Economic Survey of the United Kingdom 2005: Public Services and Infrastructure: Tracking the Improvements

The following OECD assessment and recommendations summarise Chapter 3 of the Economic Survey of the United Kingdom 2005 published on 12 October 2005.

How can improvements in public services be sustained as spending slows?

Taxes and public spending have outpaced economic growth so that the public spending to GDP ratio reached 44% in 2004 compared with 40% in the late 1990s. Publicly funded provision of healthcare and education has risen considerably. But flexible product and labour markets have been maintained while benefits and the overall tax pressure have been kept at levels that do not blunt incentives to look for work, helping people and families to support themselves. Maintaining this balance is crucial to ensure the sustainability of the expansion in welfare programmes.

• Efforts need to continue to increase efficiency. While outcomes in health and education have improved recently, improvements are slow to come and much slower than the expansion of inputs. Building on payment by results, incentives faced by providers could be further improved, for example by the introduction of incentive pay for hospital doctors, and further involvement of private sector providers may be desirable to ensure contestability.

Spending and outcomes in health and education

1. "Public expenditure in real terms" refers to nominal central government and local authority spending deflated using the GDP deflator which can be interpreted as the volume of alternative consumption foregone. For health care, input and output volume indices follow the post-Atkinson methods as described in A. Pritchard (2004), "Measuring Government Health Services Output in the UK National Accounts", Economic Trends, No. 613, ONS. For education, only volume indices following the pre-Atkinson method are so far available, as based on A. Pritchard (2003), "Understanding Government Output and Productivity", Economic Trends, No. 596, ONS.
2. GCSE and equivalents for 2004 which includes new qualifications approved for under 16-year-olds.
Source: ONS (2005), United Kingdom National Accounts: The Blue Book; HM Treasury; Department of Health and Department for Education and Skills.

• Where possible, users should contribute to the costs of service provision. Reinvigorating higher education based on increased fees from 2006, which students can defer and repay as income contingent contributions once they have graduated, is a good example. But also here policy could be fine tuned as the planned zero real interest rate implies a subsidy which is not warranted on exclusively economic grounds. Applying instead an interest rate close to government borrowing costs would free substantial government resources.

How can improvements in the transport system be achieved ?

For decades under investment in public infrastructure was an easy option for constraining public outlays. The government’s first fiscal rule, the so called “golden rule”, distinguishes between capital and current spending, and has helped to avoid such short term expediency. Indeed, the share of government investment in GDP has risen, and there are plans for it to rise further. Nevertheless, even after it rises to just under 2½ per cent of GDP next year, it still remains relatively modest compared with many other OECD countries and may be inadequate to correct years of neglect. The United Kingdom ranks poorly in international comparison both on survey based measures regarding the quality of transport infrastructure and on measures of congestion, although there have been recent improvements in rail performance. Additional road building will not by itself permanently relieve these pressures, rather it needs to be combined with congestion charging. The success of the London Congestion Charge suggests that there might be growing public acceptance of the principle and growing interest in a nation wide congestion charging scheme, although this would be costly and not feasible for some years. Nevertheless, it is important in the meantime that all tiers of government undertake research and experimentation on smaller scale projects that build on the experience of the M6 toll road and the London Congestion Charge.

General government gross fixed investment
Period averages, in per cent of GDP

Source:OECD Economic Outlook 77 database.

• Investment in transport infrastructure should be maintained to at least levels envisaged in current spending plans over the long term and the reasons for any persistent under shoot relative to plans should be examined with a view to taking remedial action. The case for further raising expenditure on strategic roads should be considered given that on current plans such outlays in real terms remain well below levels in the first half of the 1990s.

Public expenditure on strategic roads and construction output of road infrastructure (1)
In per cent of GDP

1. Investment and expenditure series are on a fiscal year basis. The projections beyond fiscal year 2000/01 are taken from the government's 2000 “Transport Ten Year Plan”.
Source: Department for Transport.

• The Government should monitor incentives for local authorities to pursue local congestion charging schemes. This might be done by making funds from the Transport Innovation Fund available sooner. Additionally, future planned increases in funding for local transport could be made contingent on local plans to tackle congestion.

• In assessing the appropriate level of public investment and subsidy for public transport, account should be taken of the criteria used to assess the national road pricing scheme, in particular giving weight to time savings resulting from less road congestion. On this basis, it seems likely that more subsidy should be directed at those railway lines which have greatest potential for relieving road congestion.

Most intensively used train operating companies serving London
are least subsidised (1)
2004-05

1. Each point represents a different train operating company,
those serving London are marked with an “L”.
Source: Department of Trade and Industry (2005),
National Rail Trends: Yearbook 2004-2005.

• Further measures for closer integration of investment decisions between railway infrastructure and train operations need to be found. The success of recent changes to integrate planning around Network Rail’s regional offices need to be monitored.

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