Labour markets, human capital and inequality

Economic Survey of the United Kingdom 2011

 

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Remarks by Angel Gurría, OECD Secretary-General

The UK economy emerged from the 2008–09 recession with elevated public and private debt and high unemployment. Strong growth and macroeconomic stability in the run–up to the crisis had hidden a build–up of significant imbalances, influenced by overreliance on debt–finance and the financial sector, and booming asset prices. These imbalances need to be addressed to ensure a sustainable and balanced recovery. The government is pursuing a necessary and wide ranging programme of fiscal consolidation and structural reforms aimed at achieving stronger growth and a rebalancing of the economy over time.

Selected indicators¹


 1. The shaded area indicates the maximum and the minimum among the seven major OECD countries.
Source: OECD, OECD Economic Outlook database.

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A broad based recovery started in end–2009, but faces significant headwinds during 2011, which can be mitigated by monetary policy remaining supportive. The planned fiscal consolidation is needed to ensure that the fiscal position will be sustainable over time. Nonetheless, it adds to the headwinds from weak real income growth and a fading rebound in global trade. Monetary policy should hence remain expansionary, even if headline inflation is significantly above target, to support the recovery.

While the government’s fiscal plans and reforms to the fiscal policy framework have significantly reduced fiscal risks, further improvements to the fiscal framework and reforms to make the financial sector more robust are needed. The government has embarked on an ambitious and necessary fiscal adjustment and strengthening of fiscal institutions, including the welcome creation of the Office for Budget Responsibility. Steps towards establishing a permanent fiscal framework should start to be undertaken as the public finances are returned closer to balance. The creation of a Financial Policy Committee will strengthen macro–prudential policy, but further steps are needed to deal with banks that are “too big to fail”. 

Reforms to housing policy should aim to increase affordability and mitigate excessive house price volatility by enhancing the supply of available land and reducing the volatility of housing demand. Rigid housing supply and fast–rising demand have fuelled house prices, reducing affordability and contributing to macroeconomic and financial instability. Policies to increase supply should focus on lowering barriers to access to land for housing and providing sufficient incentives for local communities to allow development. The current system of housing taxation is regressive, encouraging excess demand for housing and should be modified to better reflect the value of ownership.

Further reforms are needed to improve education outcomes in England, especially among disadvantaged groups. Despite significantly increased resources, education performance in England measured by PISA scores remains static and uneven, and could be improved by focusing resources more on disadvantaged children. The new pupil premium is a step in the right direction, but funding should be even more transparent. Higher and more equal autonomy across school types, in terms of hiring and pay, would support efficient deployment of resources. The quality of vocational training should be increased. Legislated tuition fee reforms could be taken further to lower fiscal costs and expand tertiary education.

To meet ambitious climate change targets and reduce emissions, higher and more consistent carbon prices are needed. Climate change is a global challenge, and working for higher, more broadly based and stable carbon prices within the European Union should be a priority. Domestic carbon pricing policies need to be harmonised and streamlined in terms of programmes and prices. More stable conditions for renewable energy providers would support deployment, but more R&D support for new technologies may be needed. Adaptation planning needs to proceed and focus initially on low–regret investment.

How to obtain this publication

 The complete edition of the Economic Survey of the United Kingdom 2011 is available from:

Additional information

For further information please contact the United Kingdom Desk at the OECD Economics Department at eco.survey@oecd.org.

The OECD Secretariat's report was prepared by Henrik Braconier, Christophe André, Alex Bowen and James Rydge under the supervision of Piritta Sorsa. Research assistance was provided by Jérôme Brézillon and Ane Kathrine Christensen.

http://www.oecd.org/eco/surveys/uk

 

 

 

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