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Business investment in the UK is set to drop for the first time in six years in the wake of Rachel Reeves’ Budget, as high interest rates and weak corporate sentiment weigh on companies’ capital spending.
Expenditure by businesses on assets will contract by 0.4 per cent next year, according to forecasts from the Office for Budget Responsibility, the first decline since Covid-19 curbs meant the economy was in effect shut down.
Despite growing by more than 2 per cent annually since 2021, investment would be “sluggish” until 2030 on the back of lower profits, poor sentiment and borrowing costs pushing up the cost of capital, the fiscal watchdog said.
The OBR’s estimate, published on Wednesday, is in stark contrast with the chancellor’s ambition to increase business investment as part of a wider push to boost the economy and improve living standards.
Reeves in the Budget said private investment was “the lifeblood of economic growth” and stressed her commitment to the “full expensing” scheme, which allows companies to write off the cost of investment in some assets.
She also introduced a new 40 per cent first-year allowance, enabling businesses to write off a greater share of their investment bill upfront.
Yet the fiscal event raised taxes by £26bn, pushing the overall burden to a record 38 per cent of GDP by the end of the decade and prompting accusations that the chancellor had failed to meet a promise to kick-start growth.
Neil Carberry, head of the Recruitment & Employment Confederation, a trade body, said Reeves had emphasised the importance of growth but that her second Budget offered “too little to get business investing”.
“With rising business costs, the incentives . . . are not as strong as they need to be, and certainly not as strong as some of our competitors.”
Business investment is considered a key factor for productivity growth, the ultimate driver of living standards. But it stagnated after 2016, when the country voted to leave the EU.
Investment rose to an eight-year high of 10.7 per cent of GDP in 2024, up from a post-Brexit referendum low of 10.3 per cent in 2021, according to the OBR. It is expected to edge up to 10.8 per cent this year but fall from next year, ending the decade at 10.4 per cent of GDP.
Although interest rates have fallen from a 16-year high of 5.25 per cent in 2024 to 4 per cent now, they remain historically high, weighing on chief financial officers’ willingness to spend.
“Business optimism is just non-existent, and usually that means business investment will fall,” said Paul Dales, economist at consultancy Capital Economics, adding that poor levels of investment had long been “one of the Achilles heels of the UK economy”.
“Businesses really need a stable political and economic environment, which is just not something the government has really been able to generate,” he added.
Signs of weakness are already emerging: annual growth in business investment slowed to 0.7 per cent in the three months to September, according to official data. The figure was down from 3 per cent in the second quarter of 2025 and 5.8 per cent earlier this year.
Meanwhile, a majority of businesses in the manufacturing and retail sectors told the CBI that they were investing less as speculation swirled around the Budget in October, according to research by the lobby group.
A separate Bank of England survey in September found policy uncertainty and financial constraints meant businesses’ plans were “subdued”.
Some economists have warned that, despite the recovery in business investment over the past three years, it remained unclear how much it had boosted the economy because it was driven by only a few sectors.
In the three years to the second quarter of 2025, business investment rose by 51 per cent in utilities such as electricity and water, ONS data shows. But it dropped by 15 per cent, 10 per cent and 4 per cent in manufacturing, financial services and hospitality respectively.
Investment in information and communications and transport rose over the same period, but excluding utilities, overall business investment was up only 1 per cent over the same period.
Sandra Horsfield, economist at bank Investec, said that while the utilities sector “sorely needed” more investment, bigger inflows were “not necessarily adding much to the productive capacity of the economy”.
“It will not deliver faster long-term productivity growth, the holy grail when it comes to prospects for GDP growth and sustainable increases in living standards,” she added.