Chart of the Week: The UK’s productivity problem

The global financial crisis of 2008 brought with it a structural shock to labour productivity across the world, but since the crisis, US and UK labour productivity have trended very differently. US labour productivity started to return to its pre-crisis (1991–2007) trend, whereas UK labour productivity growth has flat-lined and diverged strongly from its pre-crisis trend. There are many reasons for this, including the competitiveness of their respective domestic industries, the size of the market that these industries have access to, and electricity price differential; but one reason is certainly the more cautious approach to investment taken by the UK’s public and private sector. This has manifested itself in low levels of R&D expenditure and innovation in the economy, both of which are key drivers of long-term productivity growth. The Labour party’s budget seems to have begun to address this, with a record amount of R&D investment, around £20.4 billion or approximately 1 percent of GDP, being penned in for 2025-26. This compares to around £12.8 billion, or 0.6 percent of GDP dedicated to public R&D in 2021. Sectors with high potential for innovation — AI, net-zero technology, aerospace and life sciences — have been specifically earmarked for R&D investment. These commitments are a step in the right direction, but by themselves are unlikely to reverse the trend in productivity growth that has developed in the UK over the last decade and a half.

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The views expressed in this article are the views of the author, not necessarily those of LSEG.

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