Britain Maintains Lowest G7 Investment Rate Amid Government Spending Push

Britain recorded the weakest investment levels among G7 economies during the third quarter of 2025, with total public and private investment reaching merely 18.6 per cent of gross domestic product. The figures, released by the Organisation for Economic Co-operation and Development, underscore a persistent structural weakness that has plagued the British economy for three decades.

The United Kingdom has occupied the bottom position among the world’s seven largest economies for 23 of the past 31 years, a record that reflects systemic underinvestment across both public infrastructure and private capital formation. Japan maintained the highest investment rate at 27 per cent during the same period, whilst Germany, despite enduring a two-year recession, achieved a 20 per cent investment rate, substantially outpacing Britain’s performance.

The Labour government has responded to this chronic investment deficit with commitments to increase public capital expenditure by £13 billion in the 2026-27 fiscal year. According to analysis from PwC, this represents the largest two-year increase in public investment since the financial crisis of 2008. Barret Kupelian, chief economist at PwC, noted that whilst government spending will accelerate, private investment is projected to stagnate owing to deteriorating business sentiment and compressed profit margins.

The broader investment landscape presents significant challenges for policymakers seeking to close the gap with international peers. EY has identified approximately 1,000 investment projects scheduled to commence or complete by 2040, with government capital expected to provide £1.1 trillion of the total funding requirement. However, the government’s commitment to raise defence spending to 3 per cent of GDP by decade’s end creates an immediate funding shortfall of £583 billion. Should defence expenditure reach 5 per cent by 2035, as current trajectories suggest, this gap would expand to £817 billion.

Mats Persson of EY-Parthenon emphasised that whilst the government has made progress addressing infrastructure funding deficits, the simultaneous transitions required across energy, infrastructure, health and defence sectors continue to escalate funding requirements. The professional services firm’s analysis highlights the fiscal constraints facing the government as it attempts to maintain multiple capital-intensive programmes.

Britain’s investment underperformance has been identified as a primary driver of the economy’s weak productivity growth over recent decades. Business investment facilitates technological adoption and innovation, whilst public capital expenditure on housing and transport networks provides essential infrastructure for economic activity. The persistent gap between British investment rates and those of comparable economies suggests deep-rooted structural impediments to capital formation.

Louise Haigh, former transport secretary, characterised the investment deficit as the product of half a century of short-termism. She argued that the current policy-making cycle, based on five-year horizons, fails to provide businesses with the long-term confidence necessary for substantial capital commitments. Haigh advocated for fundamental reforms to fiscal institutions, including the Office for Budget Responsibility and HM Treasury, to encourage sustained investment.

Critics have pointed to recent government policies as exacerbating investment challenges. Richard Tice, deputy leader of Reform UK, contended that the administration has created a hostile environment for capital allocation, with rising uncertainty and ideologically driven policies deterring wealth creation. He cited record-low business confidence as evidence that investors are redirecting capital to more favourable jurisdictions.

The divergence between public and private investment trajectories presents a significant risk to the government’s growth strategy. Whilst state-led capital expenditure will accelerate sharply over the coming two years, the anticipated stagnation in private investment threatens to offset these gains. The government faces the dual challenge of maintaining fiscal discipline whilst creating conditions conducive to sustained private capital formation, a balance that has eluded British policymakers for more than three decades.