What would the UK have to do to raise our growth rate to that in the US?

 1.  UK labour productivity growth is about 0.3%pa, 2019-2024. US labour productivity growth is at least 1 percentage point higher over a similar period (see OECD ).  So what would we have to do to get an extra 1%pa productivity growth?

2. Lets see this in terms of building more houses.  

3. The rate of return on capital is around 10%.  That tells you the extra output from one extra unit of capital.  Let's convert that into a percentage: since the capital output ratio is about 3, then the percentage change from a 1% change in capital is 0.3%. 

4. The UK has around 30m dwellings (25m in the England).  Dwellings are about 40% of the UK capital stock.   So to get 1 percentage point more growth we would need 12% more housing (0.3*0.4*12%=1%).  

5. On a stock of 30m, 12% is 3.6m new homes.  The government's target is 1.5 new homes over 5 years = 300,000 per year. Over the last decade we have been building around 0.8% of the stock  which is around 240,000.  So at previous rates, this objective would take us 15 years, at the new rate 12 years. That is, we would have to do 15 years worth of building in one year. 

6. a passing note. Why do we care about these seemingly small numbers, changes from 0.3% to 1.3% to 2.3%?  The answer is compounding. By the rule of 72, we can double output in 72/2.3 = 31 years with growth at 2.3%.  With growth at 1.3% and 0.3% it takes 55 years and 240 years.  

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. 

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%)"

• 
  
  
  

How important are intangibles in accounting for productivity growth?

1. I was asked today: if intangible capital deepening slows, is that a big effect on productivity growth?  This is part of a broader question; what's the relative importance of intangible assets in accounting for productivity growth (value added per hour growth)?

2. Growth accounting allows a decompositition of labour productivity growth into the contributions of:  

a. reallocation = workers moving between industries of different productivity levels 

b. labour composition = increased skills, age and experience

c.  ICT capital deepening = increased ICT capital (computers, comms equip) per hour 

d.  NonICT capital deepening = increased NonICT capital (buildings, vehicles, non-ICT plant) per hour 

e.  Intangible capital deepening = increased intangible capital (R&D, software, artistic originals, design, marketing, business process, training) per hour 

f. TFP = increased total factor productivity (what's left over, which increased efficiency plus mismeasurement etc.)

Here are some results from our EUKLEMS-INTANProd database, in hopefully obvious notation.  Countries are US, UK, EU (France, Germany, Spain, Italy, Denmark, Holland, Austria, Sweden, Finland). Industries are all ommiting A (agriculture), OPQ (defence, education, health), B (mining), D-E (gas, electricity, water), F (construction).  All these are not well measured, and/or mostly public sector. 

As the results show, intangible capital deepening is much the most important contributor to labour productivity growth in the 2011-19 period (tangible capital deepening contributions is the sum of ICT and NonICT, which is still lower than the intangible contribution).

Table:  of contributions

 

And a picture

As we saw in a recent blog the employment rights bill will very likely lower intangible investment. That will lower intangible capital deepening, other things equal.  This then is a policy measure lowering the major source of UK productivity growth.  Not a good policy if you want growth to increase. 

What has happened to R* recently?

 The 2025 Brookings Papers conference had a sesssion on this.  

The slides from Lukasz Rachel and the discussants are available. 

The discussant Adrien Auclert makes some very nice points. I picked up on some.

First, the framework.  R* is the price that balances demand for capital for use in production by firms with the supply of savings by consumers.  But terminology is hard here: the savings by consumers causes them to build up wealth, which is in part demand for durable assets (e.g. a house).  So wealth accumulation is asset demand which is capital supply.   And the demand for the use of capital is by firms and governments to produce goods/svcs, and they issue claims on the owernship of such assets e.g. shares (and for government, government debt).  So the value of assets issued by firms and government is asset supply or capital demand.  This is nicely illustrated by his graph which highlights the demand/supply nomenclature 

Thus he talks nicely about forces that raise asset supply which raise r*

And forces that raise asset demand, which lower r* 

He summarises the main finding of the paper as being that asset demand has won

with the main drivers falling productivity, rising aging and rising risk

Here is the prediction for the future

most of these are putting upward pressure on r*, but intangibles are lowering. why? this is because in his model more intangibles offset competition and innovation and so lower productivity.  

Thus we have

1. business as usual, small and gentle fall in r*

2. more productivity growth, r* rises. 

A portrait of UK R&D

 Getting a handle on innovation support is hard with many schemes, funding etc.  Just looking at R&D, here is some data from Cambridge UK Innovation Report, 2025, using the latest 2022 data.

1.  Spending on R&D, excluding tax credits looks like this: where the Sankey diagram nicely shows the potential difference between an intangible asset that can be financed in one area and have the performed investment be in another place: 

(btw, within UKRI are a number of other institutions; research councils (competitive grants allocation, about 50% of the money: innovateUK(working with companies to derisk innovation, catapult centres etc. about 20% of the money).  HEFCE/Research England give out REF-based money to universities.  See here,). 

.  

2.  What does business spend the R&D money on (notice these are products and not industries)?  Notice the massive figure on software development; and notice too the seperate line for computer programming and info services.  The days of R&D being mostly pharma and transport are over. 

3. Finally, notice too that government support for R&D can also be tax credits.  They are much more than direct funding as the below shows:

4. and the figures for tax credits are very large; £7.5bn in 2022-3 "For the 2022–23 tax year, UK businesses claimed a total of £7.5 billion in R&D tax relief support. This figure is more than twice the £2.6 billion of direct support to business R&D provided by the government and UKRI in 2022" 

By size "In terms of R&D tax credit claims by firm size in the UK, in the 2022–23 tax year:[2] • 67% (US$5 billion) were claimed by small and medium enterprises • 33% (£2.5 billion) were claimed by large firms." 

 

Did persisently low interest rates post GFC lower productivity growth?

Many allege that the long run of low interest rates post global financial crisis lowered productivity growth via zombie firms.  These low productivity firms survived more than they should have done and hence productivity growth stalled.  

An alternative view is that low productivity growth, for other reasons, lowered r* and hence interest rates.  

A paper "Aggregate productivity decompositions using structural business surveys: Evidence from the UK by Russell Black, Rebecca Riley and Garry Young", available here sheds a bit of light on this for the UK.

It uses UK company data to decompose productivity growth into that 

a. within surviving companies

b. reallocation of market share between surviving companies

c. the net effect of exit and entry.

One might think that the zombie firms view would say that the net entry/exit effect would be less as fewer low productivity firms exit.  

Their chart shows this isn't the case.

1. Using various different methods the change in the net entry effect, see middle panel is very small, a slight fall.

2. instead, the fall in productivity growth is due more or less equally to falling within firm growth and falling between firm reallocation.  The latter might be a zombie phenominon, but it isn't clearly so.

Update, with some numbers
1. using the Foster. Halitwanger, Krizan decomp, the 5 year interval, 99-07, within effect is 1.95%, net entry 0.22% (total LPG is 1.4).  The same data, 2011-19 are 0.61%, 0.08% (-0.32%).  

2. so the net entry effect has slowed, but it's 8% of the slowdown.  The change in within effects are 80% of the slowdown.

Rates of return, net present values and cost-benefit ratios

 1. suppose the government spends £x on some investment, say a road or R&D.  What is the rate of eturn/ 

2. Following some excellent notes from the OBR, we have that the IRR of that spend is the discount rates that solves the equation

 

 that, is the rate of return that sets this number to zero.

3. the Benefit from spending on some investment is more GDP.   That increase in GDP is dY/dK.=alphaY/K where alpha is the elasticity of output with respect to capital.  If Y/K is constant and we imagine spending £1 investment we have 

which says that the IRR is the marginal product of the project less the depreciation rate.  Or, the marginal product of the product is the gross rate of return.