Economic Survey of the United Kingdom 2005

 

 

Published on 12 October 2005

Executive summary

An Economic Survey is published every 1½-2 years for each OECD country. Read more about how Surveys are prepared

The OECD assessment and recommendations on the main economic challenges faced by the United Kingdom are available by clicking on each chapter heading below. Chapter 1 identifies the challenges for which the subsequent chapters provide in-depth analysis and policy recommendations.










 

 

 

The stability and resilience of the economy has been impressive and labour and product markets are among the most flexible in the OECD, but structural economic performance judged against a range of indicators can be further improved. For the full Executive Summary, click here.

Impressive macroeconomic stability but structural performance
can be further improved

Chapter 1:  Key challenges: Translating a resilient macroeconomic performance into faster growth in living standards
Macroeconomic performance has been amongst the most resilient in the OECD over the last decade, but policy makers currently face a slowdown in growth, in part caused by an overdue cooling of the housing market, as well as the need to reduce the government deficit. The former raises the issue of the risk of a more pronounced housing market correction as well the need to take measures to improve housing supply. The latter raises issues of how to raise efficiency in priority areas of public service provision more rapidly, particularly in health and education, as well as longer term issues regarding pensions. However, the most important challenges relate to improving productivity performance, where international benchmarking suggests that priority areas for attention should be the general level of skills, innovation performance and transport infrastructure. While labour utilisation is generally high, there may be scope for further improvement by helping many of those currently claiming disability related benefits to find work.

Chapter 2:   Housing: Raising responsiveness of supply
Pronounced cycles in house prices have been a major cause of macroeconomic instability in the past. Following up on a chapter on housing in the previous Survey this chapter begins by updating the assessment of the risk to macroeconomic stability from the housing market in the current conjuncture. It then considers measures to improve housing supply in the light of the recent Barker review as well as other recent policy initiatives and proposals affecting the demand side. While there have been recent changes to planning laws which might help to improve housing supply, it is essential that progress is monitored and if necessary additional incentives provided to local authorities to ensure regional housing targets are met. Reform of property taxation, in particular bringing assessed property values closer to market valuation and ensuring that they are regularly updated, could also help to reduce volatility in house prices.

Chapter 3:  Public services and infrastructure: Tracking the improvements
On current government plans there will have been a rise in the public expenditure to GDP ratio by 5½ percentage points in the eight years to 2007 08, with much of the increase targeted on health, education and transport infrastructure. This chapter updates the previous Survey to document progress in improving outcomes, especially in health and education. It also reports on progress to improve national accounts measures of public spending outputs following the Atkinson review. Further improvements in outcomes, particularly once the ratio of public expenditure to GDP stops rising beyond 2007 08, will require efficiency gains across all public programmes. Planned increases in activity based funding should further improve health care efficiency, but more could be done. Improving outcomes in transportation will require a combination of sustained higher investment and road pricing, as well as ensuring that local authorities have both incentives and resources to implement such changes.

Chapter 4:  Pensions: Options for reform
Unlike the situation in many OECD countries, future fiscal costs from public pension provision are not projected to rise significantly as the population ages. Instead concerns focus on the declining average public pension relative to the income of those in work and the projected increase in the extent of means testing. With the level of private pension provision also declining this has also led to concerns that many are not saving enough for retirement. Reforms should focus on reducing the complexity of the pension system and reducing reliance of means testing. The fiscal costs of such reforms could be partly met by raising the state pension age in line with increasing life expectancy and focussing tax relief for pension contributions on low  and middle income earners.

Chapter 5:  Could more childcare increase labour supply?
The female employment rate has risen from 56% in 1971 to 70% in 2004. Among mothers with two or more children under 15 years, 24% work full time and 40% part time. Improved childcare might bring more mothers into work. In particular it should make work more attractive for sole parents, because with one in two being out of work, joblessness and poverty is much more concentrated among sole parent families than in other OECD countries. This chapter reviews the government’s ten year childcare strategy. It considers prioritisation between longer paid leave and better childcare, and suggests adjustments to how childcare is supported via the working tax credit.

Chapter 6:  From incapacity to rehabilitation and employment.
Seven per cent of the 25 54 year old men are now inactive outside the labour market, many more than three decades ago. Solid growth since the late 1990s has brought down unemployment but not inactivity, with 2½ million currently claiming incapacity benefit. This chapter evaluates how these people could be helped back to work via active support from the Pathways to Work programme and encouragement from a restructured incapacity benefit. Better understanding the role played by mental health problems and improving treatment and rehabilitation will be key to success in this area.

Chapter 7:  Raising innovation performance
A wide range of indicators suggests that UK innovation performance has been mediocre in international comparison. An improvement is often viewed as one important means of closing the productivity gap with the best performing countries. This chapter assesses the appropriate policy response in the context of the government’s ten year plan to boost innovation performance. There are reasons to be optimistic given favourable framework conditions, a strong science base and recent changes in innovation policy. At the same time success should not be judged solely against conventional indicators, which often poorly reflect innovation in certain sectors such as knowledge intensive services, in which the United Kingdom has shown considerable strength.

Chapter 8: Raising the level of skills
Lack of skills in large parts of the workforce is a key factor holding back the capacity to absorb innovations and adapt work processes to take advantage of new technologies. While the supply of university graduates compares well internationally, there is a lack of intermediate and vocational qualifications even for the current youth cohorts. Following on from the Survey’s chapter on innovation, this chapter aims to disentangle the root causes of the shortfall of intermediate skills and examines the options for improving the education of 14 19 year olds as well as developing adult training. Given the magnitude and entrenched nature of the skills shortfall, a wide set of measures is needed. Stronger basic literacy and reduced school truancy should give a better foundation for further learning. Building on this the offer and quality of intermediate and vocational training should be improved to raise its low esteem. Clearer economic incentives to accumulate human capital would also help.

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A printer-friendly Policy Brief (pdf format) can also be downloaded. It contains the OECD assessment and recommendations, but not all of the charts included on the above pages.

To access the full version of the OECD Economic Survey of the United Kingdom:

  • Readers at subscribing institutions can go to SourceOECD, our online library.
  • Non-subscribers can purchase the PDF e-book and/or printed book at our Online Bookshop. 
  • Government officials can go to  OLISnet's Publication Locator.
  • Accredited journalists can go to their password-protected website .

For further information please contact the United Kingdom Desk at the OECD Economics Department at webmaster@oecd.org.  The OECD Secretariat's report was prepared by David Turner and Jens Lundsgaard under the supervision of  Peter Hoeller.

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