The Pre-Budget Report published by the Treasury last November picked out the problem. It said: "Our record on investment has been poor by international standards." And it added one possible explanation: "The UK's track record of macro-economic instability has discouraged long-term planning and investment."
This is a possibility that has concerned the Bank of England for some time. For one thing, if there is too little investment in new capacity in some sense, the economy will run into the inflationary buffers sooner rather than later. For another, the Bank had hoped that the introduction of inflation targeting after the September 1992 exchange rate mechanism crisis would have started to improve the record of macroeconomic instability. Ever since that point, in fact, the economy has been expanding much more steadily than was the norm in previous recoveries.
In the Bank's Quarterly Bulletin, published today, one of its economists, Simon Whitaker, takes a closer look at the recent investment performance. It notes that since the recovery began, starting in early 1992, total investment has declined as a share of GDP. About one-third of the relative weakness is due to low investment by government, but the private sector has accounted for two-thirds. A drop in residential construction since the property price collapse explains a further one third of this. But the rest is down to business investment, which has risen far less than in the 1981-1986 upswing, as the chart shows.
Most of the attention about the issue of missing investment has focused on manufacturing, but the Bank's breakdown of the data immediately turns up two facts that challenge the received wisdom. One is that within business, it is services and utilities that explain the relative weakness; and as the utilities enjoyed a privatisation-related investment boom, the more recent weakness is perhaps not surprising. The other is that business investment as a share of GDP might have grown slowly during this recovery but it started at a high level and its share is now above the long-term average.
Mr Whitaker goes on to ask what it is that determines this share. Why do businesses want to invest as much - or as little - as they do? Did they start this recovery with "too much" capital already, explaining why investment has climbed so slowly since 1992? He also looks at whether investment is mis-measured.
The Bank's findings are that, on balance, the after-tax cost of investing in new capital has been lower during this recovery than the previous one. The reduction of tax allowances for investment spending in 1984, phased in over two years, raised the tax rate by more than subsequent reductions in corporation tax have reduced it. But the pre-tax cost of finance has probably been well below its level during the 1970s and 1980s.
This does assume that there has been no change in the average life of a capital asset, which might not be true. The growing importance of information technology, which has a short life, in services in particular would imply investment had become more expensive. But equally, the price of IT goods has probably been overestimated because they are falling so rapidly alongside quality improvements, and that would work the other way.
So investment has probably been less costly than in the past. At the same time, stock market values have soared and profitability has been high. All of these should have encouraged an investment boom. The paper identifies three reasons why the boom never materialised. One is that companies entered the 1990s with an unprecedented burden of debt. Much of the profit of British business during the early stages of the recovery went to repay debt and restore balance sheets to health. A second is the high-dividend payout ratio, which has tended to reduce retained earnings. Until Gordon Brown's corporate tax reforms, the UK tax system encouraged high dividends to shareholders. This might change in future thanks to the abolition of advance corporation tax, as pension funds will no longer get a refund on ACT paid on dividends on their behalf.
But the third possibility is simply that the statistics have under-recorded investment spending by overstating the prices used to convert actual cash spent into "real" terms. This type of mis-measurement would be worse when prices were falling, as they have been for some types of investment good. Certainly, business surveys of investment intentions have been far out of kilter with the official statistics - especially in services - for at least a year. In addition, the ONS has found that over a 10-year period its statisticians tend to underestimate investment at first and revise it up significantly later.Since 1986 the average upward revision in the year-on-year growth rate of total investment has been 2.6 percentage points.
Finally, the Bulletin article observes, spending on software will not be included in the definition of investment for statistical purposes until later this year. Even before panic about the year 2000 problem and converting financial computer systems for the euro set in, software spending has been a huge item for many businesses. The US has long included software within the investment umbrella in its figures.
Is it safe to conclude that Britain has no investment problem after all? It is unlikely that Mr Brown would agree. The Government's ambitions for creating well-paid and meaningful jobs for more people depend totally on British industry to create them. Without the growth in capacity, whether in manufacturing or services, there is unlikely to be enough jobs growth.
And expanding and renewing the nation's capital stock, implementing new technologies, is the path to improving productivity and, ultimately, levels of prosperity. The moral is that we might have had more of it than we thought, but this is one good thing you can't have too much of.