British productivity paradox: Workers have $128 capital/hour vs $190 in peers but generate 22% more value
The UK workforce operates with a third less capital than workers in comparable economies, creating a £2 trillion shortfall that explains the nation's productivity puzzle
British capital deficit directly translates to stagnant wages, with real income growth averaging 33% per decade from 1970-2007 but flatlining since 2008. The Productivity Institute study by Tera Allas (University of Manchester) and Dimitri Zenghelis (University of Cambridge) provides the first rigorous quantification of this gap, revealing the true scale of the UK's investment challenge.
By the numbers:
UK workers have access to 33% less capital per hour worked than peers in the US, Germany, France, and Netherlands
The absolute capital gap stands at £2 trillion (2019 figures)
UK productivity is 15% below Germany and the US, 10% below France
GDP per hour worked: UK at $66 vs peer average of $72 (PPP-adjusted)
Capital stock per hour: UK at $128 vs peer average of $190 (PPP-adjusted)
At current investment rates, closing the gap would take nearly 100 years
With 4% of GDP additional annual investment: still requires a century
To close gap in 20 years: UK needs 28% of GDP investment rate (10 percentage points above 30-year average)
What they found: Researchers analyzed the EUKLEMS & INTANProd dataset, which includes both traditional assets (machinery, buildings, transport equipment) and intangibles (software, R&D, training, organizational capital). The study uses harmonized net capital stocks with geometric depreciation to approximate productive capital.
The scope: Capital measured includes:
Traditional tangible assets: Equipment, structures, transport (excluding residential dwellings in main case)
National accounts intangibles: Software, databases, R&D, intellectual property
Additional intangibles: Training, organizational development, design, branding, market research
Key insights:
UK capital generates 22% more value per unit than peer countries, indicating high returns but persistent underinvestment
UK has second lowest capital stock per hour among 12 countries analyzed
Investment gap persists across all sectors: services, manufacturing, ICT, pharmaceuticals
Sensitivity analysis shows gap ranges from 12% to 50% depending on methodology, but remains substantial in all scenarios
Including residential housing increases absolute gap to £6.2 trillion
Go deeper on causes:
Investment flows chronically low: UK averaged 18% of GDP (1993-2024) vs 22% for France/Germany, 21% for US
Policy uncertainty: Rapid political changes and fiscal constraints deter long-term commitments
Ownership structure: UK has most dispersed shareholding among OECD countries, creating short-termism
Management quality: Poor assessment of future risks and returns, cultural differences in ambition
Coordination failures: Between firms, financial markets, and government
Public infrastructure: Underinvestment reduces returns to private capital
Current policy response:
Chancellor Reeves' National Wealth Fund: "tens of billions" equals roughly £20 billion annually
Expected additional investment over parliament: £100 billion total
Public sector net investment forecast to decrease from 2.7% to 2.4% of GDP by 2029-30
Business confidence remains weak (ICAEW, 2025)
What's needed:
Immediate action: Investment increase of at least 1% of GDP public, 3% total (£77 billion annually)
Strategic coordination: Align regional development, skills training, innovation diffusion
Fiscal reform: Adjust accounting to consider assets, not just liabilities
Macroeconomic space: Boost household savings, consider revenue-raising measures
Management focus: Improve firm-level decision-making and technology adoption
Stability: End decades of policy churn
Methodology notes:
Uses 2019 data to avoid COVID distortions
Compares whole economy excluding households as employers
Converts currencies using purchasing power parities for accurate comparison
Hours worked data from OECD for international consistency
Bottomline: This isn't about "more investment at any cost" but recognizing that marginal increases and minor initiatives are distractions. The UK sits in a fundamentally different steady state from its peers. Breaking this low productivity/low capital equilibrium requires unprecedented, coordinated action measured in hundreds of billions, not tens of billions, sustained over decades.