Ben Chu: The long and the short of it is that we urgently need more investment


If you require evidence of the short-termism that bedevils our economy you probably require a new pair of spectacles. Bank bosses are still busily trying to pump up their institutions' returns on equity at the same time as they starve small and medium-sized companies (the growth drivers of the future) of loans for expansion. Pension fund managers have resisted the inducements of the Chancellor to invest in infrastructure bonds, preferring instead to carry on ploughing their money into risk-free gilts.

Big businesses, despite the slashing of corporation tax, relentlessly build up their cash piles and consider equity buybacks to support the all-important share price. Energy firms demand massive state subsidies to engage in new plant construction needed to keep the country's lights on.

The depressing results are plain to see in the national accounts. Business investment levels remain 13 per cent below where they were in 2007. This needs to change.

The Office for Budget Responsibility's forecasts for an eventual recovery are based on the assumption that business investment will pick up strongly from 2014. If that doesn't happen, kiss goodbye to the recovery.

This is, appropriately, the subject of Labour's first policy review, which reported this week. Written by Sir George Cox, a former head of the Institute of Directors, it argues that short-termism has become "an entrenched feature of the UK business environment".

This follows a similar report last year by the economist John Kay for Vince Cable's Business Department, which argued that executives are often focused on the next quarter's earnings rather than looking to the longer term.

Andrew Smithers, of the investment firm Smithers & Co, is also thinking along these lines. He argues that the stock-based bonuses awarded to UK company bosses in recent years have introduced a dangerous bias among managements towards pumping up profit margins at the expense of investment.

However, the solutions proposed by Mr Kay and Sir George have a different emphasis. Sir George calls for the capital gains tax regime to penalise people who flip their shares quickly and reward those who hang on for longer. He says late-coming shareholders should be barred from participating in takeover votes in order to disenfranchise opportunist hedge funds out to make a quick buck.

Mr Kay, on the other hand, who was commissioned by Mr Cable to look at whether there was a case for legislation to throw sand in the wheels of big corporate takeovers, is much less prescriptive. He suggests that new rules governing takeovers would probably do more harm than good, and anyway would only address the symptoms of the illness rather than the disease itself, which he identifies as the gulf between those who invest money and those to whom it belongs. Sir George wants new rules. Mr Kay wants broad cultural change. Of the two, Mr Kay is the more compelling.

But could these analyses be missing the point? Chris Dillow of the Investors Chronicle, and an insightful economics blogger, has a different take on the UK's investment dearth. He argues that it is, in fact, rational for firms to eschew long-term spending plans because the future is so uncertain. Why should a hi-tech firm, for instance, make spending plans for a decade hence when the inexorable forces of technological transformation might well wipe it out long before then?

This inescapable uncertainty is why John Maynard Keynes talked of "animal spirits". The belief that any given investment will result in strong revenues cannot be based on evidence – we cannot see the future and so must rely on irrational, even primal, enthusiasm. This analysis lends support to the idea that the authorities today should concentrate on stimulating those animal spirits in the economy, rather than them getting sidetracked with an attempted overhaul of corporate and investor incentives.

It's a compelling debate. Yet it's not clear to me why both descriptions of the world can't be true. Incentives in our corporate remuneration system and equity markets might well be inhibiting long-term investment. But weak demand could be exacerbating the problem. This would suggest we need to try to improve corporate and investor incentives while also injecting a bit of irrational optimism into the economy. If your trousers are falling down, it's generally a good idea to go for the belt and braces.

Start your day with The Independent, sign up for daily news emails
Arts and Entertainment
Brendan O'Carroll as Agnes Brown in the 2014 Mrs Brown's Boys Christmas special
tvCould Mrs Brown's Boys have taken lead for second year?
Arts and Entertainment
Jack O'Connell stars as Louis Zamperini in Angelina Jolie's Unbroken
film review... even if Jack O'Connell is excellent
peopleIt seems you can't silence Katie Hopkins, even on Christmas Day...
Arts and Entertainment
Wolf (Nathan McMullen), Ian (Dan Starky), The Doctor (Peter Capaldi), Clara (Jenna Coleman), Santa Claus (Nick Frost) in the Doctor Who Christmas Special (BBC/Photographer: David Venni)
tvOur review of the Doctor Who Christmas Special
Life and Style
Arts and Entertainment
Japanese artist Megumi Igarashi showing a small mascot shaped like a vagina
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
Arts and Entertainment
tvChristmas special reviewed
Arts and Entertainment
Jenna Coleman as Clara Oswald in the Doctor Who Christmas special
tvForget the rumours that Clara Oswald would be quitting the Tardis
Arts and Entertainment
The Queen delivers her Christmas message
newsTwitter reacts to Her Majesty's Christmas Message
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Selby Jennings: Oil Operations

Highly Competitive: Selby Jennings: Our client, a leading European Oil trading...

The Jenrick Group: Night Shift Operations Manager

£43500 per annum + pension + holidays: The Jenrick Group: Night Shift Operatio...

SThree: Trainee Recruitment Consultant - LONDON

£20000 - £25000 per annum + OTE £40,000 + Car + Pension: SThree: SThree are a ...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £35K: SThree: We consistently strive to be the...

Day In a Page

A Christmas without hope: Fears grow in Gaza that the conflict with Israel will soon reignite

Christmas without hope

Gaza fears grow that conflict with Israel will soon reignite
After 150 years, you can finally visit the grisliest museum in the country

The 'Black Museum'

After 150 years, you can finally visit Britain's grisliest museum
No ho-ho-hos with Nick Frost's badass Santa

No ho-ho-hos with Nick Frost's badass Santa

Doctor Who Christmas Special TV review
Chilly Christmas: Swimmers take festive dip for charity

Chilly Christmas

Swimmers dive into freezing British waters for charity
Veterans' hostel 'overwhelmed by kindness' for festive dinner

Homeless Veterans appeal

In 2010, Sgt Gary Jamieson stepped on an IED in Afghanistan and lost his legs and an arm. He reveals what, and who, helped him to make a remarkable recovery
Isis in Iraq: Yazidi girls killing themselves to escape rape and imprisonment by militants

'Jilan killed herself in the bathroom. She cut her wrists and hanged herself'

Yazidi girls killing themselves to escape rape and imprisonment
Ed Balls interview: 'If I think about the deficit when I'm playing the piano, it all goes wrong'

Ed Balls interview

'If I think about the deficit when I'm playing the piano, it all goes wrong'
He's behind you, dude!

US stars in UK panto

From David Hasselhoff to Jerry Hall
Grace Dent's Christmas Quiz: What are you – a festive curmudgeon or top of the tree?

Grace Dent's Christmas Quiz

What are you – a festive curmudgeon or top of the tree?
Nasa planning to build cloud cities in airships above Venus

Nasa planning to build cloud cities in airships above Venus

Planet’s surface is inhospitable to humans but 30 miles above it is almost perfect
Surrounded by high-rise flats is a little house filled with Lebanon’s history - clocks, rifles, frogmen’s uniforms and colonial helmets

Clocks, rifles, swords, frogmen’s uniforms

Surrounded by high-rise flats is a little house filled with Lebanon’s history
Return to Gaza: Four months on, the wounds left by Israel's bombardment have not yet healed

Four months after the bombardment, Gaza’s wounds are yet to heal

Kim Sengupta is reunited with a man whose plight mirrors the suffering of the Palestinian people
Gastric surgery: Is it really the answer to the UK's obesity epidemic?

Is gastric surgery really the answer to the UK's obesity epidemic?

Critics argue that it’s crazy to operate on healthy people just to stop them eating
Homeless Veterans appeal: Christmas charity auction Part 2 - now LIVE

Homeless Veterans appeal: Christmas charity auction

Bid on original art, or trips of a lifetime to Africa or the 'Corrie' set, and help Homeless Veterans
Pantomime rings the changes to welcome autistic theatre-goers

Autism-friendly theatre

Pantomime leads the pack in quest to welcome all