Remarks by Angel Gurría,Secretary-General of the OECD
24 February 2015
London, United Kingdom
(As prepared for delivery)
Chancellor Osborne, Ladies and gentlemen:
It is a great pleasure to be here with you to present our latest Economic Survey of the United Kingdom.
The United Kingdom has succeeded in jump-starting its growth engines!
The last time I stood here in February 2013, our Survey of the United Kingdom economy painted a much bleaker picture than the one we see today. Back then, the economy flat-lined, the unemployment rate was stuck at 8%, and stubbornly high inflation was eating away purchasing power.
Now, growth in the United Kingdom reached 2.6% in 2014, the strongest among G7 countries. And the performance of the labour market has been remarkable! Private sector employment has increased by almost 3 million since 2010. With employment at record levels, the unemployment rate has fallen below 6%. Even as unemployment has fallen, inflationary pressures have vanished and real wages are rising again.
We are predicting this economic expansion to continue this year and next.
What a difference effective economic policies can make! Powerful monetary and credit stimulus has lowered the cost of funding, eased credit constraints, helped exporting firms to rebuild their margins, and revived the housing market.
As we recommended, even as the budgetary situation has improved, the automatic stabilisers have continued to operate in full. This has ensured that the expansion has not been cut short.
And, most importantly, these have helped to put people back to work. The United Kingdom is a textbook case of best-practice on how good labour and product markets can support growth and job creation.
So my main message to you today is "well done and keep going with the plan!”
Reviving labour productivity remains a major challenge
Despite all these achievements, the United Kingdom is not fully out of the woods.
Some risks to the recovery remain, especially from the outside. The euro-area recovery is still weak and uncertain. Lower world oil prices, the start of QE and the depreciation of the euro should all help. However, unsurprisingly, the main domestic risk remains very volatile house prices. The combination of rising demand and restrictions on supply mean that improving land use planning and thoroughly reviewing the boundaries of the Green Belt are now more important than ever.
But perhaps the biggest challenge for the United Kingdom is to make work more productive. Low productivity is not just a challenge for the United Kingdom; it is a challenge for many OECD countries. In fact, it is the structural challenge of our time! How can we better use the assets, qualities and endowments a country has and turn it to productive use?
As opposed to past crises, productivity in the UK has not revived during the recovery. Labour productivity has been weak, even compared with other countries which have also enjoyed solid job creation since 2010, such as Canada and the United States.
Reviving productivity is vital to maintain high growth and boost competitiveness. Stronger productivity is also essential to boost real wages and purchasing power. And sustainable wage growth would not only support deficit reduction, but help to address inequality, and promote well-being!
There are many drivers of productivity, but low investment and weak labour efficiency are two important drivers of the productivity shortfall in the United Kingdom and the main focus of the Survey. Allow me to highlight a few of our recommendations, in areas which have been the major focus of this survey, namely how to improve infrastructure and to enhance sustainable bank lending.
First, in respect of infrastructure, greater investment is needed to ease bottlenecks and make the private sector more productive. Further developing long-term infrastructure strategy and planning is needed to attract private investors. I strongly encourage the authorities to continue to build on the progress already made with the National Infrastructure Plan.
With high public debt, it is difficult to finance public infrastructure, even at today’s exceptionally low interest rates. Further developing the use of public-private partnerships and public guarantees can help leverage limited public resources with private infrastructure investment. Strengthening the Green Investment Bank would also support the transition to low-carbon technologies.
Second, concerning sustainable lending, improving the financing of infrastructure and of the corporate sector more broadly will allow productive firms to grow and prosper. Major and welcome reforms have been implemented to strengthen banks and tighten financial supervision and regulation, which should support lending in the medium-term.
However, only 3.5% of banks’ assets are devoted to lending to non-real estate firms, and SMEs struggle to find financing. The Funding for Lending scheme was an innovative way to address this problem. But, greater sharing of credit information would help boost competition among lenders.
The authorities should also continue to encourage the development of non-bank credit providers, while making sure that they are properly supervised.
Further progress is also needed to address inequality and enhance the knowledge-based economy.
Yesterday, I spoke to a group of cross-party MPs on the importance of inclusive growth here in the United Kingdom. Recent OECD research estimates that rising inequality has knocked as much as 9 percentage points off growth in the UK in the last twenty five years. That’s against 6 or 7 points in the US, Italy and Sweden. More importantly, this is not just about numbers; it is about people’s lives!
This means that the necessary further fiscal consolidation is made considering their impact on the different groups of the population. The tax base should also be broadened to improve the composition of fiscal adjustment. For instance, the self-employed should pay the same income taxes and social security contributions as employees.
Investment in education and skills is also vital for supporting the poorest and promoting social mobility. At the same time, it will also help to promote growth, enhance individual well-being and benefit society at large, increasing the tax base and the pool of skilled workers. For example, more needs to be done to encourage highly qualified immigrants, and to gear employment and skills policies towards the world of work.
Today I am also releasing a new report on Local Job Creation: Employment and Skills Strategies in England, which argues that the gradual devolution of employment and skills policies to the local level can support growth and productivity by improving connections between skill formation and employers’ needs.
Equipping workers with skills to climb the career ladder in work would also support those falling behind and foster greater social cohesion.
Leadership capacities need to be built locally and national programmes need to become more flexible and adaptable. The City Deals, in particular, are a promising example and other countries can learn from this! These cities are now helping the government to raise investment in apprenticeship and workplace learning.
Finally, the UK needs businesses which are true learning organisations, where everyone from the shop floor worker to middle management can contribute to innovating products and services.
Chancellor, Ladies and Gentlemen:
The United Kingdom has made tremendous progress in recovering from the largest economic crisis in 80 years. And this progress has laid the foundations for further reforms needed to boost productivity and inclusiveness.
Rest assured that the OECD will continue to work with the United Kingdom, for theUnited Kingdom. Our common purpose is best summed up in the five words that make up the OECD motto: Better Policies for Better Lives.