I've spent the past day working through the UK's Budget 2025 document — all 150-odd pages of it. The government talks constantly about growth. It's the "number one mission". The Chancellor called it "the engine that carries every one of our ambitions forward". And yet, one thing stood out: there's no serious attempt to answer the central question of British economic underperformance.

Why don't UK firms invest?

The Budget's implicit theory is that if you provide enough capital allowances, infrastructure and R&D funding, private investment will follow. But what if the real constraint isn't incentives at all — it's capability?

The Office for Budget Responsibility has just downgraded its productivity forecast. That single revision wiped £16 billion off expected revenues by 2029-30. The only reason the fiscal hole wasn't even larger is that the composition of GDP has shifted — more growth is now expected from wages (taxed heavily) than profits (taxed lightly). The government was spared by luck, not a stronger economy.

The Budget itself acknowledges that if pre-financial crisis productivity trends had continued, GDP per capita would be around £15,000 higher today. That's not a rounding error — it's a generational failure. And at the heart of that failure is a puzzle the Budget doesn't engage with: UK business investment has been chronically weak for decades. We've had different governments, different tax regimes, different labour market policies. The investment drought remains. Why?

The investment puzzle no one wants to discuss

The UK has had the lowest investment rate in the G7 over the past 30 years — averaging 18% of GDP compared to 21.9% for the rest of the group. This isn't a recent phenomenon or a consequence of any particular policy. It's structural.

The Budget's response is to increase public investment to 2.7% of GDP — the highest sustained level in four decades — and hope this crowds in private investment. R&D spending grows to £22.6 billion annually by 2029-30. Capital allowances are maintained. The theory is straightforward: improve infrastructure, fund innovation, provide tax incentives, and firms will invest.

But we've tried variations of this before. The gap doesn't close. Perhaps the problem isn't the incentives. Perhaps it's the firms themselves.

The management problem hiding in plain sight

There's a body of academic research — the World Management Survey, led by researchers at LSE and Stanford — that's been measuring management practices across countries for years. The findings are consistent and uncomfortable: UK firms, particularly mid-sized ones, systematically underperform on structured management practices compared to US, German, and Japanese peers.

This isn't about intelligence. It's about whether firms have rigorous processes for setting targets, tracking performance, allocating capital, and developing talent. The best UK firms match the best anywhere. But the average is lower, and the tail of poorly-managed firms is longer.

The research finds that firms with better management practices invest more, adopt new technology faster, and achieve higher productivity — even within the same sector and country. The relationship is causal, not just correlational.

Here's why this matters. Consider two manufacturers — one German, one British — each evaluating a £10 million automation project.

The German firm has structured processes for this. They model productivity gains, assess implementation risks, have clear project management approaches, and know how they'll retrain affected workers. Management is confident they can execute because they've done similar things before and have systems to track progress.

The British firm has a less rigorous process. The investment case is based on rough estimates. There's no clear implementation plan. Middle managers are uncertain about their ability to manage the transition.

Same investment opportunity. Same potential returns. But the German firm proceeds and the British firm doesn't — or does a half-hearted version that fails to deliver.

Multiply this across thousands of firms and you get chronic underinvestment. Not because the incentives are wrong, but because the capability to act on them isn't there.

How weak management practices suppress investment

The connection between management quality and investment runs deeper than just individual project decisions.

Short-termism becomes structural. Without clear strategic frameworks, decisions default to what's easy and immediate. Investment requires conviction about the future — that a project will pay off over five or ten years. If management can't articulate a coherent strategy, or doesn't have systems to track whether investments are working, the rational response is to avoid the risk.

Capital allocation stays unsophisticated. Well-managed firms evaluate investments rigorously — discounted cash flows, scenario analysis, clear hurdle rates. Poorly-managed firms use gut feel, or just do what they did last year. This leads to both underinvestment in good projects and misallocation to bad ones.

Technology adoption lags. Adopting new technology requires change management capability. You need to understand workflows, retrain people, adapt processes. If management can't execute that kind of change, firms stick with familiar but inferior approaches. This is why productivity-enhancing technology diffuses so slowly from frontier firms to the rest of the UK economy.

Risk aversion becomes endemic. Managers who aren't confident in their ability to execute complex projects will avoid them. If you don't trust your organisation to adapt when things don't go to plan, you'll stick to incremental improvements rather than transformational bets.

A tax system that works against itself

Even if the Budget can't easily fix management capability, you'd expect it to at least avoid making things worse. In an environment where many firms already lack the capability and confidence to invest, adding extra tax complexity and higher marginal rates nudges them further towards caution. Instead, several measures actively undermine the growth rhetoric.

Take the new cap on salary sacrifice pension contributions. Previously unlimited, the Budget now makes National Insurance payable on contributions over £2,000 per person — raising £2.6 billion by 2030-31. This discourages savings (essential for domestic investment) and increases employer costs. It's a quintessentially anti-growth measure tucked inside a pro-growth Budget.

Meanwhile, the broader tax system continues to disincentivise enterprise at every turn. Marginal tax rates of 62% at £100,000 encourage high earners to go part-time rather than push forward. Stamp duty discourages people from moving to areas with more productive jobs. Lower taxes for self-employed people discourage joining companies, even when doing so would be more efficient. A Budget serious about growth would tackle these perversities. This one largely ignores them.

The Employment Rights Bill — proceeding separately — compounds the problem. It makes the labour market more inflexible and employers less willing to take a chance on new people. Whatever its merits for worker protection, it increases the friction in an economy that already has too much.

The long tail that drags everything down

The UK has world-leading frontier firms. The problem isn't at the top — it's the remarkable persistence of low-productivity businesses that neither improve nor exit. The gap between the best and the rest is wider here than in comparable economies. The long tail of low-productivity firms is, in large part, a long tail of poorly managed firms.

In a dynamic economy, productive firms grow by attracting capital and talent away from less productive ones. Weak firms either improve or disappear. This reallocation process is a major driver of aggregate productivity growth.

In the UK, that process is gummed up. Low-productivity firms persist year after year. The Budget focuses almost entirely on frontier sectors — AI, life sciences, clean energy — rather than asking why so many firms remain stuck at low levels of performance. Competition policy gets virtually no attention. The Competition and Markets Authority receives a single mention, asked to "support growth" but given no specific reforms to pursue.

Even stability isn't being taken seriously

The Chancellor boasted about doubling the headroom against her fiscal stability rule from £9.9 billion to £21.7 billion. That sounds reassuring until you realise the OBR gives her only a 59% chance of meeting the rule — barely better than a coin toss.

Instead of using the OBR's windfall to build a genuinely robust cushion, the Budget allocates most of it to reversing previous cuts and introducing new entitlements. Some of these — like abolishing the two-child benefit limit — may be socially desirable. But they don't strengthen the fiscal position that long-term business confidence depends on.

This matters for the investment puzzle. If firms suspect the fiscal position is fragile — that taxes might rise again next year to fill another hole — they'll hesitate to commit capital. The Budget's thin margin against its own rules doesn't inspire the confidence that encourages long-term investment.

Why this is genuinely hard

I should be fair to the government here. Improving management practices across an economy is harder than building infrastructure or funding R&D. You can't just write a cheque. There's no obvious policy lever.

Germany's Mittelstand ecosystem developed over decades, supported by regional banks with long-term relationships, technical universities embedded in local economies, and institutional structures that encourage patient capital. You can't replicate that with a Budget announcement.

But acknowledging the problem would be a start. The Budget doesn't even do that. It assumes that incentives are the constraint, when the evidence suggests capability is at least as important. It pours money into the supply side of the economy without asking whether firms can actually absorb and deploy that investment productively.

What might a capability-focused approach look like? It's not obvious, but directions exist: embedding operational improvement support into existing industrial strategy programmes, using procurement to favour firms that demonstrate strong management practices, encouraging transparent performance benchmarking within sectors. None of this is as simple as a tax credit. But it would at least be addressing the right problem.

The takeaway

The UK Budget 2025 is stronger on diagnosing the productivity problem than solving it. It acknowledges the gap. It funds infrastructure and R&D. But it doesn't engage with the central puzzle: why UK firms persistently underinvest even when conditions seem favourable.

The answer — or at least a significant part of it — is that many UK firms lack the management capability to identify, evaluate, and execute investment opportunities confidently. They're not stupid. They're rationally cautious given their own limitations. But the aggregate effect is an economy that underinvests and underperforms.

The Budget's implicit theory is that better incentives will produce better outcomes. But incentives only work if firms have the capability to act on them. And when policies like the pension salary sacrifice cap and the Employment Rights Bill actively increase friction, they make the capability gap worse, not better.

In my experience, when organisations keep trying the same category of intervention and keep getting disappointing results, it usually means they've misdiagnosed the problem. The UK has been trying to incentivise its way to higher investment for decades. Perhaps it's time to ask whether the firms themselves are the constraint — and what, if anything, government can do about that.

That's a harder conversation than announcing infrastructure spending. But if we're serious about growth, it's the conversation we actually need.