Britain invests far too little. Yet, Britain’s under-investment has often been misunderstood. The key problem is that our businesses invest less than their foreign counterparts. There are likely multiple reasons for this under-investment, our analysis of public investment points to one: cost. British infrastructure buildout is stunted and expensive due to our lack of state capacity. When Britain’s public sector invests in new transport infrastructure, we pay a large premium over our international counterparts. Every £1 spent on roads, railways, and trams in Britain buys just 60p’s worth of what it would on the continent. If Britain’s 65% cost premium over European peers was eliminated, Britain’s £21bn (£308 per head) annual spend would buy the equivalent of £34.7bn of infrastructure at today’s prices.
This analysis is limited to transport, yet there is evidence Britain infrastructure cost premium applies beyond road and rail. Hinkley Point C, the first nuclear plant built in Britain in three decades, is on course to be the most expensive ever built – six times more expensive than South Korean plants and 77% dearer than France’s Flamanville 3 plant (which uses the same EPR design).
It is likely that the underlying causes of high infrastructure costs, most notably planning regulations, also affect the private sector. While public investment projects can be justified on a wide range of grounds, business investments only go ahead when investors feel confident they will make a reasonable return. The causes of high infrastructure costs therefore may push many private projects that would be investable in Europe or the US to the point of unviability. For example, in 2023 London was the most expensive major European city to build a data centre, costing 12% more per Megawatt of capacity than in Amsterdam and 18% more than Vienna.71
The high cost of new transport and energy infrastructure is likely to also reduce the potential returns of private investment. Other than London, Britain’s cities tend to have worse road and rail connectivity than their European or US counterparts, reducing the availability of labour. Additionally, the high cost of building nuclear has contributed to the UK’s heavy exposure to spikes in the price of oil and gas. British businesses must contend with the highest industrial energy prices in the developed world. As a result, investments in equipment for energy-intensive industries that may be viable in the US or Europe, may be unviable here.
Most attempts to raise Britain’s persistently low levels of investment have focused on the demand-side: reforming the tax system to improve the incentive to invest (Full Expensing) or consolidating pension funds and creating new mandates to invest in high-growth British businesses. There may be a strong case for both policies, though there are certainly risks to the latter, but neither addresses Britain’s fundamental problem: that rules and regulations that make building more expensive (and simply harder) than it needs to be.