Graph(s) of the week: best from the 2013 Budget

Even though the focal point of attention this week was Cyprus, in Britain the central issue was the 2013 Budget, for which I found some policies encouraging but some of them deeply disappointing  implying that there Osborne still hasn't got a clue as to how to initiate the recovery. 

Anyway, from the Budget and the OBR report I found a couple of interesting graphs, some good, some bad. I start off with tax competitiveness and how the UK has significantly increased its competitiveness vis-a-vis the corporate tax rate cuts on KPMG's survey (the survey is based on businesses responding to the changes): 

Even in comparison the 20% announced corporate tax rate (in 2015) is beginning to look very good:

On this list, among the lower rates, the UK has by far the strongest institutional system and rule of law, thereby triggering positive signals to attract new investments. It's unfortunate for the US and Japan not to follow upon this. The US is particularly troublesome in this perspective especially with regards to the first graph and the business perception of their tax competitiveness. 

Moving on to the OBR report, with slightly worse off news regarding the slow recovery and declining Total Factor Productivity. First up is the output gap, estimated to be -2.7% in 2012: 

Using the same method they have calculated the declining Total Factor Productivity (TFP), which is starting to turn into a serious issue for the British economy: 

And it's a real puzzle: 
"...the cyclical indicators imply a sharp fall in trend TFP through 2012, which would imply that the economy has become noticeably less efficient in its ability to combine inputs to produce a unit of output. Given likely movements in the capital stock, this also implies a fall in trend labour productivity. A sustained fall in trend TFP and trend labour productivity seemed plausible during 2008-09, given the severity of the financial crisis at that time, its impact on output from the financial sector, and the consequences for capital allocation in the rest of the economy. In recent quarters, however, the financial system has not been under anything like the same strain (although it remains impaired)." (OBR, Economic and Fiscal Outlook, pg.31)
However, some explanations are afloat: 
"Output per hour and output per worker were 12 per cent and 13 per cent below their pre-crisis levels in the fourth quarter of 2012... In December we set out various possible explanations for very weak productivity seen in the UK economy since the 2008-09 recession, some of which imply a permanent hit to productivity and potential and some of which imply a temporary hit...
  • A recent ONS paper ... [looks at] firm-level data ... dispersion of productivity across firms in 2008 and 2009 has increased, with high productivity firms becoming more productive and low productivity firms less so, and in some cases experiencing negative productivity. This gives some support to the view that there has been an increase in the degree of misallocation of capital in the economy. The widening distribution suggests that some firms continue to operate despite low or even negative returns, potentially hindering capital flow to firms with higher returns.
  • A Bank of England working paper ... looks at the long and short-term effects of financial crises on labour productivity, capital and output. The findings support the view that credit rationing and impaired financial markets can negatively affect productivity. Banking crises on average are found to reduce the short-run growth rate of labour productivity by between 0.6 and 0.7 percentage points per year and permanently reduce the level of productivity by around 1 per cent for each year of the crisis. 
  • A paper by Goodridge ... investigates the exclusion of investment in intangibles from GDP... The authors argue that real output growth was probably underestimated in 2009-2011, but overstated in most of the 2000s, as a result of this omission. They believe this measurement error explains only a small part of the puzzle from the start of 2011." (OBR, Economic and Fiscal Outlook, pg.32)
I would add my arguments on distorted signals to employers resulting from the government's work schemes, where employers lack the incentive to hire but are encouraged to take the government benefit and pile up on some workers who aren't necessarily improving production or adding anything to the company. These are all just theories for now, with neither fully explaining the productivity downturn, but there could be truth in each of them. I believe this could be a fruitful ground for future research, especially for labour market economists.


  1. I feel that the productivity puzzle is much more than any of the explanations. At first the BoE explanation seems to be the most plausible one, but it doesn't seem to explain WHY would financial crises distort productivity (I haven't been able to find the paper, perhaps they do explain it in there).

    The misallocation of capital argument and distorted signals seem to be closer in explaining the effect, but to prove them I feel you should somehow try to link them to the aftermath of the financial crisis. For example, that the crisis was a strong shock and that because of it more people failed to adjust their capital and/or labour inputs. The policymakers intervened further and made things worse. And now are unable to fix it.

    1. Here is the paper from the BoE. I think that's basically the idea - to link the effect from the crisis to capital and labour misallocation (they explain it via labour hoarding and damage to capacities). I still feel there is a missing parameter in there, in particular distorted political signals on the labour market, aimed at a short-run employment boost. I feel they have succeeded in the employment boost, but productivity suffered (they have initiated a sort of a different incentive for labour hoarding by businesses)


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