Tuesday 05 May 2026 5:04 am | Updated: Monday 04 May 2026 3:32 pm
Britain's £800bn Investment Pile That Isn't Being Used
By Andrew Allum
Britain's 'mainstream investors' hold more than £800bn in net financial wealth, an investment sum large enough to meaningfully address the capital gap, writes Andrew Allum.
Compounding is taught in GCSE maths, but not its financial implications. Players of Civilization 4 would be familiar with the apocryphal Einstein quote: 'compound interest is the most powerful force in the universe.' However, the power of compounding in economics depends on the rate.
In the 1980s and 1990s, labour productivity (GDP per hour worked) grew so fast that it doubled in a generation (2.5 per cent growth, compounded for 28 years). Generation X therefore earned roughly twice what their parents had earned in real terms. Many things worked well as a result.
Since 2000 this has slowed down, to an average of 0.9 per cent growth per year. At this rate it takes 79 years to double. In this context, many have lost faith in economic growth and politics has taken an ugly turn towards envy. As a result of this slowdown, we have slipped down international rankings. Using GDP per hour worked in PPP terms, we are 46 per cent below Norway's productivity and 15 per cent or more below Germany, Netherlands, US and a dozen other advanced economies. If we had maintained the 1980s and 1990s pace of productivity growth, the result of faster compounding would mean that we would earn £24 per hour more worked.
Why Has Productivity Slowed So Drastically?
According to the Productivity Institute, a major reason for this slowdown is a lack of private capital investment. They estimate the UK's capital gap (the aggregate amount of business capital that we have not invested compared with close comparators US, Netherlands, Germany and France) at £2 trillion. We have been in the bottom quartile of the OECD for gross fixed capital formation every year since 1993 and to reach the OECD average would require investing an additional £100bn per year.
This lack of capital is apparent in the scaleup problem whereby British private businesses struggle to raise capital to grow from SMEs into global enterprises. This directly constrains aggregate productivity and discourages entrepreneurs from building for the long term. Another example of compounding is retail investment returns. At the low end, returns on cash struggle to cover inflation but still British households hold the vast sum of £2.3 trillion in cash.
By contrast the long-run UK equity return is 9.1 per cent (UBS). The equity risk premium is familiar, almost mundane, to professional investors (and City AM readers) who use the concept to underpin very large investment decisions and make a lot of money for themselves and their clients.
The Untapped Retail Cash Pile
In the Jobs Foundation's latest report, Jobs and Investment: Using untapped capital to boost productivity and growth, Duncan Simpson and I have linked together the low level of UK business investment with the retail cash pile.
We found that financial wealth is surprisingly widespread in the UK. There are 13.5m households with between £10,000 and £250,000 in net financial wealth (ONS) who are currently excluded from many investments. This population holds more than £800bn in net financial wealth, a sum large enough to meaningfully address the capital gap. We call them 'mainstream investors', and we asked why they hold so much cash rather than investing. 83 per cent said they would move more cash into productive investments if government acted to remove barriers and deterrents through four categories of reform: better education, easier access, higher returns and lower risk. The reform proposals do not involve tax breaks, mandates or quotas. They come from the belief that involving the minds of millions of mainstream investors, as well as their cash, will lead to better outcomes and more growth.
The British Public Can Plug the Investment Gap
Mainstream investors should have full access to the information, educational courses and tools (product calculators) to make their own investment decisions. Many may be novices to financial investment and at the same time capable and ambitious people who are not novice to making complex decisions in other fields.
To improve access, the vision is low ticket and low fee entry to many more investments through new channels. To attract more investment, the asset class itself (British business) needs to be more attractive through supply-side reform and tax and regulatory policies aimed at providing a more stable medium term investment outlook. There is another reason for retail cash to be mobilised into investment: the looming fiscal burden of funding state pensions and benefits to pensioners which cost 5.9 per cent of GDP, rising to 8.9 per cent (OBR) by the time Generation Z retire. This is unsustainable. Instead, many more people engaged in productive investment would become self-sufficient in retirement.
It appears that the FCA wants to move away from risk avoidance and needs political cover to do so. These reforms aim at a more radical move in this direction.
More private capital investment is an essential and important part of the solution to the UK's productivity problem and the British public has the cash to fund it.
Andrew Allum is a trustee of the Jobs Foundation.
