The Impact of the Bonus Culture on the UK Economy

Andrew Smithers
World Economics • Vol. 21 • No. 3 • July–Sept 2020, 1st October 2020


Key Points

• The decline in UK tangible investment since 2000 has led to a sharp decline in labour productivity and the trend growth rate of the UK economy. A similar decline in the US was caused by the perverse incentives of the bonus culture, but due to poorer statistics the connection between the bonus culture and investment is less easy to demonstrate for the UK than for the US.

• More than 100% of the fall in UK investment is attributable to private non-financial companies (“PNFCs”). The reasons that could possibly explain this weakness are: (i) Low return on equity (“RoE”). (ii) Weak labour supply. (iii) A perceived need to reduce leverage. (iv) A rise in monopoly power. (v) Low expectations. (vi) A rise in the hurdle rate due to the bonus culture.

• I show that while other explanations are not necessarily impossible they are highly unlikely; a rise in the hurdle rate, i.e. the required return on equity, is thus the only credible one.

• Even before the Covid-19 crisis raising the trend growth rate of the UK was by far its most important economic issue. The policy challenge is therefore to reverse the damage done by the bonus culture. I suggest that the most likely way to achieve this is through introducing a tax credit for tangible investment.

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The Impact of the Bonus Culture on the UK Economy
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