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  Basic statistics of United Kingdom, 2011

  This Survey is published on the responsibility of the Economic and Development Review Committee of the OECD, which is charged with the examination of the economic situation of member countries.The economic situation and policies of the United Kingdom were reviewed by the Committee on 11 December 2012. The draft report was then revised in the light of the discussions and given final approval as the agreed report of the whole Committee on 21 December 2012.The Secretariat’s draft report was prepared for the Committee by Christophe André, Dawn Holland, Jon Pareliussen and Clara Garcia, with contributions from Simon Kirby, Giulia Giupponi and Nicola Brandt, under the supervision of Piritta Sorsa. Research assistance was provided by Aurélie Delannoy, Iana Liadze, Katerina Lisenkova, Ali Orazgani, Pawel Paluchowski and Anna Rosso.The previous Survey of the United Kingdom was issued in March 2011.

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  Executive summary

  Recovering from the recession, improving longer-term growth potential and reducing inequality are key challenges for the UK economy. Lingering effects from the global financial crisis, the restrictive impact from necessary fiscal consolidation and headwinds from the euro area sovereign debt crisis risk prolonging and worsening the economic downturn and hurting the long-term growth potential. Monetary policy and the operation of the automatic stabilisers should support the economy in the short term. Structural reforms, including those current implemented by the government, are crucial to boost growth and equality.

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  Assessment and recommendations

  The global economic slowdown and uncertainty about the euro area outlook, alongside necessary fiscal retrenchment and private-sector deleveraging, are generating strong headwinds for the UK economy. Output has been broadly flat over the past two years and remains more than 3% lower than at its peak in the first quarter of 2008 (, Panel A). Private consumption is being restrained by declining real disposable income, deleveraging, precautionary saving and tight access to credit. Private investment suffers from weak demand for goods and services, high uncertainty and tight financial conditions. Foreign trade was supportive in 2011, as exports benefitted from the depreciation of sterling and exceeded their pre-crisis peak, but growth in net exports turned negative in 2012 as the world economy slumped.

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  Labour market, welfare reform and inequality

  Employment has risen by more and unemployment has risen less than expected, given the path of output. Nevertheless, long-term and youth unemployment and involuntary part-time work are high. A polarised labour market risks worsening income inequality, which is high by OECD standards, despite a recent and likely temporary decline. The UK welfare system is an essential safety net, which needs to promote employment, while protecting the most vulnerable. The reformed welfare system, Universal Credit, and the employment programme for disadvantaged workers, Work Programme, will generally improve work incentives and provide support for return to work, but need to be refined. Skill deficiencies are holding back employment and fostering inequality, as low education achievements penalise children from lower socio-economic backgrounds. Vocational training needs to be strengthened and co-operation with employers reinforced. Transition from education to work can prove challenging, requiring more attention to the integration of university graduates into the labour market.

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  Growth, productivity and innovation

  Productivity remains low compared to the best performing OECD economies, despite significant catch-up in the decade preceding the global economic and financial crisis and a supportive business environment. The crisis has impacted on the level and growth of productivity, reflecting cyclical factors like labour hoarding during the recent slowdown, persistent factors linked to the financial crisis, overlaying long-standing structural factors like planning, innovation, insufficient infrastructure, public sector inefficiencies and weak export performance. A Plan for Growth set by the government aims at enhancing the potential of the economy and rebalancing towards exports and investment. Investment in infrastructure needs to be supported by removing land-use planning constraints and addressing the lack of financing. The weak productivity in the public sector could be improved through better management and greater regional flexibility in public sector wages. The low R&D intensity compared to other OECD countries could be addressed by better rewarding innovation through the tax system. Innovation and development of green technologies should be supported by more uniform carbon pricing and enhanced innovation policies, which can be a win-win policy for both environmental sustainability and growth. Other growth opportunities will also need to be better seized. Higher education is among the United Kingdom’s most important exports and has strong growth potential, which should not be hampered by excessive restrictions on student visas. Demand from emerging markets is likely to expand, especially in financial and business services, where the United Kingdom has a competitive edge.

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