This is the first of a series of essays from the Rt Hon Kit Malthouse MP on how to fix the British economy. You can read the other instalments in the series here:
2. Ownership & Nationhood: The Fight for Economic Belonging
3. The Friendly Giants: Breaking Free from Our New Masters
.
Growth is the child of capital
Last month, Rachel Reeves set out yet another economic vision for the country. Delivered at the Oxford branch of a German healthcare company, her speech was filled with the usual tired promises: grand plans, infrastructure drives and state-led investment, as if prosperity can be drafted in Whitehall and willed into existence by committee. But here’s the brutal truth: growth cannot be legislated into being. It doesn’t come from government blueprints, five-year strategies or bureaucratic diktats. Growth is not granted; it is earned, risked and built. It is, above all, the child of capital. And after decades of policy failure, Britain is perilously short of the right kind of capital.
Once, the UK was a nation of capitalists driven by investment, innovation and an unshakable belief in enterprise. Before the 2008 crash, banks lent over £200 billion a year to small businesses, venture capitalists backed our brightest minds and pension funds anchored themselves in British industry. Our post-war GDP growth averaged 2.5% per year. Then came the storm, and with it the destruction of thousands of businesses and millions of livelihoods.
Capital fled, regulation tightened and Britain’s appetite for risk vanished. Bank lending collapsed and venture capital, once the engine of innovation, rebranded itself private equity, abandoned risk and turned into a machine for financial engineering. Instead of backing the next generation of businesses, funds piled into safer, established firms, saddling them with massive debts to extract short-term gains. The very industry meant to fuel bold new ventures became a vehicle for squeezing returns from what already existed, leaving true entrepreneurship starved of support.
At the same time, the shell-shocked British public’s engagement with capital markets collapsed. In the 1990s, household investment in equities was far more widespread, encouraged by initiatives like Personal Equity Plans (PEPs), which helped foster a culture of individual share ownership. But over time, retail investors retreated. Today, Britons allocate just 8% of their wealth to equities and mutual funds, compared to 33% in the US and an average of 14% across the G7. Instead of investing in businesses, UK savers now overwhelmingly funnel their money into property or low-yielding savings accounts.
And pensions? Once the bedrock of British investment, they were looted before the crash. In 1997, Gordon Brown couldn’t resist dipping into the nation’s retirement savings, stripping away tax credits on dividends and draining £100bn from future investment. Back then, pension funds held 50% of their assets in UK stocks. Today? Less than 4%. The capital that once built Britain now builds elsewhere.
The result was a stock market starved of domestic capital, startups and scaleups struggling, pension funds disengaged from British business, and an economy in which capital formation is increasingly an afterthought.
GDP growth since 2010? A meagre 1.5%, with productivity frozen in time. We once roared as an economic powerhouse; now, we barely whisper.
But the real killer was quantitative easing (QE). What began as a crisis measure became an economic tranquiliser, blunting capitalism’s natural energy. Instead of fuelling investment, QE inflated asset prices, rewarding those who already had wealth, while doing little for economic dynamism or popular capitalism. Trillions were conjured, not for visionary businesses or innovation, but to sit in government bonds and on bloated corporate balance sheets. Risk-taking dried up, and productivity stagnated. A great dynamo of economic energy was replaced with a machine that hummed but produced nothing new.
Beyond the capital exodus, risk-taking itself has been systematically punished. Investment flows where it is rewarded, yet successive governments – Labour and Conservative alike – have chipped away at those rewards. The erosion began under George Osborne, who, despite his alleged free-market instincts, presided over a quiet yet damaging assault on capital. Under his chancellorship, taxes on dividends were increased, stripping away a key incentive for investors to back British businesses. Capital gains tax, once designed to reward long-term risk, was flattened into a punitive structure that treats an entrepreneur building a company almost like a speculator flipping properties. To make matters worse, life for entrepreneurs has only become more complicated. In 2020, Rishi Sunak slashed the lifetime allowance for Business Asset Disposal Relief (formerly Entrepreneurs’ Relief) from £10 million to £1m – gutting a key incentive for business owners to build and scale companies.
Instead of rewarding success, policy now punishes it, forcing entrepreneurs to navigate an ever-shifting tangle of regulations and tax regimes just to hold on to a fraction of what they create. Wealth creation is no longer seen as something to encourage but as something to tax. The Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS), supposedly lifelines for startups, but in reality, complex and expensive to navigate, have seen investment stagnate for a decade at around £2bn a year. Set against an economy worth £2.5 trillion, this is a pathetic figure. What should be a flourishing ecosystem of risk-taking and reward has become a shrinking pool of caution and stagnation.
Meanwhile, Britain’s stock market is in terminal decline. Since 2007, the number of listed companies on the London Stock Exchange has fallen by more than 40%, and investor confidence has drained away. There has been much handwringing over listing rules, but that is not the problem. It is not the process of floating a company that is the issue; it is the total absence of domestic capital to support it. The UK has one of the lowest retail investor participation rates in the developed world, with only 11% of the stock market held in British retail hands. Pension funds, once the natural home for long-term capital, have abandoned equities in favour of government debt. It is no surprise that British firms are increasingly spurning London and instead looking to go public in New York, where they can access deeper capital markets and better valuations.
At first glance, the early-stage capital market seems in relative health compared to our European neighbours. In fact, we lead in Europe, securing $9bn in the first half of 2024, approximately double the VC investments in both France and Germany. But for an economy the size of ours, the numbers are paltry. More worryingly, the lack of scale-up capital means many of our most promising companies exit the UK entirely, heading to the United States for the funding they need to grow. Thanks to the country’s restless minds, the UK has become a breeding ground for innovation, but the real economic rewards are reaped elsewhere.
The tragedy is that we Conservatives, once champions of free markets and enterprise, have lost our way. We fell for the fantasy that government can engineer prosperity, that ministers and civil servants can guide the economy better than the private sector. We even adopted an industrial strategy, a phrase that should send shivers down the spine of any true Tory. Instead of focusing on unleashing private capital to support ingenuity, we focused on picking winners, funnelling taxpayers’ money into hand-selected sectors while weighing down British business with bureaucracy and then raising taxes to pay for it all. This wasn’t a plan for growth; it was simply corporate welfare. Governments make terrible investors, yet we convinced ourselves that mandarins could outthink the market.
And now we have Labour, promising an ‘investment-led recovery’. A National Wealth Fund, government-backed green projects, yet another British Investment Bank. It is the same tired formula of central planning dressed up as ambition. Rachel Reeves may talk about prosperity, but she is building a state-led economy on a foundation of higher taxes and tighter regulations. That’s not how growth works. Capital drives growth. And without dynamic capital, the economy stalls. Entrepreneurs don’t need the Chancellor mapping their futures; they need the freedom to take risks and reap rewards.
Don’t get me wrong, better infrastructure and smarter regulation would be splendid, but the United States proves that dynamic capital can overcome even the most daunting obstacles. America’s infrastructure is, in many places, crumbling; its regulatory maze is sometimes dizzying. Yet, thanks to its deep and flexible capital markets, it remains the global leader in business creation, technology and innovation. Despite these challenges, US venture capital investments reached nearly $250bn in 2023 alone, ensuring a steady pipeline of new companies and world-changing ideas. Capital, when allowed to flow freely, can outmanoeuvre even the heaviest of bureaucratic burdens.
The contrast with Europe is stark. Decades of rigid labour laws, high taxes and over-regulation have turned once-great economic powerhouses into museums of stagnation. While the US and Asia have produced trillion-dollar companies – Apple, Amazon, Tesla, Alibaba, TSMC – Europe has failed to produce a single firm of that scale in the last four decades. In fact, Europe now accounts for just a tiny fraction of the world’s stock market value in companies founded since 1990, while the US dominates with over 60%. That is the cost of a capital-hostile economic model.
And then there’s Britain’s productivity problem, which is not, as some suggest, a mystery – it is a direct function of capital investment. Productivity does not rise because politicians make speeches about it; it rises because businesses invest in better machinery, smarter technology and more efficient processes. But even if capital is available, people will only invest if they can see a reward. When tax and regulatory policies erode returns, when a government signals that success will be punished rather than encouraged, investment dries up.
There have been attempts to encourage investment in order to boost productivity, but they have been misdirected. Policymakers focused on tax relief for the cost of investment rather than the reward for risk-taking, meaning the response was muted. Temporary allowances, such as the ‘super-deduction’, made investment slightly cheaper but did little to change the fundamental calculation for investors: whether they would actually see a worthwhile return.
Here’s the thing, though: we sort of know what works. Just look at the UK’s life sciences industry. It is a rare example of a sector where risk is rewarded, rather than costs simply being offset. The Patent Box, offering a significantly reduced tax rate on profits from patented inventions, directly incentivises risk. The result? UK life sciences make a massive contribution to the national economy, with the biotech sector alone raising £3.5bn in 2024 – a 94% increase from the previous year. This targeted support has cemented Britain as a global leader in biotech and pharmaceuticals, attracting investment, creating high-skill jobs and driving high-value exports. In classic British style, of course, we made the scheme too complicated for small startups to use, but the answer is nonetheless in plain sight.
In 2024, the UK’s venture capital market collapsed to its lowest level in nearly a decade, with the number of companies securing external funding plummeting to 5,256, down from 6,885 in 2023 – a level not seen since 2015. Total investment shrank to £16.5bn, a staggering decline from the £28.6bn peak in 2021, according to research by Beauhurst. This sharp contraction is starving fledgling outfits of the growth capital they need, forcing many to look abroad for funding, or abandon scaling up altogether. The long slow decline of British dynamism continues. If the Government continues to strangle risk capital, we will lose the next generation of global businesses before they even begin.
To make matters worse, in our hearts we know we are still living off the wealth created by Victorian entrepreneurs. The backbone of our economy – companies like HSBC (founded 1865), Rolls-Royce (1906), Unilever (1894 as Lever Brothers) and GlaxoSmithKline (established in 1880 as Burroughs Wellcome & Co.) – were all born in an era when Britain rewarded ambition, risk and industry. These businesses, and many more, were founded when capital was abundant, markets were open and entrepreneurs were celebrated rather than shackled. But what have we built since? Where are the global titans of the modern era? Instead of fostering the next generation of industrial giants, we are coasting on the momentum of our forebears, mistaking preservation for success
The economy doesn’t need tweaks – it needs capitalist electric shock therapy. It needs a government brave enough to step back, to let capital do what it does best: build, innovate, grow and harvest the rewards.
This isn’t about minor reforms; it’s about a fundamental reset. If we are serious about revival, we must set capital free. Banks must lend again. Pension funds must be reconnected to British business. Schemes like EIS and SEIS must radically change from treating investors like pickpockets, eyeballing their every move as if they’re scheming to pull a fast one, to a more generous, simplified and supercharged system that frees them to invest boldly, fuel growth and drive innovation without unnecessary suspicion or red tape.
But above all else, risk-taking emphatically must be rewarded, not penalised. Until taxes on gains and returns from risk capital fall significantly and permanently, we will see no appreciable, sustained, growth. This is the basic and unavoidable truth behind our economic malaise.
You can build all the bridges and tunnels you like, spend billions on corporate subsidies, funnel thousands of kids into STEM and apprenticeships and even slash regulation, but unless people can clearly see a decent reward for investment and risk, it’s all just pushing on a string.
For the country, this is urgent. For the Conservative Party, it is existential. This is not just about policy – it is a battle for British capitalism and the foundational convictions of our party. Do we still believe in enterprise, in risk and reward, in Britain as a place where ambition is celebrated rather than stifled? Or do we accept a managed economy and the slow suffocation of opportunity?
If we are to lead again, Conservatives must state our beliefs about capitalism clearly and unapologetically, speaking to something deep and instinctive in the British people – a fundamental understanding that ingenuity, enterprise, risk taking and ambition have always defined our national character, and, given the chance, can build our economic success once again.
Click here to subscribe to our daily briefing – the best pieces from CapX and across the web.
CapX depends on the generosity of its readers. If you value what we do, please consider making a donation.
