Why share buybacks are slowly killing Britain’s economy

All these negative considerations should worry us, since right now, buyback activity in the UK market is close to record levels. According to collations by Russ Mould, investment director at AJ Bell, share buyback programmes in the UK market this year have already reached £46.6bn.

With some 30 trading statements still to come from FTSE 100 companies over the next couple of weeks, the total for the year is likely to come close to last year’s record of £58.2bn, and may even exceed it.

This may of course be largely yesterday’s story. Much higher interest rates make share buybacks more expensive to finance, so you’d expect the numbers to fall quite significantly next year. As I say, managements are on the whole keener to protect the dividend than the buyback programme.

But there is also a wider reason to worry. Over the past 30 years, there has been a remarkable shift in share ownership for UK companies, with international ownership of the FTSE 100 increasing from around 12pc to 56pc. UK Pension Fund and Insurance Company ownership has meanwhile fallen from 52pc to just 4pc. Even retail and unit trust ownership has plummeted.

The upshot is that the bulk of the money from UK buybacks and dividends goes overseas these days, rather than being recycled back into the domestic economy.

As such, the explosive growth of buybacks can reasonably be seen as at least some part of Britain’s shamefully low overall level of business investment. Capital that is notionally available for investment within the company, or alternatively through dividends in the wider economy, is instead being syphoned off and invested elsewhere by overseas shareholders.

British companies have in other words become a kind of wasting asset, with their lifeblood being slowly sucked out of the UK economy.

Gross fixed capital formation (GFCF) – a measure of both public and private investment – in the UK is already one of the lowest in the OECD. Rishi Sunak and Jeremy Hunt have made it their mission to improve on that position, even if slashing the Government’s capital spending budget scarcely helps them achieve it.

Even so, there is some evidence to suggest that Downing Street’s strategy of significantly raising the rate of corporation tax for larger companies so as to patch up public finances, while at the same time increasing allowances for investment, is working.

Since the Government introduced super deductions in the spring of 2021, replaced this year by “full expensing”, business investment in the UK has risen faster than any other G7 economy, albeit from a much lower base.