The productivity puzzle: Why Britain has plenty of capital but no capital spending
Despite holding £1.9 trillion in financial wealth, the UK has failed to invest in its future, leaving a generation stuck with 20-year-old productivity and pay, say Andrew Allum and Jack Duckworth
When Warren Buffett announced his retirement last month, he had created many billions, and many memorable quotes such as “Someone’s sitting in the shade today because someone planted a tree a long time ago”. In the UK, it seems we lost the habit of planting these metaphorical trees more than 20 years ago.
Governments want growth (to service the national debt), whereas individuals want growth per capita – or more precisely, growth in GDP per hour worked – so we can foresee earning a better living in fewer hours. So the measure of focus should be Labour Productivity: GDP per hour worked. The ONS tracks this and recently reported that it was 0.2 per cent lower in Q1 2025 compared with a year earlier, following many years of poor growth.
Back in the 1980s and 90s, the UK achieved 2.5 per cent annual improvement in productivity. This implies a doubling every 30 years – meaning a typical Generation X worker, born in the 1960s, could expect to earn twice what their parents did, above inflation.
Everything in life works better when you earn twice what your parents did. Life has momentum
Everything in life works better when you earn twice what your parents did. Life has momentum. They are proud of you. You don’t resent taking care of them because, with hindsight, they were poor.
But this trajectory faltered after the millennium. The early 2000s saw a boom in financial services that masked the problem. Measuring the 90 per cent of the economy outside financial services, the UK achieved less than one per cent annual improvement in the 2000s. The whole economy achieved only 0.4 per cent annually in the 2010s — a doubling every 160 years, which pushes the boundaries of economists’ understanding of ‘in the long term’.
A problem older than Gen Z
Generation Z, born in the 2000s, are entering a workforce that is barely more productive than when they were born. The problem is older than Facebook (2004), YouTube (2005) and Twitter/X (2006) – and indeed older than Strictly Come Dancing (2004), The Apprentice (2005) and The X Factor (2005). With all these new ways to connect and to find talent, why do we have a productivity puzzle?
A 2024 academic survey of economists cited lack of private investment as the #1 factor. The data backs this up. OECD figures show that the UK has been in the bottom quartile for gross fixed capital formation every year since 1991, across more than 30 OECD countries. It has also consistently been in the bottom quartile for productivity growth.
Our work shows a link — the OCED, countries that invested more private capital in the 2000s and 2010s saw faster growth in productivity.
Had the UK kept up with other leading economies and invested around three to four per cent of GDP more (roughly £80-100bn annually), and maintained productivity growth at the 1980s-90s rate, we would now be earning 36 per cent more, or an extra £37 per hour.
Here’s the paradox: the UK public holds £1.9 trillion in net financial wealth, excluding pensions and housing. How to attract that capital into productive uses?
Andrew Allum and Jack Duckworth are Partners at L.E.K. Consulting. “The UK Productivity Puzzle: A Long-Term Lack of Private Capital Investment” is published on lek.com.