View from City Road: Industry waits for the promised land

If economic recovery is not to burn itself out in resurgent inflation and a yawning trade deficit, British companies have to invest more to strengthen the nation's industrial base. So far there is little evidence of them doing so. According to Trade Indemnity, companies are still more concerned to strengthen their balance sheets than to boost their capacity.

Recent figures from the Bank of England confirm this deeply worrying diagnosis. Industrial and commercial companies increased their investment in the second and third quarters last year, only to retrench early this year. Their capital spending in the first quarter was 0.2 per cent down on a year earlier, with a 3.7 per cent fall in manufacturing.

The Confederation of British Industry has already expressed concern about companies' lack of enthusiam for investment. The Bank of England goes further and argues that companies are failing to adjust to a new era of low inflation, in which they should be prepared to invest for a lower return and be prepared to wait longer to recoup their money. Typically companies demand 20 per cent returns, or payback in five years. Some 44 per cent of manufacturers told the CBI that inadequate returns were the biggest barrier to capital spending.

Business cannot be forced to do what it doesn't want to; right now it is taking the view that caution is the better part of valour and waiting for hard evidence that Eddie George's verbal commitment to low inflation will be matched by results. There are signs that the 20 per cent rule is beginning to crack but as yet they are few and far between. British economic history is littered with broken promises on inflation. Even those minded to trust the Bank must surely be unnerved as the Government and the Labour Party compete to promise ever lower taxes - a sure-fire recipe for a repeat of the boom and bust of the past 10 years.

Getting the management of the macro-economy right is more important than any amount of tinkering with the tax treatment of dividends, reforms to capital gains tax and the like. John Maynard Keynes was right to talk of the importance of entrepreneurs' 'animal spirits' as the key to investment. Those spirits can be lifted only by clear evidence that British economic policymakers have permanently raised their game.