Effective Investment: Stimulating UK Productivity

Economic growth fundamentally relies on productivity gains, allowing more output from the same resources to strengthen public finances and broad-based prosperity. However, the UK has experienced a severe productivity slowdown compared to other OECD economies, driven largely by a decline in Total Factor Productivity (TFP). Despite holding approximately £5.5 trillion in investment capital, the UK financial system routinely fails to drive this required productivity. The system increasingly mediates rather than invests, meaning capital circulates through complex chains focused on liquidity and arbitrage rather than funding business expansion.

NCC conceptualises this environment as an "investment chain" linking savers, pension schemes, fund managers, capital markets, and society. A healthy investment chain requires the system to differentiate between long-term and short-term risk, value risk-bearing capital, and prioritise primary investment over secondary market trading. Currently, the system is broken at nearly every link.

  • Long-term risk is improperly converted into short-term risk, driving institutional investors toward low-volatility, highly liquid assets.

  • Primary investment is bizarrely used to support secondary investment, while UK asset owners behave like short-term traders.

  • Secondary investment is persistently directed into passive overseas global companies and non-risk-bearing capital, starving UK technological champions of funding.

  • Regulatory interventions meant to eliminate systemic risk have instead created the "stability of a graveyard" by attempting to squeeze all risk out of the system entirely.

To correct these failures, the report advocates shifting the terminology from "productive investment" to "effective investment," demanding that capital deployment generates demonstrable real-world economic and social effects. Policymakers and the industry must reduce market demands for immediate, daily liquidity and actively promote long-term investing over passive index-hugging. The government should implement an "Effectivity Screen" across key systemic points to ensure asset allocators measure and report their direct contributions to jobs, innovation, and social objectives. Furthermore, significant consolidation of UK pension funds is necessary to ensure asset owners possess the scale and competency required to bear long-term, illiquid risks.

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