2004 OECD Economic Surveys: United Kingdom 2004

image of OECD Economic Surveys: United Kingdom 2004

OECD’s 2004 review of the UK economy finds that performance has been impressive in recent years.  The main challenges are to contain instability in the housing market, to spend public money more efficiently, and to close the productivity gap with the best performing OECD countries.  This edition also looks at product market competition and sustainable development in the UK. 

English Also available in: French

The Fiscal Challenge

Complying with the Fiscal Rules while Raising Standards in Health and Education

The United Kingdom has endeavoured to increase the quality of public services in three strategic areas where it lags behind countries with a similar degree of economic development: public infrastructure, education and health. Raising quality of services involves more public spending. This ambitious spending plan will have to be executed without compromising a fiscal framework that has served the United Kingdom well so far and is mainly based on a “golden rule” that seeks to prevent a decline in public net wealth in the long-run while providing flexibility over the cycle. This framework allows the financing of new public infrastructure subject to a “sustainable investment rule” which sets a target for net public sector debt that is comfortably met at present. However, the increase in current expenditure will have to come either from increased taxation or slower growth of expenditure in the long run. The government has already increased taxes and has set very strict targets for spending outside health and education. The government also started from a strong budgetary position that could accommodate part of the spending increases on health and education. However, the surpluses achieved in 1999-2000 seem to have had an exceptional character, with buoyant tax receipts linked to the equity price bubble. Recent budgetary developments indeed suggest that the underlying position of public finances is weaker than originally expected in Budget 2003. Going forward, an important strategic variable is the speed of the build up in priority spending. It could be reduced on several grounds: firstly, cost-effectiveness needs to be ensured, to lock in improved performance, rather than higher costs; secondly, more time to pilot and implement promising innovations in health care would be available; and finally, potential strains on a fiscal framework that has been very successful so far would be diminished. This chapter will first assess how much the government deficit has departed from the original plans and evaluate the consequences for the government’s room for manoeuvre. It then considers how best to meet the challenge of adhering to the government’s fiscal rules and code while at the same time raising standards in health and education. An in-depth examination suggests that the existing room for budgetary manoeuvre is less than expected and that securing increases in the quality of services may call for a somewhat less rapid growth in spending in the future...

English Also available in: French

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