Remarks by Angel Gurría, OECD Secretary-General
London, United Kingdom
Chancellor Osborne, Ladies and gentlemen,
It is a pleasure to be in London once again to share the OECD’s views on the UK economy.
We are now into the fifth year of the greatest economic crisis of our lifetimes. These are tough times for OECD economies. Britain is no exception. Growth has been flat for the past 2 and a half years. It is expected to pick up slowly at 0.9% in 2013, but to only gain momentum at the end of the year, with 1.6% growth forecast for 2014. The job market provides one bright spot, with unemployment falling from a peak of 8.4% in late 2011 to 7.7%.
But let’s not forget that the UK economy continues to face major challenges: to improve economic performance, notwithstanding the headwinds from the ongoing euro area debt crisis; to reduce government debt and deficit levels; to encourage Banks to resume lending at an acceptable rate; and to improve productivity growth.
Our 2013 Economic Survey of the UK provides the OECD’s perspective on how the UK can sow the seeds of an enduring recovery.
Creating the conditions necessary for growth: restoring fiscal sustainability
Creating the basic conditions for sustainable growth remains a priority. It is important that monetary policy continues supporting the economy. With conventional monetary policy constrained by the zero bound on interest rates, unconventional measures, including further quantitative easing may be needed, if growth fails to gather momentum. Additional measures to improve the financing of the economy, such as the Funding for Lending Scheme, are also welcome.
But we cannot ignore the elephant in the room. The government deficit is still over 8% of GDP (excluding one-offs), one of the largest in the OECD today. So, getting public finances back under control is as important as ever. Put simply, the deficit needs to be reduced over the medium term to further stabilise debt and create the conditions necessary for sustainable growth.
Progress has been made. Thanks to vigorous efforts by this government, the underlying deficit has fallen by almost 4 percent of GDP since 2009. In addition, the UK has strengthened the reputation of its public institutions through the creation of the Office for Budget Responsibility. These decisive policy measures have delivered significant credibility in the markets, demonstrated by the very low interest rates of UK’s public debt issuances. However, such credibility cannot be taken for granted in today’s global economy!
Indeed, weak economic growth means that the actual deficit has fallen by much less than planned. And as announced in the Autumn Statement, the target of net debt declining as a share of GDP by 2015/2016 will not be met.
So where should we turn? Our recommendation is to use the flexibility provided by the fiscal framework itself. It is not a question of Plan A or Plan B. Every smart plan has flexibility built into it, and this one does too. Strong institutions and steady market confidence in UK government bonds allow financing on favourable terms. This leaves room to let the deficit expand to cushion the shock and to help households through the downturn – the so called “automatic stabilisers”.
Planting the seeds of growth
Of course, fiscal consolidation needs to be embedded in a more comprehensive package to promote growth. That is why the “austerity v.s. growth” debate is a "false dilemma". You need to plant the seeds that will allow the economy to bloom. That is why the OECD has been calling on all countries to “Go Structural”.
Structural reforms are a pivotal rung on the ladder to prosperity and inclusiveness. They can encourage entrepreneurship; induce competition; promote innovation; and address inequality.
Our analysis also finds that well-targeted, well-sequenced, well-packaged and well-communicated structural reforms can deliver results faster and more efficiently than generally expected. And reforms do not necessarily have to be costly or painful. If properly designed, short-term costs can be minimized by exploiting synergies amongst complementary policies.
For example, a comprehensive strategy that maximises complementarities across mutually reinforcing policy domains, such as, labour and product market reforms, will alleviate the transitional costs and accelerate results when compared to the case where individual reforms are adopted in isolation.
The UK is in an excellent position to build on existing strengths: flexible labour and product markets, a business-friendly environment and openness to foreign investment, top-class universities and knowledge base, and a major world financial centre.
The Survey we are releasing today focuses on two key areas for structural reform.
A more inclusive United Kingdom
First, we advise the UK to “Go Social”. Labour market performance has been remarkable. Over half a million jobs were created over the past year, despite flat growth and large cuts in public sector employment. Nevertheless, many jobs are part-time or temporary, and real wages have declined. Youth unemployment also remains high at 20.4 %, compared to the OECD average of 16.2% .
The social impact of the crisis is all too real in many countries. In the UK, income inequality was rising even before the crisis. The average income of the richest 10% was about ten times that of the poorest 10% -a ratio of 10 to 1- and it is still growing. We see this trend in practically all OECD countries, but the average ratio is somewhat lower, at 9 to 1. There is a high risk that the increased polarisation of the labour market, and high youth and long-term unemployment will exacerbate the situation.
Raising the number and quality of jobs, investing in people’s skills and strengthening the welfare system are key to reducing inequality, improving well-being and sustaining long-term growth.
Sustained job creation requires investments in skills that match the demands of firms. In the UK, workforce skills can be enhanced by developing educational support for young people from disadvantaged backgrounds. High quality vocational training, designed in close cooperation with employers, as in Austria, Germany and the Netherlands, where youth unemployment is much lower than in Britain, is also crucial.
The welfare system, which will be streamlined by the ambitious Universal Credit reform, needs to make work pay, while protecting the most vulnerable. Childcare costs for parents, which are still too often an obstacle to taking up work, particularly for women, should also be lowered. In addition to making work pay, this would help promote gender equality.
A more productive United Kingdom
Second, we stress that higher productivity growth is essential to raise living standards for all Britons. Productivity in the UK has been very weak, with a cumulative fall of about 4% since 2008. As a result, in 2011 one hour of work in the UK produced on average 80% of what an hour of work would produce in the US.
Investment in infrastructure, notably in transport and energy generation, is essential to build a more competitive and green economy. Other structural reforms, including those in the government’s Plan for Growth, can also boost activity. For example, the land-use planning reform offers opportunities to boost construction, create jobs and make housing more affordable, raising well-being for many.
Innovation is also essential for productivity growth. This means policies to promote Research and Development and to further support higher education, one of Britain’s most important exports, with strong growth potential. It is also about taxes. Corporate taxation should be reformed, to focus more on rewarding social returns rather than private gains.
Looking outwards, UK firms, with support from the government, need to be more ambitious in foreign markets, especially in high-growth emerging-market economies. Today, British exports to peripheral euro area countries are twice as large as those going to the so-called BRICS countries. Recent OECD-World Trade Organisation research also suggests that a stronger integration of the UK in global value chains has an important potential for growth and jobs.
Finally, I would like to acknowledge the UK’s commitment to working with the OECD, in the context of the G20, to re-examine the international taxation rules, which were designed decades ago, to ensure that all taxpayers pay their fair share. At the moment, many multinationals exploit legal loopholes to shift profits to low tax jurisdictions, resulting in little or no corporate tax being paid. They see this as fulfilling their responsibility to maximise shareholder profits. We need to close these loopholes, but more importantly, we need to provide countries with the information, the analysis, the best practices, the recommendations and the international instruments to better address the business practices of the 21st century.
This work, together with the efforts of the OECD and the G20 since 2009 to tackle offshore tax evasion through increased international cooperation and transparency, will make the tax system fairer and increase revenues.
The OECD is also fully committed to supporting the UK’s Presidency of the G8 in the MENA region, and more broadly in the pursuit of the three T’s (Tax, Trade and Transparency) to help countries compete and succeed in today’s global economy.
Ladies and gentlemen,
The United Kingdom, like many other countries, faces a difficult recovery from the greatest crisis of our lifetimes. Restoring fiscal sustainability remains a priority. But at the same time the seeds of future growth must be carefully sewn. The OECD will continue to support the British Government in the design, promotion and implementation of better policies for better lives.