Economics Department

Economic Survey - United Kingdom 2004: Policies to enhance potential growth


Of special interestGraduate contributions (tuition fees) for higher education (pdf-format)

How can long-term growth be raised?

The UK’s trend growth has been boosted over the last two decades by the substantial decrease in structural unemployment. However, there has been virtually no increase in the activity rate. Indeed, the male activity rate has shown a consistent downward trend and has been accompanied by a similar rise in men reporting long-term sickness or disability as the main reason for inactivity. There has also been a trebling of persons on invalidity benefit during the 1980s and the first half of the 1990s, and since 1995 the number claiming incapacity benefit has continued to rise, albeit at a slower rate, to a level which is now two-and-a-half times the unemployment claimant count. This may partly be because the rest of the income support system has been tightened so much that incapacity benefits have become a pressure valve. “New Deal” active labour market policies to deal with particular disadvantaged groups, notably lone parents, have been successful in raising their employment rates. The voluntary New Deal for Disabled People (NDDP) is the major employment programme available to all those claiming incapacity benefits. The new “Pathways to work” scheme offers improved financial incentives and support. Together these represent steps in the right direction, although an expansion in the scale of these programmes will probably be needed to make significant progress.

Inactivity of older workers due to illness or disability
Persons aged 50 - 64 years, 2000

1. Population-weighted average for countries shown.
Source: OECD, Employment Outlook 2003.

The United Kingdom has achieved a commendable rate of potential growth, which is above the European average. As a consequence, the GDP per capita gap with the major continental European countries has nearly closed. However, the gap with the best performing OECD countries – such as the United States, Canada, and Australia – has hardly diminished and stems mainly from weaker levels of productivity. Closing the “productivity gap” with major competitors has been an important theme motivating structural reforms and a multitude of policy initiatives address this weakness. The most important among these are: a “Skills Strategy” to raise skill levels throughout the workforce; increased government infrastructure investment; and a recent overhaul of competition policy.

How can skills be raised to reduce the productivity gap?

The recent OECD Growth Project  highlighted the importance of human capital in explaining differences in growth performance among OECD countries. The United Kingdom compares poorly with its major competitors on both basic literacy and vocational skills, suggesting that this has been a major factor holding back productivity growth. It may explain why there has been no boost to multi-factor productivity growth recently, despite a substantial increase in ICT investment. The education system is now improving, but too many people still leave education early and relatively few get an apprenticeship, skilled craft or technician level qualification. Improving the educational opportunities of this group should remain a policy priority along with providing more resources to universities via the graduate contribution scheme. Training of persons with limited skills already in work is valuable from a personal as well as productivity perspective, but only if improvements are sufficient to warrant the costs of tuition and the loss of production from being out of work. In this context, cost-sharing should be developed to ensure that relevant course content is chosen.

Educational attainment of the adult population


1.  “Low” comprises persons having primary school, lower secondary school or ISCED 3C short programmes as their only formal qualification; upper secondary includes also post secondary non tertiary programmes.
Source: OECD, Education at a Glance 2003.

Could graduate contributions fund higher education?  

The private returns to higher education are probably the highest in the OECD due to a wide earnings differential between persons with and without university education. Letting graduates pay a larger share of the study costs would be both fair and economically efficient, and the government’s plan to introduce a graduate contribution scheme is both innovative and welcome. It resolves the credit constraints facing students from poor backgrounds by giving a loan to fund increased tuition fees which will have to be repaid after graduation unless the person’s income falls below a minimum threshold. Expanding higher education based on income-contingent graduate contributions, while maintaining the large publicly funded improvements made in early childhood and compulsory education, is the most direct way to achieve equity in access to higher education and education outcomes more generally.

Expenditure on tertiary education institutions,


1. For New Zealand, OECD education data only has information about public spending. Other spending components are estimated based on the Statement of Financial Performance for tertiary education institutions from the cash flow from tuition fees, revenue from services provided, investment income and other sources. Using the same data source to estimate public spending produces results that are consistent with what the New Zealand authorities report to the OECD Education data.
2. Net of tuition fees paid by government.
Source:  OECD, Education Database and Statement of Financial Performance for tertiary education institutions in New Zealand.

Where is more public investment needed?  

The government is committed to raising general government investment, which over decades has been sacrificed as a short-term palliative for achieving budget cuts, but which under the current fiscal rules should be insulated from such pressures. However, even plans to double the share of public net investment in GDP to just over 2 per cent will still leave government investment below the level in most other major OECD countries. Probably the area where insufficient infrastructure investment has most impinged on long-term growth prospects is transport. The government is committed to a substantial increase in investment in transport, especially on roads. However, this is unlikely to stem traffic congestion, which is already much worse and more costly to business than in most other countries. Following the early signs of success of the London congestion charge, the government should consider introducing road charging schemes on an experimental basis, with a view to deciding whether road use charges, which better reflect congestion costs, could complement and partially replace fuel taxes.


The complete version of the OECD Economic Survey for the United Kingdom is available from :


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