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OECD Economic Surveys UNITED KINGDOM

OECD Economic Surveys UNITED KINGDOM FEBRUARY 2015 OVERVIEW This document and any map included herein are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area. The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law. OECD Economic Surveys : UNITED KINGDOM OECD 20159 Executive summary Main findings Key recommendationsOECD Economic Surveys : UNITED KINGDOM OECD 2015 3 EXECUTIVE SUMMARY10 Main findingsAfter a period of subdued growth in the aftermath of the global downturn, growth in theUnited KINGDOM has picked up since early 2013 to in 2014, the strongest performanceamong G7 countries that year.

Following a deep recession and a subdued recovery, economic growth in the United Kingdom (UK) has bounced back strongly since …

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Transcription of OECD Economic Surveys UNITED KINGDOM

1 OECD Economic Surveys UNITED KINGDOM FEBRUARY 2015 OVERVIEW This document and any map included herein are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area. The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law. OECD Economic Surveys : UNITED KINGDOM OECD 20159 Executive summary Main findings Key recommendationsOECD Economic Surveys : UNITED KINGDOM OECD 2015 3 EXECUTIVE SUMMARY10 Main findingsAfter a period of subdued growth in the aftermath of the global downturn, growth in theUnited KINGDOM has picked up since early 2013 to in 2014, the strongest performanceamong G7 countries that year.

2 Against the background of subdued growth in the euro area,the recovery has benefitted from the cumulative impact of wide-ranging domestic included highly-accommodative monetary policy and measures to support lendingand revive the housing market. For fiscal policy, while there have been some additionalconsolidation measures, the automatic stabilisers have continued to operate in has recovered to its pre-crisis trend and is now at record levels. However, weaklabour productivity since 2007 has been holding back real wages and well-being. Thesustainability of Economic expansion and further progress in living standards rest onboosting productivity growth, which is a key challenge for the coming a balanced recovery through macroeconomic policy hasremained highly expansionary for some time. Inflationary pressures have so far been lowowing to ample spare capacity and, more recently, falling commodity prices and a reboundof the exchange rate.

3 Credit constraints have been partly addressed by the Help to Buy andFunding for Lending programmes, which seem to have been effective at reviving lending tohouseholds and strengthened housing demand. However, housing supply has not risen tomeet demand. In addition, house prices have increased rapidly and may create risks tofinancial stability in the case of a downward adjustment. The Funding for Lendingprogramme was closed to mortgage lending in late 2013. Conversely, net lending to firms hascontinued to fall while the large share of loss-making companies could suggest that newloans could have been skewed to inefficient firms to the detriment of young and innovativeones, which could restrain productivity. The budget deficit has been significantly reducedsince the peak of 2009, but at a slower pace recently notably as growth has been insufficientlytax-rich.

4 Public debt as a share of GDP is projected to rise the provision of quality of perceived infrastructure isclose to the OECD average, leaving scope to improve productivity and the well-being ofcitizens. Historic underspending in infrastructure is being tackled by the authorities withintight budget constraints, but greater private infrastructure spending is still in attracting private investors can be partly attributed to insufficient long-terminfrastructure planning and long decision-making processes that generate investmentuncertainties, which the National Infrastructure Plan is starting to address. Although theregulatory framework is robust, the use of some infrastructure is sub-optimal owing tocongestion and insufficient incentives for private operating companies. The financingframework for private infrastructure investment is also facing market failures, such asfragmented institutional investors.

5 However, the authorities have been making progress inencouraging green infrastructure sustainable bank UK banking sector was deeply affected by thecrisis and important regulatory reforms have been implemented to address financialstability risks. Given short-term risks emerging in the housing market, regulatoryauthorities have taken significant precautionary measures to sustain underwritingstandards and prevent significant increases in the number of highly indebted Bank of England has also requested from the government additional powers to caploan-to-value and debt-to-income ratios. Banks remain very large, however, and if they arenot well capitalised they could pose a risk to the economy. In addition, banks have beencutting back net lending, making it more difficult for small and medium-sized enterprisesto get financing.

6 Part of this financing has been replaced by alternative credit providers,which are creating new regulatory challenges. To support sustainable bank lending, theauthorities have taken steps to boost competition in the credit Economic Surveys : UNITED KINGDOM OECD 2015 4 EXECUTIVE SUMMARY11 Key recommendationsSecuring a balanced recovery through macroeconomic policies As underlying inflationary pressures emerge, gradually start increasing the policy rateand, thereafter, begin reducing the size of the Bank of England s balance sheet. Continue to pursue the medium-term fiscal consolidation path while letting automaticstabilisers operate, and ensure consolidation efforts are fair. Seek further efficiency gains in health and education, and broaden the tax base, such asequalising income taxes and social security contributions between the self-employedand the provision of infrastructure Continue to build on the progress made with the National Infrastructure Plan to furtherenhance long-term infrastructure strategy and planning.

7 Develop further the use of public-private partnerships (PPP) and public guarantees forprivately financed infrastructure projects, recording the associated assets and liabilitiesin the government fiscal accounts. Enhance the provision to investors and the public ofcomparable data about public guarantees and the financial and operational performanceof PPP projects. Improve the use of roads by introducing user-paid tolls, and of railways by ensuring thearms-length responsibility for awarding rail franchises. Strengthen the Green Investment Bank and other targeted financial aids to furthersupport the implementation of not yet commercially viable low-carbon technologiesthat have the prospect of becoming so in the foreseeable future. Evaluate the interaction between the Electricity Market Reform and existing policies topromote renewable sustainable bank lending Consider higher leverage ratios for global systemic banks to complement risk-weightedcapital ratios.

8 Encourage the development of new credit providers and gradually extend regulatoryinstruments beyond the banking sector. Continue to uphold underwriting standards in mortgage lending. Further relaxregulatory constraints to boost housing supply, in particular by thoroughly reviewing theboundaries of protected areas of the Green Belt. Collect and share credit information on businesses through credit reference agencies ordirectly through the Economic Surveys : UNITED KINGDOM OECD 2015 5 OECD Economic Surveys : UNITED KINGDOM OECD 2015 6 OECD Economic Surveys : UNITED KINGDOM OECD 201513 Assessment and recommendations Making the recovery sustainable Normalising macroeconomic policies Rekindling productivity growthOECD Economic Surveys : UNITED KINGDOM OECD 2015 7 ASSESSMENT AND RECOMMENDATIONS14 Making the recovery sustainableKey challenges to unleash productivityFollowing a deep recession and a subdued recovery, Economic growth in the UnitedKingdom (UK) has bounced back strongly since 2013.

9 Real gross domestic product (GDP) isback above the pre-crisis peak and growth has been broadening (Figure 1). Macroeconomicpolicies have played a key role. Monetary policy has been very accommodative, measureshave been put in place to support the recovery in the housing market, and fiscal policy hascontributed to some pick-up in growth. Structural reforms have strengthened workincentives and supported a business-friendly environment, thus sustaining one of themost flexible economies in the outcomes remain robust, although income and financial wealth, as well aseducation and skills, are somewhat weaker than the G7 average (Figure 2, Panel A). Incomeinequality is high (Figure 2, Panel B). However, relative income poverty is comparatively lowand has been falling (Figure 2, Panel C). The average income of the richest 10% of thepopulation is nearly ten times that of the poorest, but the gap shrunk between 2009and 2011 to slightly below the OECD average.

10 Moreover, the share of wealth held by the top10% is among the lowest in the G7 (IMF, 2013; Davies et al., 2012).However, labour productivity has been exceptionally weak since the onset of the crisis,and as a result real wages and GDP per capita have been flat (Figure 3). Investment hasrebounded and has recovered close to the pre-crisis peak. Exports have been subduedFigure is strong1. The figures in parentheses show 2010 weights in :OECD (2015),OECD Economic Outlook: Statistics and Projections(database), February and ONS (2014), QuarterlyNational Accounts, Q3 2014 , Office for National Statistics, 2 2008 2009 2010 2011 2012 2013 2014A. GDP is catching upReal GDP, index Q1 2008 = 100 UNITED KingdomCanadaFranceGermanyUnited States7580859095100105110115 2008 2009 2010 2011 2012 2013 2014B.


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