UK TFP relative to other countries

 1. The Fernald/Inklaar paper is important.  It argues that the UK TFP levels problem not in manufacturing or market services.  It is  mining and utilities.

2. First they look at overall TFP levels

The key here is that they take comparative level data from 1997 and extrapolate it forward using national data.  This means that an awful lot depends on the accuracy of that 1997 level data.

As they say, the UK coverged towards the US pre-2007 but then has been in a consistent gap. "althought the US has been pulling ahead in terms of labour productivity in the left panel..., TFP levels in the right panel are much more stable. For example, the EU-5 level of TFP was 90% of the U.S. level in 1985, 91% in 1995, and 91% in 2019."

3. where do these TFP level differences come from?  Using the same method they can break levels out by industry

Some definitions:EU-5 (Germany, France, Netherlands, Belgium, Finland). Market services is G, H, I, J, K, N, S.  Other is A agriculture, B Mining, DE Utilities, F construction).  Other is 17% share of UK  market sector value added, manufacturing about the 20%, services the remainder. 63%.  

4. so what explains the differences in the overall TFP levels?  

"But as Figure 2 showed, the overall UK level of TFP remains well below the US or EU-5. If it is not manufacturing or market services, then it must be in the remaining 17% of the market economy that we labelled “other” (agriculture, mining, utilities, and construction). Indeed, a third takeaway from Figure 6 is that he level of TFP in other industries has collapsed since the early 2000s, dropping from approximately two-thirds of the US level to only one-third."

5. They have a good discussion of falling TFP in mining 

"Consider the accessibility of an oil deposit as the “quality” of the natural resource as an input. Holding fixed that natural resource quality, suppose that the same quantity of other capital and labor leads to the same output. Then technology and TFP are both unchanged. But if the quality of the natural resource gets worse (e.g., the North Sea runs out of oil), then the same observed inputs, with unchanged technology, leads to lower output. Although technology has not changed, measured TFP falls.

From this perspective, the observed decline in UK TFP in mining (oil extraction) presumably reflects the declining quality of North Sea deposits. " (My italics).

They continue: " In the U.S., fracking is a technological innovation that substantially lowers the cost of extraction at a given location. Because of that, new locations that were previously uneconomic are now worth drilling. In other words, fracking allowed a given quantity of observed inputs to lead to increasing amounts of oil and gas extraction, despite a shift to lower-quality deposits. Hence, measured TFP (which does not account for the shift to high cost, ‘low quality’ deposits) also understates the true technology gains."

6, the PWT data. The latest PWT data shows comparative TFP levels (this uses the CTFP measure). 

This seems to show Britain ahead of the US.  Looking at the data appendix to the PWT, see here, appendix C, we have this calculation is relative PPP outputs over relative PPP inputs

which is writtne

where j is the country.  

How do they get internationally comparable capital stocks?  For each country Changes in capital stock of assets are calculated by a PIM for each asset.  This change is then aggregated over the assets.  To get an internationally comparable total capital stock level, the level of this is deflated by an investment price for each asset 

where i is the coutnry and a the asset, with the relative prices of the capital stock as 

In turn the "The prices for each asset are based on PPP benchmark surveys: the six ICP surveys since 1970 and the more frequent surveys by the OECD and Eurostat since 1995. The prices from these surveys do not directly map into the six assets we use. "

Given these issues, the meaurement of the comparative levels might be different to the 1997 method used in the Fernald/Inklaar work above. 

Is Britain an low investment country?

1.  Giles Wilkes shows this graph, drawn in turn from OECD via ONS for total investment as a share of GDP.  The UK is resoundingly at the bottom 

2. Fernald and Inklaar, in an excellent piece, look over a longer period, including and excluding dwellings

(EU-5 are appropriate PPP-weighted Törnquist indices for Germany, France, the Netherlands, Belgium, and Finland).

Some points.

a. note that excluding dwellings is a big deal.  The EU lags the US in recent data when you do this (remember dwellings are around 20% of total GFCF in countries like the US, and UK, Germany, France: 30% in Spain, see Table 3 in ONS).

b. the very low UK story in the Wilkes table is a post 1990 story.  Before then the UK was with other countries.  So if we want to say why the UK is so low, we have to say why it was high before 1990.

3. What if we include intangibles Fernald and Inklaar then show, using  our EUKLEMS-INTANProd dataset this really matters

Some points.

a. note how the UK is more in line with others, though this is a shorter time span

b. Note the UK flatlining since 2016, the Brexit referendum. 

Notes on the UK Steel Industry

 1. the ever-brilliant House of Commons Library published British Steel and government special measures, June 23rd. Some notes.

On 12 April 2025, Parliament passed the Steel Industry (Special Measures) Act 2025, giving the Secretary of State powers to issue directions or take control of steel undertakings in England at risk of closure. This allowed the government to take control of British Steel’s operations, including securing raw materials, and maintaining blast furnace activity.

What is it costing

2.  On 20 June 2025, the Minister for Industry, Sarah Jones stated that the amount of working capital provided for British Steel since passing the emergency legislation on 12 April stood at £100 million.

On 27 March 2025, announcing its plans to consult on closing the two blast furnaces at Scunthorpe, British Steel said that despite Jingye’s investment of £1.2 billion since 2020, the operation of the blast furnaces caused losses of £700,000 a day. British Steel’s costs of building an electric arc furnace have previously been estimated to exceed £1 billion.

Comment. 0.7m per day is £255m per year.

Employment.

3. The company had opened a formal consultation on “the closure of the blast furnaces, steelmaking operations and a reduction of steel rolling mill capacity in Scunthorpe”, which means a consultation with its workforce on redundancies.14 The closure of blast furnaces at Scunthorpe would put 2,700 jobs at risk out of a workforce of 3,500, according to BBC News

in UK Steel Industry: Statistics and policy we learn 

"According to the latest (May 2024) UK Steel estimates, the industry employs 33,700 people and a further 42,000 in the wider supply chain." 

Comment.  2,700 jobs is 8% of the whole workforce.  A payment of £255m per year is £94,000 per job.  There is more or less full employment in the UK at the moment. It's not clear those individuals wouldn't get another job.

Green.

4. From  in UK Steel Industry: Statistics and policy we learn:

"The steel industry is a significant contributor to greenhouse gas emissions. It is responsible for 13.4% of greenhouse gas emissions from manufacturing, and 2.2% of total UK greenhouse gas emissions, while it contributes 0.1% of the UK economy and 1.0% of UK’s manufacturing output." 

"Two main methods dominate steelmaking in the UK: the blast furnace and electric arc furnace method" 

Tata Steel has closed its blast furnaces at Port Talbot and is investing in EAFs, as set out in more detail in section 6. Also British Steel had plans to decarbonise steelmaking at Scunthorpe by closing its blast furnaces. This together was estimated to reduce the UK’s territorial greenhouse gas emissions by 2%

However, the extent to which an EAF is green will depend on the electricity that powers it. For example, if the electricity is produced from fossil fuels, the EAF will have limited emissions savings, whereas if the electricity is produced from a mixture of technologies including some that are low carbon (as the electricity grid in the UK is) then the EAF does provide emissions reductions to the steel making process.

Comment.  So if we are to decarbonise then we will have to spend on an EAF. This is estimated to be £1bn. 

Energy costs

5. UK electricity prices for very large industrial consumers in the second half of 2023 were higher than for any EU member state. They were 23.04 pence per kWh which was 71% above the median price in the EU.

The main support measure for energy intensive industries’ electricity costs is a series of exemptions and compensation. The government provides compensation or exemptions to energy intensive industrial users for the indirect costs (higher electricity prices) associated with funding certain decarbonisation policies. The policies include the climate change levy, contracts for difference mechanism, renewables obligation and feed-in tariffs. The government said in November 2023 it had provided the steel sector with more than £730 million of relief since 2013 to make energy costs more competitive

Comment.  So additional support comes from these exemptions. 

Security

6. "With the closure of the blast furnaces at Port Talbot, and the possible closure of British Steel’s blast furnaces in Scunthorpe, and the transition to solely electric arc steelmaking, the UK would lose its primary steelmaking capacity. 150 Should that happen, the UK would be the only G20 country that does not produce its own virgin steel. This has led to some questions around national security and whether virgin steel production should be retained as a sovereign capabiliy". 

"According to the Royal United Services Institute for defence and security studies, prime contractors supplying the MoD have a mixed record on the use of UK steel. The Financial Times reported the facilities at Port Talbot were not used to produce steel used in defence" 

"In the Opposition Day Debate on 23 January 2024, the Secretary of State for Wales acknowledged that historically there was an issue with the quality of the steel produced in an arc furnace. Experts had reassured him, however, that it was steadily improving. He said: Tata expects an electric arc furnace to be able to supply about 90% of the products that it currently supplies through the blast furnace"

the Business and Trade committee take the view " The committee refers to evidence that blast furnaces still play a critical role in strategic and high-grade steel production, including for infrastructure construction. Keeping the Scunthorpe blast furnace open would maintain supply chains" 

Comment.  It's a bit obscure to me whether this steel is security necessary.  And if it needs blast furnaces then it won't be very green. 

Updates.

1. the New York Times reports, August 22nd 2025, "for the second time this year, the British government is set to take control of a large, ailing steel business.

The move comes after a court approved on Thursday the liquidation of the unit, called Speciality Steel UK, which is part of Liberty Steel, a metals business started by the industrials entrepreneur Sanjeev Gupta. The government is expected to guarantee pay for the nearly 1,500 employees there" 

2. speaking in Parliament, we have the minister: it's not clear, but I think she is supporting the workforce on furlough. 

But she then advances a new argument regarding Scunthorpe:

"It is worth noting that Liberty Speciality Steels uses electric arc furnace technology that can be powered up or down as needed" 

"The circumstances in Scunthorpe were fundamentally different. British Steel operates the UK’s last remaining blast furnaces—assets that, once shut down, cannot simply be restarted. Allowing those blast furnaces to be closed pre-emptively would have removed our ability to make strategic choices about the future of steelmaking in Scunthorpe, and that was not a position this Government were prepared to accept. Scunthorpe was therefore a truly exceptional situation and that is why we took the unprecedented step of implementing the Steel Industry (Special Measures) Act 2025 to maintain the safe operation of the blast furnaces."

As for Liberty, the support seems to be for the workforce:

"The situation with Liberty Speciality Steels is not comparable. The company was issued with a winding-up order by the High Court due to longstanding financial issues. Spending taxpayers’ money on a company operating in such a way would have exposed taxpayers to hundreds of millions—potentially billions—of pounds in hidden costs." 

R&D and productivity: some notes

I'm kindly invited to the British Academy to discuss a report https://www.thebritishacademy.ac.uk/publications/mapping-the-economic-returns-of-r-and-d-in-the-uk/  Mapping the Economic Returns to R&D.

Here are some notes.

1. A puzzle. “changes to the Office for National Statistics (ONS) Business Enterprise R&D (BERD) survey methodology suggests that business investment in R&D is higher than previously thought. However, the UK is still seeing stagnating productivity and economic growth.” 

How can this be?  There is a confusion here on levels and growth.  Remember that the level of productivity depends on the level of the capital/labour ratio.  The level of capital this year depends on the net of deprecation last year capital plus investment.  If we have discovered more investment then 

a. The level of GDP rises since there is less intermediate and more investment 

b. The level of capital rises with more investment.  

c. What about growth? proportional capital growth is I/K – deprecation.  So discovering more I only raises capital growth if there is no more K, but the more I means more K.  So in the steady state, capital growth is the same. 

2. Is the “UK good at research but bad at commercialisiation”.  Commercialisation costs money.  So if we were bad at it, then the returns to UK investment would be very low.   Below is a picture of the return on UK market sector capital. 

 

The UK is the thick black line. No sign that it’s particularly low. 

3. The report rightly points out that there are many pathways to innovation.   Using the latest ONS data on intangible investment, https://www.ons.gov.uk/economy/economicoutputandproductivity/productivitymeasures/bulletins/investmentinintangibleassetsintheuk/latest#investment-by-industry-section-in-2022, we have the following

a. R&D GFCF as a proportion of GVA is largest in manufacturing

 

b. But viewed besides other intangibles, it’s relatively small: notice the investment in software.  

 

c. There’s an important point here: in the national accounts, ESA10, software made in the process of conducting R&D is counted as GFCF in software and not R&D.  

4. The report has an interesting take on government innovation around it’s discussion of “moats”.  I think the idea is this

a. There is a wedge between the private value of spending on innovation and social value if spenders cannot appropriate returns from spending e.g. rivals copy their ideas.  

b. The usual economics answer is that if returns can be appropriated = a “wide moat” e.g. watertight IP, then firms need no support and vice versa for a “narrow moat”. 

c. They then distinguish between “tradeable” and “non-tradeable” technologies and processes.  They say “For non-tradeable technologies and processes, or those that primarily operate in a domestic market, research, commercialisation, and adoption tend to occur in domestic pathways, with commercialisation and adoption more tightly bound, often with a single actor or firm. There is a high proportion of process-led innovation and direct implementation within firms.”  I think the terms are unfortunate since tradeable and non-tradeable mean something specific in economics, but I think what is implied is whether commercialisation occurs, for reasons of technology, secrecy etc., either largely within firms or could also occur outside.  

d. Their examples are in their Table 1: 

 

Where for example mRNA is tradable, by which I think they mean potentially developed anywhere, but has patent protection.  Innovative galleries, are, non-tradable ie. Found in a particular country, but have a wide moat, which means they are hard to duplicate.  

e. This leads to policy proposals

 

5. Some thoughts on this

a. The point that knowledge is non-rival is often used to justify that innovation will not earn returns.  But this depends if the knowledge is also excludable, which is the moat point.  This is valuable.  The UK Patent box costs £2bn with 145 companies accounting for 92% of relief. They probably have IP protection, so this feels like money that can be reassigned (https://haskelecon.blogspot.com/2025/10/how-much-is-uk-r-tax-credit-scheme.html). 

b. The R&D tax credit costs not £7.6bn, with around 40% going to large firms.  Perhaps we have to live with this since we have a relatively high corporate tax rate (https://obr.uk/box/corporation-tax-in-historical-and-international-context/) , 2020 data from OBR below.

 

c. What is the problem we want to solve here?  In my work with Hans Neilson we have some of the following: a.       

                                                              i.      The UK post GFC slowdown is mostly a slowdown in TFP in non-ICT service industries. 

                                                            ii.      The UK productivity growth story since the pandemic is this. Excluding sector L, GVA per hour grew 0.34pppa 2011-18 and 0.24pppa 2019-24.  (Notice how important sector L is, Whole econ data are 0.50 and 0.35).

                                                          iii.      The Marimekko diagram is this 

Where notice that health and education have growth and shares of -3.5%pa and 1.8%pa and 10% and 7% (pre-pandemic, 2011-18 growth rates were 0.4%pa and -0.3%pa).  Thus the 2019-24 contributions to labour productivity growth were -0.31%pa and 0.12%pa. 

So to a first approximation, the answer to the question " we are doing all this R&D and what is happening to labour productivity growth" is, since 2019, the drag from the health service. 

How much are the UK R&D tax credit and Patent Box schemes costing? (Around 7.6 and 2.0 bn in 2023/4)

 1. There are some new figures just out, 30th Sept 2025 (next ones due in a year):  "

Research and Development Tax Credits Statistics: September 2025

here. 

2. "The total support claimed through both R&D schemes for the tax year 2023 to 2024 is estimated to be £7.6 billion (figure 2 and table RD2). This is a decrease of 2% from last year’s total of £7.7 billion."

3. Broadly, the green and purple are SMEs .  The lighter orange/red is large firms. 

4. There is some explaination of these schemes here. Broadly, the RDEC is aimed at large companies, but some small ones claim.  

5. One interesting point is that cloud computing and data expenses are now eligable, since April 2023. As usual ForrestBrown are on top of this.  This is an evolving area, but their broad view is, I think, that cloud computing and data licenceing costs, if they are used in R&D, qualify for relief.

6. it is interesting how. much R&D tax credits have grown, they were around 4bn in 2016.  

7. There is also the Patent Box This costs about £2bn, with 145 companies accounting for 92% of relief. It is very concentrated in manufacturing.  Some excerpts: 

"In financial year 2023 to 2024, it is estimated that the top 145 companies (by the value of the relief they receive each year) accounted for 92% of the relief." 

"

• in the financial year 2023 to 2024, it is provisionally estimated that 1,650 companies elected into the Patent Box regime. 

• the value of relief provided under the Patent Box is estimated to have increased to £1,977 million in the financial year 2023 to 2024 from £1,449 million in the financial year 2022 to 2023. This was driven by the change in the main rate of Corporation Tax from 19% to 25% on 1 April 2023

• of the companies that elected into Patent Box in financial year 2023 to 2024, it is estimated that 28% were classified as ‘Large’ and accounted for most of the relief provided (95%)"

•