & Economics; OBR By CMI Economics
Chancellor pushes for capital investment - only part of
the challenge

Almost £9 billion - the most expensive measure in the March 2023

Budget, was allocated to capital investment incentives. The measure
is a successor scheme to the temporary Covid-era “super-deduction”
allowing companies to write-off the full cost of their investment against
taxable profits. A recent study by the Resolution Foundation found a key
determinant of the UK’s underperforming productivity is weak business
investment. So the announcement is a step in the right direction. But
the scheme only runs for three years, demonstrating hesitancy around
longer-term commitments to supply-side measures needed to boost
long-term growth.

Future growth held back by capital vs human imbalance

The OBR’s latest potential growth forecast, which is the economy’s future
capacity to produce output from its capital and workers, falls to c.1.75%
by the end of the forecast period. The forecast indicates a worrying
imbalance between investment in people and machines. Over time, the
share of human contribution to the economy’s potential growth weakens,
whereas the growth of capital’s contribution remains robust. This
suggests an underinvestment in the human components of the future
economy - employment and worker hours - both of which are influenced
by skills: the ability to work well.

To boost potential growth, investment in capital, and the quality and

quantity of labour are all required. However, the ONS recently found that
worker productivity impacted the UK’s poor productivity performance
more than capital investments. It therefore seems sensible to prioritise
investment in people - workers’ skills.

INSIGHTS
Apprenticeships are a timely solution

In the budget, broader education and skills policy were sparsely

mentioned, despite being key for achieving long term economic growth.
Michael Saunders, former Monetary Policy Committee member, stresses
supply side policies to fix skills and productivity are a long term project,
often slow to show up in official statistics but, “that is not a reason to
avoid doing them; if anything, it is a reason to avoid delay.”

The most timely supply-side solution lies in apprenticeships which last

between one and five years. Apprenticeships provide immediate on-the-
job skills alongside theory, enhancing worker productivity quicker than
traditional forms of education. Recent CMI economic modelling found that
by the end of an apprenticeship, employers in the private sector saw a
productivity gain of c.£7000 over and above their initial costs. This means
that, in one year, the estimated productivity gain to the UK economy from
all apprenticeships is between £600-700 million And, by the 10th year,
the productivity gain to the UK economy is c.£7 billion per annum.

In the Future of the Apprenticeships Levy report, CMI also recommends

initiatives to incentivise investment in high-quality skills. These include:
tax allowances encouraging investment in skills, an apprenticeships
opportunity fund, a new regional skills deal and CMI’s Help to Hire
initiative complementing the newly-announced returnships for older
workers.

For more insights & resources

visit the CMI website:
www.managers.org.uk

INSIGHTS