EUROPEAN COMMISSION Brussels, 26.2.2020 SWD(2020) 527 final COMMISSION STAFF WORKING DOCUMENT Country Report United Kingdom 2020 Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE EUROPEAN COUNCIL, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP 2020 European Semester: Assessment of progress on structural reforms, prevention and correction of macroeconomic imbalances, and results of in-depth reviews under Regulation (EU) No 1176/2011









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Contents Executive summary 1.Economic situation and outlook 2.Progress with country-specific recommendations 3.Reform priorities 3.1.Public finances and taxation 3.2.Financial sector 3.3.Labour market, education and social policies 3.4. Competitiveness, reforms and investment 3.5.Environmental sustainability Annex A: Overview Table Annex B: Commission debt sustainability analysis and fiscal risks Annex C: Standard Tables Annex D: Progress towards the Sustainable Development Goals (SDGs) References LIST OF Tables Table 1.1:Key economic and financial indicators Table 2.1:Assessment of 2019 CSR implementation

Table 3.1.1:Composition of tax revenues 2018 Table 3.2.1:Financial soundness indicators, all banks in UK22 Table C.1:Financial market indicators Table C.2:Headline Social Scoreboard Indicators Table C.3:Labour market and education indicators Table C.4:Social inclusion and health indicators Table C.5:Product market performance and policy indicators Table C.6:Green Growth LIST OF Graphs Graph 1.1: Annual real GDP growth Graph 1.2: Private consumption and wages Graph 1.3: Real household saving ratio Graph 1.4: Potential GDP growth Graph 1.5: Inflation and the nominal effective exchange rate Graph 1.6: Key employment rates Graph 1.7: Wage growth: actual and predicted based on economic fundamentals, 1999-2019 Graph 1.8: Current account balance Graph 1.9: Consumer credit growth Graph 2.1: Overall multiannual implementation of 2011-2019 CSRs to date

Graph 3.1.1: Public debt as % of GDP Graph 3.2.1: Real house price growth Graph 3.2.2: Quarterly housing starts and completions Graph 3.3.1: Net childcare-related costs and benefits as a percentage of disposable income, by three earning levels Graph 3.4.1: Trends in UK labour productivity and real wage Graph 3.4.2: Contribution of production factors to labour productivity growth including intangible assets Graph 3.4.3: Quarters needed to recover 2007 investment levels (in chained volume measures ref. 2016) Graph 3.4.4: Breakdown of intangible investment in the market sector (current prices) Graph 3.4.5: Trends in new infrastructure and housing work Graph 3.4.6: GDP per capita (2017) and GDP per capita growth (2011-2017) Graph 3.4.7: GDP per head (PPS) in UK, NUTS 2 regions (2017), EU=100 Graph 3.5.1: Indicative rates of decarbonisation required to achieve 80% and 100% reductions by 2050 LIST OF Boxes Box 2.1: EU funds and programmes to address structural challenges and to foster growth and competitiveness in the UK Box 3.3,1: Monitoring performance in light of the European Pillar of Social Rights Box 3.4.1: Key drivers of the recent weakness of UK productivity Box 3.4.2: Investment challenges and reforms in the UK

Executive summary The United Kingdom has high employment but low, stagnant productivity. Unemployment is low and the UK business environment has many positive aspects, including relatively free and efficient product, labour and capital markets. However, labour productivity and investment are low and not improving. The UK faces a broad need for more investment in equipment, infrastructure and housing, while also bringing down project costs. There is scope to improve the effectiveness of education and training systems in areas such as basic and technical skills. Tight regulation of the land market can also prevent capital and labour from moving to where it is most needed(). Following the withdrawal by the UK from the EU on 31 January 2020 and the entry into force of the Withdrawal Agreement, the UK entered a transition period, lasting until 31 December 2020. During this period, EU law — including that related to the European Semester — continues to apply to and within the UK. The UK will continue to participate in the implementation of EU programmes and activities committed to under the 2014-2020 multiannual financial framework until their final closure. During the transition period, trading relations between the EU and the UK will remain essentially unchanged. Beyond this period, however, they will depend on the outcome of the negotiations on the UK’s future relationship with the EU. This report does not speculate on the impact of different scenarios, and the projections for 2021 are based on a purely technical assumption of status quo beyond the transition period in terms of trading relations between the EU and the UK. This means that the 2021 projection does not reflect the fact that, even in a scenario where a free trade agreement is concluded, the resulting situation will be less beneficial to EU-UK trading relations than when the UK was in the Internal Market and the Customs Union. In 2019, UK GDP growth remained subdued. Annual growth was 1.4% in 2019, slightly up from 2018 (1.3%). Growth in private consumption continued to slow, despite increasing real wage growth, linked to subdued consumer confidence. After falling in 2018, business investment has stabilised. Investment remains subdued, in part due to uncertainty over the UK’s future trading relations with the EU. On the basis of the purely technical forecast assumption, the UK’s GDP growth is expected to be 1.2% per year over the forecast period, as consumption growth is supported by rising real wages and an expansionary fiscal stance but investment remains subdued. Consumer price inflation eased to 1.3% in December 2019. This is well below a peak of 3.1% in November 2017 and reflects lower oil prices and the fading impact of the depreciation in sterling by about 15% from late 2015 to mid-2016. After a period of relative stability, sterling fell further in mid-2019 in the context of very high Brexit-related uncertainty. However, it has since recovered to a level slightly higher than in most of the post-referendum period. Annual inflation was 1.8% in 2019. It is expected to remain slightly below target at 1.7% in 2020, before picking up to 2.0% in 2021. Employment is high. The employment rate (people aged 20-64) stood at 79.1% and unemployment was low and stable at 3.8% in the third quarter of 2019. Wage growth was relatively strong in 2019, peaking in the middle of the year. Average weekly earnings increased by 3.6% in September-November 2019 (1.8% in real terms). However, if labour productivity remains stagnant, the current rate of real wage growth does not appear to be sustainable. After widening in 2018, the current account deficit was volatile over 2019. The deficit rose to 6.8% of GDP in the first quarter of 2019 before falling to 2.8% of GDP in the third quarter, largely due to fluctuations in the trade balance. The overall net trade response to the 2016 sterling depreciation has been disappointing, as evidenced by recent losses in the UK’s export market share. Household debt remains high, at 83% of GDP in 2018. After falling gradually for a number of years from its peak of 96% in 2009, the household debt ratio has broadly stabilised in the past four years. Growth in total lending to households has also remained broadly stable, at 3.8% year-on-year in December 2019. Most parts of the UK financial sector are well capitalised and in a position to absorb potential shocks. The UK banking system has maintained good capital adequacy and liquidity and continues to improve its profitability. However, the insurance sector faces a number of challenges that have weakened its profitability. The Bank of England’s Financial Policy Committee judges that the UK banking system would be resilient to major and simultaneous domestic and global shocks. The UK stands out among advanced economies for its low rate of investment. UK investment fell particularly sharply in the financial crisis, then recovered robustly until 2015, as the economy and employment grew. In the last 3 years, however, private investment has stalled in the context of high Brexit-related uncertainty, despite the UK having been in the phase of the economic cycle where investment is usually strongest. Growth in intangibles investment has also slowed markedly. Direct public sector investment is close to the EU average and currently growing. Overall, the UK has made some () progress in addressing its 2019 country-specific recommendations. There has been some progress in the following areas: ·Research and innovation. UK universities remain global research leaders. However, UK R&D intensity is flat and below the EU average, and knowledge diffusion is uneven. Delivering the recent ambitious proposals for future research and innovation support will be a challenge. ·Housing investment. Annual net housing supply has continued to rise but planning permissions have levelled off and there are signs of a slowdown in new housing starts. House building looks set to stabilise at a level below that which what would be necessary to meet estimated demand, due in part to capacity constraints in the construction sector. Real house prices are no longer rising though the cost of housing remains high in many places. The government has extended and revised a number of housing policies, including further changes to the planning system, but major new initiatives have been limited. ·Sustainable transport. Use of the UK’s road, rail and aviation networks is reaching capacity and this contributes to congestion, rail reliability issues and air pollution. Public sector investment in transport has increased but the effects of decades of under-investment in infrastructure will take time to address. After some signs of improvement in project delivery, major rail schemes have recently fallen behind schedule and over budget. The UK is taking action to fulfil its ambition to be at the forefront of zero emission vehicles, though it currently lags in the proportion of renewable energy used in the transport sector. ·Low carbon and energy transition. With its new commitment to net carbon emissions by 2050, the government's ambitions are clear. The preparatory work for allocating planned increases in investment is advanced. The scale of the decarbonisation challenge will require a more detailed investment strategy and sustained commitment. In the electricity sector, the UK continues to make progress in attracting investment in large-scale cost-competitive renewables, particularly offshore. Progress is slower in the heating and cooling sector and the UK is not on course to meet its overall 2020 renewables target. There has been limited progress in the following areas: ·Training and improving skills. While the number of people with low levels of skills who are looking for work has increased, the polarisation of job growth towards high and low-skilled roles (and away from roles requiring a medium level of skill) has been accompanied by increased skills mismatches. Implementing the reformed apprenticeship system is proving a challenge, with fewer registrations than in previous years. There is evidence that the apprenticeship levy, introduced in 2017, has seen funding increasingly used to train more senior staff at the expense of entry-level apprenticeships. The UK performs relatively well on a number of indicators of the Social Scoreboard supporting the European Pillar of Social Rights, but some challenges remain. The labour market shows robust performance in terms of job creation and reducing unemployment. However, some groups still have relatively high numbers of people who are not in work or who are looking for work. The proportion of young people who are neither in employment nor in education and training (NEET) increased slightly in 2018 and is now in line with the EU average (after having been consistently below it since 2014). While the employment rate for women (74.4% in Q3-2019) reached the highest level in recent decades, the employment gap between men and women is still close to 10pps. The risk-of-poverty or social exclusion has increased considerably, exceeding the EU average. Regarding progress in reaching the national targets set in the Europe 2020 strategy, the UK is performing well on reducing greenhouse gas emissions. It is on track to meet its 2020 energy efficiency targets but additional effort is likely to be required if it is to achieve the 2020 renewable energy targets.

The UK has made progress towards achieving most aspects of the UN Sustainable Development Goals (SDGs). There has been particular progress on environment-related SDGs including “Affordable and Clean Energy" (SDG 7). There has been some deterioration over the past 5 years in several aspects of the SDGs relating to poverty and deprivation, including "Reduced Inequalities" (SDG 10) (). Key structural issues analysed in this report, which highlight particular challenges for the UK economy, include: ·General government debt remains high. After several years of fiscal tightening and an improving budget balance, the general government deficit is projected to increase from 1.8% of GDP in 2018-2019 to 2.2% in 2019-2020 and 2.4% in 2020-2021. Debt is projected to fall slightly, but is expected to remain above 80% of GDP over the forecast period. The impact of an ageing population and non-demographic cost pressures on health and social care represent significant long-term fiscal risks. ·The availability and affordability of housing remains a major challenge. The housing market has softened and real house prices are no longer growing. However, house prices and rents remain high in areas of high demand, and there are signs of overvaluation. Significantly fewer young adults now own their own homes and this contributes to inequality between generations. The amount and location of land available for new housing is limited by tight regulation of the land market, particularly around big towns and cities. This has prevented housing supply from responding adequately to shifts in demand, and inflated the price of building land and existing houses. The government is implementing a range of measures to boost housing supply. House building remains below what is required to alleviate existing housing shortages. ·Not all groups have shared the benefits of a high employment rate. The employment rate (20-64) reached a record 79.1% in Q3-2019, well above the EU average (74.1%). However, significant challenges remain, including slower growth in labour productivity, polarisation of jobs towards high- and low-skilled roles, a high number of zero-hour contracts and jobs allocated through online platforms ('the gig economy'), and a persistent gender employment gap. There has been a significant increase in the use of zero-hour contracts, which are characterised by lower levels of social protection, skills progression and productivity. The number of women who are not in work or who are not seeking work due to caring responsibilities is higher than the EU average. This is partly due to high childcare costs especially for low-income earners. ·The risk of poverty or social exclusion increased significantly from 22% to 23.6% between 2017 and 2018, surpassing the EU average. This translates into an additional 1.1 million people at risk of poverty or social exclusion. The number of people turning to food banks in the UK has increased over the last year. Market income inequality is high, but social benefits have a strong poverty-reducing effect. In-work poverty and child poverty remain high. Monetary poverty is projected to rise further. Homelessness figures show no signs of abating. ·Labour productivity, which was already relatively low, has stagnated. Output per hour is significantly lower in the UK than in most other developed economies, and is barely higher than it was before the financial crisis. Recent GDP growth has been driven by rising employment, not increases in productivity. Despite a tight labour market, UK labour productivity has been essentially flat since early 2018. There is scope to increase productivity by addressing broad-based problems such as low investment in equipment, infrastructure and R&D, and skills gaps (especially in basic and technical skills). Many parts of the UK are relatively poor with comparatively low levels of investment in skills and infrastructure, and inter-regional disparities have continued to grow. The UK aims to invest more in research and innovation and improve the use of existing technologies across the economy. ·Infrastructure networks are under pressure. Use of the UK’s road, rail and aviation networks is reaching capacity and the country needs to deliver a substantial amount of new physical infrastructure. After decades of public under-investment, the government is starting to deal with the infrastructure deficit. In July 2018, the National Infrastructure Commission published a wide-ranging long-term assessment of infrastructure needs between now and 2050. A full government response in the form of a ‘National Infrastructure Strategy’ has been delayed, and is expected to be published alongside the March 2020 Budget. ·Major investment and reforms will be needed to continue the transition to a climate-neutral economy. The UK has made good progress to date in reducing greenhouse gas emissions. In 2019, the UK committed to reach net zero carbon emissions by 2050. This will require large-scale investment and behavioural changes across the economy. The prospects for further investment in the renewable electricity sector are encouraging. Reducing the amount of energy used for home heating is complicated by the age of the housing stock. Congestion and long commutes will be a challenge in reducing transport sector emissions. 1. Economic situation and outlook GDP growth UK GDP growth remained subdued in 2019. Real GDP grew by 1.4% in 2019. While increasing slightly from 2018 (1.3%), recent growth has been well below the post-crisis peak of 2.6% in 2014 (Graph 1.1). Stockpiling and other actions by UK businesses, in advance of the possible disorderly withdrawal from the EU on 29 March 2019, temporarily boosted growth in Q1-2019. The unwinding of this mitigation activity had an opposite, dampening effect in the following quarter. A similar, though less pronounced pattern was visible in the months around the possible withdrawal date at the end of October 2019 (). Graph 1.1:Annual real GDP growth Source: Office for National Statistics, European Commission Growth in private consumption continued to slow. From its post global financial crisis peak of 3.6% in 2016, growth in private consumption eased to 1.6% in 2018 and 1.3% in 2019 (Graph 1.2). The slowdown in 2018 was despite increasing real wage growth but was consistent with a significant deterioration in the Commission’s consumer confidence indicator over the second half of the year. Private consumption continued to grow at a modest pace in 2019, as the boost from rising real wages was dampened by subdued consumer confidence. The Bank of England suggest that Brexit uncertainty has weighed on consumer goods demand, in particular on ‘non-essential’ spending (Bank of England, 2019b). According to the Commission 2019 Autumn Forecast, growth in private consumption is expected to recover somewhat over the forecast period, supported by rising real wages and an expansionary fiscal policy. Graph 1.2:Private consumption and wages Source: Office for National Statistics Graph 1.3:Real household saving ratio Source: Office for National Statistics, European Commission The household saving ratio increased in 2018 and has since stabilised (Graph 1.3). It increased from 5.3% in 2017 to 5.8% in 2018. In Q3-2019, the savings ratio stood at 5.4%. The cash-basis saving ratio (which captures only the immediately available and directly observed cash to households) increased to 2.8% in 2018 from 1.6% in 2017, in line with the increase in the national accounts household saving ratio. In Q3-2019, the cash-basis ratio had fallen to 2.1%. In 2020 and 2021, growth in household expenditure is expected to grow generally in-line with gross household disposable income growth. The household saving ratio is therefore expected to remain broadly stable. Business investment remains subdued. Business investment grew by 0.3% in 2019 and it has been weak for the last 3 years (see Box 3.4.1). According to the 2019/2020 Investment Survey by the European Investment Bank, uncertainty was the most cited barrier to investment (88% of the firms surveyed, up from 76% in 2018/2019) and well above the EU average (72%) (EIB, 2019). Over the forecast period, business investment is expected to remain weak as uncertainty about the UK’s future trading relationship with the EU persists. Trade was volatile through 2019. Net trade made a negative contribution to growth in 2018 (-0.3pps), and no contribution in 2019 (0.0pps). Mitigation activity by firms before the possible disorderly withdrawal from the EU on 29 March 2019 and its subsequent unwinding introduced significant volatility in UK trade data over the first half of 2019, and a similar, though less pronounced pattern was observable around the possible withdrawal date in October 2019. Over the forecast period, net exports are projected to weigh on growth, as continued weak external demand inhibits export growth while domestic demand supports moderate import growth.

UK GDP is forecast to grow at a broadly stable pace in 2020 and 2021. Whereas during the transition period trading relations between the EU and the UK are unchanged, there is uncertainty as regards their future economic relationship beyond the transition period. For that reason, 2021 projections for the UK are based on the purely technical assumption of status quo in terms of trading relations between the EU and the UK. This is for forecasting purposes only and does not reflect any assumptions or predictions with regard to the outcome of the negotiations between the EU and the UK, nor the fact that, in any outcome, their trading relations will be less beneficial than compared to when the UK was a member of the Internal Market and the Customs Union. On that basis, and assuming an expansionary fiscal stance based on the 2019 Spending Review announcements (see below), annual GDP growth is forecast to be 1.2% in both 2020 and 2021. Potential growth Weak productivity growth continues to weigh on potential GDP growth. Potential GDP growth has remained relatively subdued compared to the pre-crisis period (Graph 1.4). This is in line with the stagnation of labour productivity since the global financial crisis. In particular, growth in the labour force and employment contributed to the increase in potential GDP growth after the crisis, and with a small deterioration in 2016 and 2017, continues to be the main contributor. In recent years, companies appear to have opted for increasing labour inputs over capacity enhancing capital investments (see Section 3.4 for detail on UK productivity developments). Graph 1.4:Potential GDP growth Source: European Commission Inflation After easing in 2019, inflation is expected to rise gradually over the forecast period. Despite the tight labour market, consumer price inflation eased to 1.3% in December 2019, and was 1.8% in 2019 as a whole (Graph 1.5). This was significantly down from 2.5% in 2018, partly due to lower oil prices and the unwinding of the effect of sterling’s depreciation in 2016. After falling by around 15% between late 2015 and the aftermath of the UK’s vote to leave the EU in mid-2016, the sterling net effective exchange rate has been relatively stable at this lower level. Sterling fell further in mid-2019 in the context of very high Brexit-related uncertainty, but has since recovered to a level slightly higher than in most of the post-referendum period. Inflation is projected to remain slightly below target at 1.7% in 2020, before picking up to 2.0% in 2021. Graph 1.5:Inflation and the nominal effective exchange rate Source: European Commission Labour market The labour market continues to perform well but employment growth has slowed down. The labour market has been strong in recent years (see Graph 1.6). Based on Eurostat data, the employment rate was a record 79.1% in Q3-2019. Employment has increased across most sectors. The activity rate reached 81.9% in Q3-2019, after flattening in mid-2018. Unemployment was stable at 3.8% in Q3-2019, the lowest level over the last two decades. At the same time, job-finding rates (11.8% of unemployed people found a job in Q1-2019) have stagnated since mid-2017. The percentage of underemployed part-time workers has remained above the EU average (4.2% vs 3.2% in Q3-2019), though it has decreased in recent years. Wage growth has accelerated and remains broadly in line with economic fundamentals. After years of relatively weak wage dynamics, real wage growth picked up through 2019 to nearly 2%. Nominal wage growth has accelerated and is expected to have averaged over 3% in 2019 (vs. 2.9% in 2018). This is marginally above a model prediction of what might be expected on the basis of developments in inflation, productivity and unemployment (2.9% for 2019, see Graph 1.7) (). However, the current rate of real wage growth may not be sustainable if labour productivity remains stagnant (see Section 3.4). Graph 1.6:Key employment rates Source: Eurostat Long-term international migration continued to add to the UK population, but the balance has shifted away from the EU. In the year to June 2019 net migration was 212,000. Net migration from the EU has continued to fall from a peak of 218,000 in 2015 and at 48,000 in the year to June 2019 is at its lowest level since 2003. Net migration from outside the EU has stabilised at an annual rate of over 200,000, after a gradual increase since 2013. Graph 1.7:Wage growth: actual and predicted based on economic fundamentals, 1999-2019 Source: European Commission Social developments The at-risk-of-poverty-or-social-exclusion rate increased by 1.6pps to 23.6% in 2018, significantly exceeding the EU average of 21.9%. Both relative poverty and material deprivation rose. In 2018, the at-risk-of-poverty rate increased to 18.9% (from 17% in 2017) and is expected to have increased further in 2019 (Eurostat, 2019a). The severe material deprivation rate increased to 4.6% (from 4.1% in 2017). Due to major reforms of the social security system, the poverty reducing effect of social transfers decreased from 41.7% in 2017 to 35.9% in 2018, bringing it closer to the EU average of 33.2%. As a result, income inequality after transfers, measured by the income quintile share ratio, increased from 5.4 in 2017 to 5.95 in 2018. In the past 5 years, the UK has moved away from reaching SDG 10 (reducing inequalities). External position The deterioration in the trade balance led to the current account deficit widening in 2018, while movements were more volatile in 2019. The UK current account deficit widened to 3.9% of GDP in 2018 from 3.5% in 2017 (see Graph 1.8). This deterioration was largely driven by an increase in the trade deficit, which widened to 1.4% of GDP in 2018 from 1.2% in 2017. In cyclically-adjusted terms, the current account position remained considerably below the country-specific ‘norm’ of around zero suggested by fundamentals (). While the current account deficit increased to 6.8% in Q1-2019, it improved to 2.8% in the third quarter, both movements driven by changes in the trade balance. Trade was volatile in 2019 in part due to stockpiling activities ahead of the UK’s expected withdrawal from the EU in March 2019, and subsequent unwinding. Since sterling’s depreciation in 2016, the net trade response to the depreciating real effective exchange rate and associated improved price competitiveness has been disappointing, as evidenced by recent export market share losses. Graph 1.8:Current account balance Source: Office for National Statistics & European Commission The primary income deficit widened very slightly to 1.3% of GDP in 2018, from 1.2% in 2017 and stood at 1.6% in Q3-2019. The main driver was a reduction of the foreign direct investment (FDI) income balance as the rates of return earned on FDI-related investments in the UK increased, and these maintained a better rate of return than that earned on UK investments abroad. This was partially offset by the portfolio income deficit narrowing from 2.3% of GDP in 2017 to 2.0% in 2018 and the other investment deficit narrowing from 0.4% of GDP in 2017 to 0.3% in 2018. Total net investment inflows into the UK decreased in 2018 and stabilised in the first half of 2019. Total net inward investment flows into the UK decreased substantially to 9.0% of GDP in 2018 from 23.7% in 2017. This was mostly due to a reduction in volatile other investment inflows from 10.8% of GDP in 2017 to 0.0% in 2018. In contrast, other investment inflows recorded a large net inflow of overall investment in the first half of 2019. Other investments, which includes loans and deposits to banks, are volatile as they are short-term in nature and are therefore subject to foreign investors’ appetite and refinancing risk.

Inflows of FDI, a more stable form of inward investment, dropped to 2.8% of GDP in 2018, from 4.6% in 2017. Interpreting aggregate FDI statistics is often challenging as they can be affected by mergers and acquisitions activity that may not result in a significant economic benefit. However, data from the Department for International Trade (DIT, 2019) shows that in 2018-2019, the number of total FDI projects decreased by 14% compared to 2017-2018. Within this overall reduction, the number of FDI projects related to mergers and acquisitions actually increased by 8% but the number of new investment projects decreased by 12%. Reflecting this, the number of new jobs created from FDI decreased by 24% in 2018-19 when compared to 2017-2018. As new FDI is believed to support productivity growth, this decline is a concern in light of the UK’s ongoing productivity growth challenge (see Section 3.4). Despite persistent external deficits, the net international investment position (NIIP) is close to balance. The NIIP widened to 12.8% of GDP in 2018, from 10.0% in 2017, as the increase in total assets of £259 billion (€296 billion) was less than the increase in liabilities of £326 billion (€372 billion). This widening of the NIIP was due to both positive net investment flows into the UK by foreign investors and sterling appreciation effects. Monetary Policy In January 2020, the Bank of England maintained Bank Rate at 0.75%. The Bank’s Monetary Policy Committee (MPC) also voted in its January meeting to maintain the stock of sterling non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves, at £10 billion (€11.4 billion). The Committee also voted unanimously to maintain the stock of UK government bond purchases, financed by the issuance of central bank reserves, at £435 billion (€496 billion). In its summary, the Committee stated, ‘policy may need to reinforce the expected recovery in UK GDP growth should the more positive signals from recent indicators of global and domestic activity not be sustained or should indicators of domestic prices remain relatively weak. Further ahead, if the economy recovers broadly in line with the MPC’s latest projections, some modest tightening of policy may be needed to maintain inflation sustainably at the target’ (Bank of England, 2020). Financial sector and private debt The UK banking sector’s profitability has increased. Banking profits have grown, mainly driven by an increase in non-interest income and a reduction in impairment charges. As discussed in Section 3.2.1, the sector has increased provisioning for misconduct costs but future misconduct costs are expected to be lower. However, the insurance sector faces issues of weak profitability, due to the intensity of competition, regulatory scrutiny and increasing attrition costs (see Section 3.2.1.). In December 2019, the Bank of England’s Financial Policy Committee (FPC) raised the UK countercyclical capital buffer rate from 1% to 2%. The FPC continued to judge that, apart from those risks related to Brexit, domestic financial stability risks remained at a standard level overall. The FPC also judged that the Bank’s 2019 stress test showed that the UK banking system was resilient to deep simultaneous UK and global recessions that were more severe overall than the global financial crisis, and would encompass ‘a worst-case disorderly Brexit’ (Bank of England, 2019a). The 2018 European Banking Authority stress test produced unexpectedly weak results for UK banks, which partly reflects differences in methodology and the scenarios applied (see Section 3.2.1). The pace of growth in total lending to households stabilised in 2019. Total lending to households grew by 3.8% year-on-year in December 2019, slightly below its 2018 average of 4.2%. Lending secured on dwellings grew by 3.4% (Graph 1.9) and it has been broadly stable for the last 3 years. Unsecured consumer credit growth is 6.1%, well below its post crisis peak of 10.9% in November 2016. The Bank of England’s 2019 stress test showed that the UK banking system could successfully absorb potential losses on household debt, even in a severe downturn (Bank of England, 2019a). Graph 1.9:Consumer credit growth Source: Bank of England Despite stabilising over recent years, household debt remains high. After falling steadily from a peak of 96% of GDP in 2009, household debt has broadly stabilised in the past four years. In 2018, it stood at just over 83% of GDP, broadly stable from 2017. In its December 2019 Financial Stability Report, the FPC stated that the proportion of households with high mortgage debt-servicing ratios remains low. Nonetheless, the Commission’s prudential threshold and fundamentals-based benchmarks for household debt suggest that household indebtedness still poses financial stability risks (). Furthermore, the Commission’s household debt sustainability indicators (S1 and S2) suggest that the near record-low household saving ratio would need to increase to make debt levels sustainable over both the medium and long term. Growth in credit to non-financial corporations was 3.2% year-on-year in December 2019. This growth was driven by credit to large businesses, which grew by 4.4% annually. At the same time, growth in credit to small and medium-sized enterprises grew by a more modest 0.8%. The ratio of gross non-performing loans improved and was one of the lowest in the EU at 1.3% as of Q2-2019 (the EU average is 3.0%) (European Banking Authority, 2019). Public finances Several methodological and data changes to the public sector finance data led to an upward revision of the budget deficit. In September 2019, the Office for National Statistics (ONS) changed its accounting treatment of student loans to better reflect the fiscal cost of loans that are not repaid, and revised other data, including on public sector pensions and corporate taxes. The changes led to an upward revision of the deficit from 2000-2001 onwards. For 2017-2018, the general government deficit was revised up from 2.1% of GDP to 2.7%, and from 1.2% to 1.8% for 2018-2019. After several years of fiscal tightening and an improving budget balance, a looser fiscal stance is projected for the coming years. According to the Commission 2019 Autumn Forecast, the general government deficit is projected to increase to 2.2% of GDP in 2019-2020 and to 2.4% in 2020-2021, before falling slightly to 2.3% in 2021-2022. The structural deficit is projected to increase from 2.2% of GDP in 2018-2019 to around 2.4% over the forecast period. In addition to previously announced extra spending from 2019-2020 onwards, in particular on the National Health Service, the Commission’s forecast also includes increases to departmental spending limits announced in the Spending Round on 4 September 2019. Due to the general election on 12 December 2019, the government cancelled its 2019 autumn budget. The next Budget will be presented in March 2020. General government debt continues to fall. The methodological and data changes mentioned above had only a limited impact on the general government debt-to-GDP ratio. For 2018-2019, the ratio was revised down slightly, from 85.2% to 84.3%. According to the Commission 2019 Autumn Forecast, the debt-to-GDP ratio is projected to continue to fall, from 84.1% in 2019-2020 to 83% in 2021-2022. Sustainable development goals The UK has made progress towards achieving most aspects of the UN Sustainable Development Goals. According to Eurostat’s Sustainable Development Goals (SDG) indicators (see Annex D), the UK has registered improvements in most of the goals over the past 5 years. There has been particular progress on environment-related SDGs including “Affordable and Clean Energy” (SDG 7), “Responsible Consumption and Production” (SDG 12) and “Climate Action” (SDG 13). In many of the indicators in these areas, the UK’s performance is in line with the EU average as many EU Member States have also made good progress. There has been some deterioration over the past 5 years in several elements of the SDGs related to poverty and deprivation, namely “No poverty” (SDG 1), “Zero Hunger” (SDG 2) and “Reduced Inequalities” (SDG 10). On several deprivation-related indicators the UK scores below the EU average, despite the UK’s high employment rate and quite redistributive tax-benefit system. Table 1.1:Key economic and financial indicators 2. Progress with country-specific recommendations Since the start of the European Semester in 2011, the UK has recorded at least ‘some progress’ on 94% of CSRs addressed to it. This includes 10%, covering access to finance and fiscal policy, where it achieved ‘substantial’ progress. On the other 6% of CSRs, it has recorded only ‘limited’ progress (see Graph 2.1). On labour market, housing and infrastructure CSRs, it has tended to record ‘some’ progress. While the government has put in place a range of relevant policies, these are all deep-rooted and longstanding policy challenges still requiring sustained reform efforts. There has been more variation in the assessment of fiscal CSRs over time as the pace of ongoing fiscal consolidation has fluctuated, as have trends in public investment.

Graph 2.1:Overall multiannual implementation of 2011-2019 CSRs to date Source: European Commission The fiscal deficit gradually decreased to below 3% of GDP, though it is no longer falling. The UK left the Excessive Deficit Procedure of the Stability and Growth Pact in 2017. The UK received a recommendation on investment in 2019 that encompasses areas covered by previous recommendations. The UK stands out among advanced economies for its low rate of investment. UK private investment recovered robustly from the financial crisis until 2015. Private investment has since stalled in the context of high levels of Brexit-related uncertainty, despite the UK having been in the phase of the economic cycle where investment is usually strongest. Growth in intangibles investment has also slowed markedly. Direct public investment is close to the EU average and is currently growing, and it has been increasingly focused on economic infrastructure. The UK’s research base is excellent, but the diffusion of knowledge and process innovation across the economy is uneven. Many parts of the UK are relatively poor with comparatively low levels of physical and human capital, and inter-regional disparities have continued to grow. The UK has announced a range of policy measures to increase housing supply. Residential construction has risen in recent years, due both to a cyclical recovery and policy action, including major reforms to the planning system. Though real house prices have flattened, the cost of housing is particularly high in major urban centres and there is a structural shortage of housing in many parts of the country. The government has set itself the difficult goal of increasing annual housing supply in England to 300,000 units by the mid-2020s. Household debt remains high but household balance sheets are strong on aggregate. The UK has received recommendations on a range of labour market and social issues. Concerns persist regarding the implications of low workforce skills for career progression and productivity. Skills mismatches and shortages have increased as employment rates have hit historical highs. However, career progression is difficult for many and upskilling of those in work needs sustained policy efforts and investment. Publicly funded childcare provision has expanded over the last decade, though net childcare costs for low-income earners remain highest in the UK. The UK also received recommendations from 2011 to 2014 on poverty and the welfare system. These had a particular focus on child poverty, which remains quite high and is predicted to increase due to cuts in public expenditure resulting from the rollout of Universal Credit.

The UK received recommendations on infrastructure from 2012 to 2014, and again in 2016 and 2019. In March 2020 the government will issue a comprehensive national infrastructure strategy, in response to the long-term National Infrastructure Assessment published by the National Infrastructure Commission in 2018. While pressure on networks is still building, the UK is starting to deal with the cumulative effects of decades of public under-investment in infrastructure. Rail usage has increased in recent years though a number of new rail projects and existing rail services have experienced problems. In 2019, the UK committed to reach net zero carbon emissions by 2050. There has been positive progress on the use of renewable energy, especially offshore wind. The UK has made some () progress in addressing the 2019 country-specific recommendations (CSRs). The UK currently has two CSRs. CSR 1 on fiscal issues is not assessed in this country report. There has been some progress on CSR 2 as a whole, which relates to several aspects of investment. There has been some progress on supporting research and innovation. UK universities remain global research leaders. However, UK research and development (R&D) intensity is flat and below the EU average. Delivering on the recent ambitious proposals for future research and innovation support will be a challenge. There has been some progress on boosting housing supply. Annual net housing supply has continued to rise but grants of planning permission have levelled off and there are signs of a slowdown in housing starts. House building looks set to stabilise at a level below that which would be necessary to meet estimated demand, due in part to capacity constraints. Real house prices are no longer rising though the cost of housing remains high in many places. The government has extended and revised a number of housing policies, including tweaks to the planning system, but major new initiatives have been limited. The UK has made limited progress on training and improving skills. While labour market participation by low-skilled people has improved, the polarisation of job growth towards high and low-skilled roles (and away from roles requiring a medium level of skills) has been accompanied by increased skills mismatches. Implementing the reformed apprenticeship system is proving a challenge, with registrations down compared to previous years. There is evidence that the apprenticeship levy, introduced in 2017, has seen funding increasingly used to train more senior staff at the expense of entry-level apprenticeships. The UK has made some progress in sustainable transport. Use of the UK’s road, rail and aviation networks is reaching capacity and this contributes to high levels of congestion, rail reliability issues and air pollution. Public investment in transport has increased but the effects of decades of under-investment in infrastructure will take time to address. After some signs of improvement in delivery, major rail schemes have recently fallen behind schedule and over budget. The UK is taking action to meet its ambition to be at the forefront of zero emission vehicles, though it currently lags in the proportion of renewable energy used in the transport sector. The UK has made some progress on the low carbon and energy transition. With the new commitment to net zero carbon emissions by 2050 the government's ambitions are clear, and the preparatory work for allocating increases announced in investment is advanced. In the electricity sector, the UK continues to make progress in attracting investment cost-competitive renewables, particularly offshore wind. Progress is slower in the heating and cooling sector and the UK is not on course to meet its overall 2020 renewables target. The scale of the decarbonisation challenge will require a more detailed investment strategy and sustained commitment. The Industrial Energy Transformation Fund, announced in summer 2019, will provide £315 million (€359 million) to businesses to reduce the impact of emissions from the industrial sector.

Table 2.1:Assessment of 2019 CSR implementation Source: European Commission Box 2.1: EU funds and programmes to address structural challenges and to foster growth and competitiveness in the UK The UK is a beneficiary of EU support and will continue to participate in the implementation of all European Structural and Investment Funds (ESIF) ( I ) programmes committed under the 2014-2020 Multiannual Financial Framework until their final closure. Its financial allocation from the EU cohesion policy funds ( II ) amounts to €11 billion (£9.65 billion) in the current Multiannual Financial Framework. By the end of 2019, 85% had been allocated to specific projects and 33% was reported as having been spent by the selected projects ( III ) showing a level of implementation below the EU average. EU cohesion policy funding is invested in operations that address specific structural challenges in the UK: €3.7 billion (£3.25 billion) is allocated to investments in smart growth, €1.7 billion for sustainable growth and sustainable transport and €5.2 billion (£4.56 billion) for inclusive growth. EU cohesion policy funding is contributing to transformations of the UK economy by promoting growth and employment via investment in: research; technological development and innovation; the competitiveness of enterprises; sustainable transport; energy transition; and employment and labour mobility. By 2019, investments supported by the European Regional Development Fund had already supported over 44,000 enterprises, of which more than 10,000 were start-ups, and helped more than 2,000 enterprises in their cooperation with research institutions. The European Social Fund has provided training to approximately 1.3 million participants, with an emphasis on disadvantaged groups. Of the participants, 245,500 came from an ethnic minority background, 241,000 had some form of disability, and some 295,000 were lacking basic skills. 110,000 of the participants subsequently moved into employment and 140,000 gained new or complementary skills, improving their employability. Agricultural and fisheries funds and other EU programmes also help to address the UK’s investment needs. The UK is eligible for €5.2 billion (£4.56 billion) of European Agricultural Fund for Rural Development (EAFRD) support, and €243 million (£213 million) from the European Maritime and Fisheries Fund (EMFF). In addition, €340 million (£298 million) has been allocated from the Connecting Europe Facility to specific projects on strategic transport networks in the UK and €6.1 billion (£5.35 billion) of EU funding from the Horizon 2020 programme has been allocated to Research and Innovation projects, of which €811 million (£711 million) has been allocated to 1 425 SMEs. EU funding also supports the mobilisation of significant private investment. 8.4% of the ESIF funding allocation is invested through loans, guarantees and equity funds, which in turn is expected to mobilise substantial additional private sector capital. EU funds already invest substantial amounts on actions that support the Sustainable Development Goals (SDGs). In the UK, the ESIF funds support 12 out the 17 SDGs and up to 96% of the ESIF expenditure is contributing to those goals. 3. Reform priorities

3.1.Public finances and taxation Taxation policy At 33.8%, the UK’s tax-to-GDP ratio remains well below the GDP-weighted EU average of 39.2% (Table 3.1.1). Total UK tax revenues increased by 2.8% between 2017 and 2018. Table 3.1.1:Composition of tax revenues 2018 Source: European Commission, Taxation Trends in the European Union, 2020 Edition (forthcoming) In comparison to 2017, corporate income tax receipts fell by 3% to £57.4 billion (€59.2 billion) in 2018. At 2.7% of GDP they are now in line with the EU average. The effective marginal tax rate for new investment dropped slightly from 23.6% in 2017 to 22.7% in 2018. However, it continues to be one of the highest rates in the EU (ZEW, 2019) and may discourage corporate investment. The tax burden on labour is among the lowest in the EU across the income scale. Personal income tax and national insurance contributions make the biggest contribution to tax revenues. At 28.93% of the average wage for a two-earner couple with two children, the UK’s tax wedge is one of the lowest in the EU (the EU average was 36.34% in 2018) (). The UK’s dividend tax regime and the UK’s high number of bilateral tax treaties are features that may be used by companies that engage in aggressive tax planning. The UK is ranked high on indicators that identify a country as having features that can be used by companies for tax optimal repatriation schemes (European Commission, 2018b). The UK dividend tax regime may also have wider effects in the economy. UK dividend payments as a share of companies' gross operating surplus have risen significantly over the last decades (ONS, 2019a). The higher dividend payouts have occurred during a period of weak investment in the UK as companies retain less funds for investment (see also Section 3.4). The UK has acted to curb aggressive tax planning by transposing the European Union ATAD1 () and ATAD2 provisions on hybrid mismatches () into its domestic law. At international level, the UK has broadly transposed the provisions of the OECD Action Plan on Base Erosion and Profit Shifting (BEPS) (). In 2019, the European Commission concluded that the UK’s controlled foreign company (CFC) rules() were partly in breach of EU State Aid rules, by giving illegal advantages to certain multinational companies through the Group Financing Exemption (European Commission, 2019a), a ruling the UK does not agree with and has appealed. This exemption partially (75%) or fully exempted from taxation in the UK financing income received by an offshore subsidiary from another foreign group company, even if the capital being used was ‘UK connected’ or this income was derived from ‘UK activities’, with the latter being ruled illegal. A multinational active in the UK using this exemption was able to provide financing to a foreign group company via an offshore subsidiary paying little or no tax on the profits from these transactions. In the context of ATAD1, the UK changed the scheme so that it complied with EU rules as of 1 January 2019. The UK is obliged to recover illegal State aid, pending the outcome of the appeal, to remove the distortion created. The UK VAT gap is slightly lower than the EU average (). It was estimated at 10.6% in 2017 (EU: 11.2%). According to the estimated policy gap, the government loses potential revenues by using reduced VAT rates (). The actionable VAT policy gap, resulting from exemptions and reduced rates, was higher (16.6%) than the EU average (13.0%) in 2017 (CASE, 2019). The UK forecasts the VAT gap to have been 9.6% of GDP in 2018-2019 (OBR, 2019a). Foregone revenues due to zero and reduced VAT rates are estimated to have been £52.7 billion (€60.1 billion) in 2018-2019 (HMRC, 2019). While the UK’s environmental tax revenue is in line with the EU average of 2.4% of GDP, as a percentage of total UK tax revenue, environmental taxes are declining. The composition of UK environmental tax revenues reflects the EU average with energy taxes accounting for 74% of total revenues. Transport fuel taxes remain a significant source of revenue for the UK. Like Belgium, the UK has equalised its nominal tax rates on petrol and diesel for private use. These do however not reflect the full social costs of transport, including congestion (European Commission, 2019b). Government plans to increase the duty rate in line with inflation have frequently been postponed or cancelled; as a consequence, the fuel duty rates have fallen by 17% in real terms since the last actual increase in 2010-2011. Nevertheless, the fuel duty rates are among the highest in the European Union (IFS, 2019a). Pollution / resources taxes account for only 3% of total environmental tax revenue, which is roughly in line with the corresponding share in the EU. The Landfill Tax, introduced in 1996, has increased recycling, however the current Landfill Tax gap (the gap between the potential and the actual revenue from the expected tax) is estimated to be £125 million (€143 million) or 12% (Noel et al, 2018). The tax was extended to cover illegal waste sites in April 2018, which may increase tax revenues. Debt sustainability analysis and fiscal risks Despite a high debt-to-GDP ratio, there are no significant fiscal sustainability risks for the UK in the short term. The Commission’s early detection indicator for fiscal stress S0 (indicating risk due to a high level of gross financing needs, of the primary deficit and of public debt) remains below its critical threshold (see Annex B). Graph 3.1.1:Public debt as % of GDP Source: European Commission, Fiscal Sustainability Report 2020, forthcoming. Over the medium term, the UK faces high fiscal sustainability risks. While the Commission’s medium-term fiscal sustainability indicator S1 indicates a medium level of risk, due to the high initial debt ratio, the Debt Sustainability Analysis (DSA) points to high risk. In the baseline no-policy change scenario, debt is expected to fall slightly, but remain high at 78.6% of GDP by 2030. If the structural primary balance (SPB) reverted to historical levels, as modelled in the historical scenario, debt could increase to 91.6% of GDP by 2030, leading to an overall assessment of a high fiscal sustainability risk over the medium term (see Graph 3.1.1.). The UK also faces high fiscal sustainability risks in the long term. This assessment is driven by the DSA historical scenario mentioned above. The Commission’s S2 indicator points to medium risk, showing that, relative to the baseline no-policy-change scenario, an improvement of 4.3pps of the structural primary balance would be needed to stabilise the debt-to-GDP ratio in the long term. According to the Fiscal Risks Report from the Office for Budget Responsibility (OBR), the impact of an ageing population and non-demographic cost pressures on health and social care are the most significant long-term risks for public spending (OBR, 2019b). The report also addresses fiscal risks due to climate change, which could be very significant but have not yet been quantified. Healthcare Funding for the health system has not kept pace with the growth in demand for health services since 2008 (OECD/European Observatory on Health Systems and Policies, 2019). Public spending on health in England has roughly increased in line with demographic pressures in the past decade, but other pressures, such as higher costs for new treatments and increasing wages for healthcare staff, create additional financing needs. In addition, since 2014-2015 money meant for capital investments has frequently been shifted to resource spending (IFS, 2019b). The 2019 Spending Round reaffirmed the previously announced increase of £33.9 billion (€38.6 billion) in cash terms to the NHS England budget by 2023-2024, compared to 2018-2019. The government also committed to around £1.85 billion (€2.1 billion) to upgrade outdated hospital facilities and equipment, an additional £150 million (€171 million) for continuing professional development of healthcare staff, and £250 million (€285 million) of investment in artificial intelligence solutions for healthcare. The financing from the 2019 Spending Round has been welcomed by stakeholders but with reservations that it does not go far enough (O’Dowd, 2019). NHS Providers considers that a doubling of the annual capital spending of NHS England, currently around £6 billion (€6.8 billion), is required over the next 5 to 10 years in order to overcome maintenance backlogs and meet patient needs (NHS Providers, 2019). Fiscal frameworks

In September 2019, the Chancellor announced a review of the fiscal rules in the next Budget. The current overall fiscal objective, as set out in the January 2017 Charter of Budget Responsibility, is to return public finances to balance by the mid-2020s. The fiscal targets are the reduction of the structural deficit below 2% of GDP by 2020-2021 (fiscal mandate); a fall of public sector net debt as a percentage of GDP in 2020-2021 (the supplementary target) and a ‘welfare cap’, setting a limit on welfare spending. With the 2019 Autumn Budget having being cancelled due to the general election, the new government is expected to publish the outcome of the review of the fiscal rules at the rescheduled Budget on 11 March 2020. While the latest official assessment of compliance with the current fiscal rules is favourable, there are several downside risks to the assessment. In its March 2019 Economic and Fiscal Outlook, the OBR expected the government to meet all three fiscal targets, but saw only a 40% chance of the government meeting the fiscal objective (OBR, 2019a). Several new developments create downside risks to this assessment, in particular for the fiscal mandate. Methodological and data changes (see section 1) have led to a significant upward revision of the deficit. In addition, in the one-year September 2019 Spending Round, the government set out plans to increase departmental spending by £13.8 billion (€15.7 billion) in 2020-21. These developments are not included in the March OBR assessment (). The next multi-annual Spending Review, originally planned for 2019, has been postponed until the second half of 2020. 3.2. Financial sector 3.2.1.financial sector The UK banking system has maintained a good capital and liquidity position. From Q2-2018 to Q2-2019, UK banks managed to increase their Common Equity Tier 1 (CET 1) capital ratio from 15.0% to 15.4% (see Table 3.2.1), just above the EU average (15%). According to Copenhagen Economics (2019), capital requirements might rise significantly for UK banks once Basel III is fully implemented. On a non-risk-weighted-basis, UK banks’ leverage ratios also remained above the EU average. Capital accumulation was helped by improved profitability. In Q2-2019, the return on assets and equity increased to 0.4% and 6.9%, respectively, about the same as the EU average. Growth in profit was mainly driven by an increase in non-interest income and a reduction in impairment charges. The proportion of non-performing loans in the UK’s total loans further decreased further and in mid-2019, it was less than half of the EU average (1.2% versus 2.5%). UK banks have ample high-quality liquid assets and comfortably meet the liquidity coverage ratio requirement. After more provisioning for misconduct and settlements on a number of conduct issues in 2018, the Bank of England’s Financial Policy Committee (FPC) expects misconduct costs to be lower in the future. Table 3.2.1:Financial soundness indicators, all banks in UK Source: ECB - CBD2 - Consolidated Banking data; own calculation In contrast, the insurance sector faces poor profitability issues, attributed to the intensity of competition, regulatory scrutiny and increasing attrition costs. This is particularly the case for the motor insurance industry, which may face losses this year due to falling prices and rising claims costs. According to the European Insurance and Occupational Pensions Authority (EIOPA), at the end of March 2019, the UK insurance sector’s solvency coverage ratio (1.52) was well below the EEA median value (2.36) (EIOPA, 2019). The flatter risk-free rate curves also have a negative impact on the sector´s technical provisions. The Bank of England’s Financial Policy Committee (FPC) judges that the UK banking system would be resilient to major and simultaneous domestic and global shocks. Based on its 2019 stress test of major UK banks, the FPC concluded that the UK financial system would be able to withstand an economic shock more severe even than a worst-case disorderly Brexit coupled with a global trade war. The Bank of England found that UK banks would be able to keep lending to households and businesses in the event of a major economic crisis, while also continuing to pay billions of pounds in fines to address misconduct (BoE/FPC, 2019a). The Commission’s assessment is that firms had largely prepared for the possibility of a withdrawal from the EU without an agreement, including by relocating some activities and applying for authorisation in the EU. As indicated in its Communication of 4 September 2019 (European Commission, 2019c), the Commission ‘does not consider that the adoption of additional contingency measures is necessary’. Following the ratification and entry into force of the Withdrawal Agreement and the Political Declaration (European Commission, 2019d) the EU and the UK will start assessing the equivalence of their respective regulatory and supervisory frameworks in the relevant areas as soon as possible, endeavouring to conclude such assessments by the end of June 2020. The UK is among the most active venture-capital investment markets in Europe. At 0.085% of GDP in 2018, venture capital investment in the UK is above the EU average (0.05% of GDP) (Invest Europe, 2019). However, the availability of equity is lower for scale-ups than start-ups. Private equity and risk capital is particularly available for entrepreneurship and high-tech sectors such as fintech, artificial intelligence, and information and communication technologies. With over 800 deals in 2019, London remains the main European hub for venture capital investment in technology firms, including for producing of venture capital backed ‘unicorns’ (start-ups reaching a market value above one billion US dollars) (Dealroom as reported by Atomico, 2019). Innovation in payments could bring significant benefits for users, but may pose risks to areas such as investor protection, legal certainty, and financial stability. In June 2019, the UK Treasury announced that it will conduct a long-term review of the UK's payments landscape and regulatory framework to lay the ground work for a new wave of fintech innovation (e.g. digital tokens) (HM Treasury, 2019a). In the most recent Financial Stability Report, the Bank of England’s FPC developed a new approach to financial stability regulation of systemic payment chains. The emphasis is on regulation that reflects the financial stability risk rather than the legal form of payments. Furthermore, it suggests that systemically important firms should be subject to standards that reflect the risks they pose. (BoE/FPC, 2019a). 3.2.2.Housing sector The UK has a persistent housing shortage. The availability and affordability of housing are a particular challenge in areas of high and growing demand, such as in and around urban centres. Annual net housing supply has increased significantly from post-crisis lows. However, a recent fall in housing construction starts suggests it will peak at a level below that which would be necessary to meet estimated demand. In recent years the government has put in place a range of policy initiatives and set ambitious objectives to increase housing supply, though the flow of new policy slowed in 2019. At the same time, regulation of the land market is still tight, and the government has reaffirmed its commitment to limiting development around urban centres. The UK has a lot of old and often energy-inefficient housing and little of this is being replaced. Housing affordability and demand Real house prices are broadly flat nationally, and declining in some regions. After robust growth from 2014 to 2016, average real house price growth gradually eased. Real house prices have been essentially flat since mid-2018 (Graph 3.2.1) in the context of persistent economic uncertainty. Indicators of housing market activity (both supply and demand) were quite weak through most of 2019. Nominal national house price growth (year-on-year) picked up to 2.2% in November 2019 (ONS, 2020a), slightly above consumer price inflation. Growth in the price of buying and renting property has slowed the most in more expensive regions. In London, nominal house prices rose by 0.2% in the year to November 2019 and are no higher than in early 2017. Leading indicators of housing transactions and prices suggest the market for house purchases is picking up somewhat (RICS, 2019). Graph 3.2.1:Real house price growth Source: Eurostat House prices and rents remain high, especially in areas of high housing demand. The average UK house price was £235,000 (€268,000) in November 2019 (ONS, 2020a). The ratio of median house prices to median annual earnings remained at a record high of 7.8 in 2018 (ONS, 2019b), following five years of decreasing affordability. The ratio is higher for newly built dwellings (9.6) than existing ones (7.6), and the decline in affordability since 2013 has been greater for new builds. The Commission estimates that, on average, UK housing is around 20% overvalued. After tending to widen over time, the gap in prices between more expensive and cheaper areas has started to close slightly. Average house prices in each of Scotland, Wales and Northern Ireland are more than a third below the English level. Private sector rent growth has been slightly below inflation since early 2017, and stood at 1.4% year-on-year in December 2019 (ONS, 2020b). The overall home ownership rate is flat, but this masks continuing structural shifts in tenure. Housing transactions remain well below pre-crisis levels, but after being on a downward trend over the last two decades, the overall rate of home ownership has been stable for the last 2 or 3 years. However, this masks a continuing generational shift in property ownership. In 1995-1996, 65% of those aged 25-34 with incomes in the middle 20% for their age owned their home. By 2015-2016 the proportion had fallen to just 27% (IFS, 2018a). The likelihood of young adults owning a house has also become much more dependent on their parents’ level of property wealth, with negative implications for social mobility (Resolution Foundation, 2018). At the same time, in addition to their high rates of owner-occupancy a significant proportion of older households own additional properties from which they receive income from (usually younger) private renters. While mortgage debt remains high, there are few signs of risky growth in lending. Several years of significant levels of high loan-to-income mortgage lending linked to high house prices has contributed to persistently high household debt (see Section 1). Since the Bank of England took some macroprudential steps to curb risky mortgage lending (see Section 1), housing market activity has cooled in the context of high economic uncertainty. The number and value of residential property transactions fell slightly in the year to June 2019 and is well below the pre-crisis peak (ONS, 2019c). The proportion of houses bought with cash (without the need for a mortgage) fell significantly in 2018 and 2019. Secured credit to households is still growing at a slow but steady pace (See Section 1). The average ‘loan to income ratio’ is no longer rising (UK Finance, 2020), and the proportion of new mortgages with a ‘loan to income ratio’ of 4.5 or above is flat and remains well below the FPC’s recommended limit of 15% (ibid.). Following a long, gradual decline, average interest rates on new and existing mortgages are bottoming out at historically low levels. Consistent with this, and the high employment rate, mortgage arrears and repossessions remain low. Less than 1% of homeowner mortgages are currently in significant arrears (UK Finance, 2019). Housing supply and constraints Housing completions have increased further, but there has been a decline in the number of dwellings on which construction is starting. The number of net additional dwellings in England (c.85% of the UK’s population) rose by a healthy 9% to 241,130 in 2018-2019 (MHCLG, 2019a). The official level of annual demolitions is very low (less than one in 3,000 dwellings), which has implications for the pace at which the housing stock modernises and becomes more energy efficient. However, as shown in Graph 3.2.2, new housing starts have declined by over 10% since peaking in early 2017 (MHCLG, 2019a). This is likely at some point to feed into lower numbers of completions.

There has been a spike in the conversion of other building types into dwellings in recent years. 12% of net additional dwellings in 2018-2019 came from change of use, including through permitted development rights, mainly office-to-residential conversions. After falling by a third from their 2016-2017 peak in 2017-2018, the number of these conversions has stabilised (ibid.). However, concerns have been raised over the quality and appropriateness of many conversions through permitted development rights (LGA, 2018). Since 2015, the nationally described minimum space standard for residential units for one person in the UK has been 37m2, but these standards do not apply to conversions under permitted development rights. Grants of planning permission have levelled off, and there is pressure on the planning system. From 2012 the annual number of units granted residential planning permission grew rapidly. This progress has now stalled, consistent with the slowdown in the number of houses on which building has started. Planning permission for 365,200 housing units was granted in the year to September 2019 (MHCLG, 2019b), a 3% fall from the preceding year. About 80% of major and about 75% of minor residential planning applications are granted. Urban centres and growth hubs cannot easily support economic growth or modernisation. As discussed in previous country reports, the process of obtaining planning permission is complex and costly. The ‘green belt’ policy was put in place to contain urban sprawl and keep broad swathes of land around existing conurbations permanently open. After growing through the post-war period, the amount of land designated as green belt has remained broadly fixed in recent years (MHCLG, 2019c). For example, London’s green belt now covers over half a million hectares, and is about three times larger than London itself. Demand for labour in London has continued to grow. This has only partially been met by densification, due in part to restrictions on the redevelopment and modernisation of existing buildings (which increases the challenge of decarbonising home heating, as discussed in Section 3.5). As well as high house prices, there has been an increase in the volume of long commutes that are expensive, reduce commuters’ quality of life and increase transport congestion and emissions. Current rules give limited scope for targeted differentiation of the level of protection, where there may for example be a good rationale for facilitating housing development close to railway stations. Graph 3.2.2:Quarterly housing starts and completions Source: Ministry for Housing, Communities and Local Government The cost of housing is linked to the high and volatile price of land with residential planning permission. On average, 70% of the price paid for a UK home is now linked to the value of the land (up from 50% in the mid-1990s) and only 30% to the value of the building itself (IPPR, 2018), though this average masks significant spatial variation. Housing supply is not responsive to shifts in demand, with little link between increases in dwellings and increases in housing prices and wealth. This inflates the role of land prices in the economy and has exacerbated regional gaps in wealth (Centre for Cities, 2019). Housing supply might keep pace with national population growth. The ONS now expects the number of households in England (about 85% of the UK population) to increase by an average of 159,000 a year over the next 25 years (ONS, 2018a). While this is significantly less than the 210,000 previously projected, and projected population growth has also subsequently been revised down slightly (ONS, 2019d), the ONS and the Ministry for Housing, Communities and Local Government (MHCLG) have stressed that this does not mean the government’s ambitions for house building should be reduced (ONS, 2018b). If it stays at or above current levels, and demolitions remain very low, residential construction could keep pace with national household formation. Demand seems set to keep outstripping supply in areas of high housing pressure. However, there are few signs that construction will be high enough to alleviate the pressure in the areas that currently have the most acute housing shortages. In the majority of cities in England and Wales, and particularly those with high house prices, floor space per resident fell between 2011 and 2018 (Centre for Cities, 2019). High housing costs may also have suppressed household formation, for example by forcing young adults to live at home or cohabit as renters for longer. As discussed in Section 3.4.3, there are also signs of capacity and skills constraints in the construction industry. The government’s policy response The government has implemented significant planning policy reforms. Fixing Our Broken Housing Market (DCLG, 2017), set out four housing policy objectives: (i) increasing the supply of land available for house building; (ii) accelerating the rate of house completions; (iii) encouraging more diversity in the building industry; and (iv) providing support to homebuyers. The government has been progressively implementing and updating a revised National Planning Policy Framework (NPPF) (MHCLG, 2019d). In 2019, the government made further changes to ‘permitted development rights’ that allow changes and extensions to existing buildings without the need to go through a full planning process (MHCLG, 2019e). This includes allowing the conversion of certain types of commercial buildings to residential or office use. In many places, empty retail premises coexist with a housing shortage. Such conversions have played a larger role in delivering new housing supply in recent years, especially in areas with high house prices. There are some concerns with the practical operation of the planning system. There have been large cuts to funding for spatial planning services at both the national and local levels, which has only partially been compensated for by increased fees and charges for planning applications and appeals (IFS, 2019c). At the same time, the post-crisis period has seen significant demand on these services, due both to the need to implement significant reforms and to a robust recovery in planning applications. The NAO examined the operation of the planning system and concluded that overall it is not working well. The issues highlighted by the NAO included a lack of consistency in targets for new homes, insufficient capacity in local planning systems, and an under-performing Planning Inspectorate (NAO, 2019a). The government planned to publish an accelerated planning white paper in late 2019, although this was delayed due to the December 2019 general election. The stated objectives are to reduce the number of planning conditions and improve the resources and incentives for local authority planning departments. This could potentially mean raising the fees for planning applications but requiring these to be refunded if a decision is not made on time (HM Government, 2019a). The public sector has a significant impact on both housing supply and demand. The government is increasingly focusing direct public support for house building on areas with the highest housing demand and prices. This includes the Affordable Homes Programme, which provides housing with different tenure types and rent levels, not just socially rented properties. The Housing Infrastructure Fund provides £5.5 billion (€6.3 billion) by 2022-2023 to support the funding and planning of infrastructure linked to housing developments. Set against this, sales under ‘help to buy’ have reduced the stock of social housing over time, contributing to long waiting lists in many areas. The government has relaxed rules on local authority borrowing to build public housing. The NAO concluded that a ‘Starter Homes’ policy that the government pursued from 2015 to 2018 did not have effective objectives and implementation (NAO, 2019b). The ‘help to buy’ scheme has accelerated home ownership for some households, but may have slightly pushed up house prices. It is not yet clear how much impact this will have on the ground. Under the ‘help to buy’ equity loan scheme the government provides a loan of up to 20% (or up to 40% in London) of the purchase price of a house, with the government taking a commensurate equity stake in the property. The number of house purchases under the scheme has grown gradually since its launch, to over 52,000 in the year to June 2019 (MHCLG, 2019e). While this only represents about 5% of all house purchases, two-fifths of all new-build properties have been bought under the scheme since its launch (NAO, 2019c). By reducing the level of deposit that purchasers need and increasing the amount they can borrow, it may have contributed to more rapid price growth in the new-build properties to which its use is restricted. New builds now typically cost 15-20% more than comparable second hand properties. The National Audit Office concluded the scheme might have increased the profit margins of builders (ibid.). If house prices fell in future, the government could lose money on its equity stake. 3.3. Labour market, education and social policies 3.3.1.Labour market Robust labour market performance persists though the economy has slowed. Employment reached a record 78.7% in 2018, well above the EU average (73.2%). Despite subdued GDP growth (see Section 1), employment continued to rise to 79.1% in Q3-2019, 0.5pps higher than a year earlier. Improving the quality of employment and education would help to raise low and stagnant labour productivity (see Section 3.4), as would reducing skills mismatch. Both skills shortages and over-qualification have increased in the last decade, to above the EU average (Vandeplas et al, 2019). High employment rates are partly explained by increases in less secure jobs. The biggest employment increases occurred in households with children and among those on lower incomes (Bell et al., 2019). Although at a slower rate than the overall growth in employment, the number of part-time employees has been increasing steadily since 2006. Within part-time employment, young people, old-aged workers, women, and low-skilled workers are over-represented (). The proportion of zero hour contracts and platform work continued to increase in 2018. There has been an increase of zero hour contracts in almost all regions of the UK. According to a report by the Economic Research Council, in the year from Q2-2018 to Q2-2019, the proportion of zero hour contracts within the UK workforce continued to grow, except in the North East and North West of England (ERC, 2020) which saw a marginal decrease. The biggest increases were of 1% in the East Midlands and the South East. The UK has a higher incidence of platform work than the EU average. The recent surge of digital labour platforms has led to new forms of work organisation and task distribution across the workforce. The proportion of adult residents in the UK who have provided labour services via platforms at least once in their lives was estimated at 12.8% in 2018. About 3.6% of the adult workforce in the UK received their main income through platforms in 2018, compared to an EU average of 2.3%. This represents a slight increase from the previous year for the UK (3.2% in 2017) (Pesole et al, 2018). The analysis of two online surveys by the University of Hertfordshire yields similar results (UH, 2019). Between July 2016 and July 2019, the share of the adult population working for online platforms at least once a week doubled from 4.7% to 9.6%. For a substantial minority (9.4% of platform workers), it is their only or main source of income, while just under 30% report that platform work provides at least half of their income. Precarious and insecure work offers substantially lower social and employment protection for the individual worker and it might also contribute to lower productivity rates at the macroeconomic level, given that firms tend to invest less in skills and training in relation to short-term employment. Despite high and increasing employment levels, labour market activity in some groups remained relatively low. The share of young people neither in employment nor in education and training (NEET) increased slightly in 2018, leading to the indicator being marked as ‘to watch’ in the Social Scoreboard, and is now in line with the EU average (after having been consistently below since 2014). The youth unemployment rate (11.7% in Q3-2019) is three times higher than the overall unemployment rate. As discussed below, the gender employment gap is still close to 10pps. The labour market is becoming more polarised. Due to technological changes, employment that relies on non-routine cognitive (high-skill) tasks is on the rise while the share of jobs with routine tasks (medium-skilled) is falling and is very low in comparison to EU Member States. Like many other advanced economies, the UK is experiencing simultaneous growth in high and low-skilled tasks, while middle-skilled tasks have declined. Job polarisation has been accompanied by increasing macroeconomic skills mismatches, despite improving general economic conditions and increasing activity rates of the low skilled. Over-qualification is a matter of concern in the UK, as one quarter of workers with tertiary education are employed in occupations that do not require tertiary education.

Box 3.3,1: Monitoring performance in light of the European Pillar of Social Rights The European Pillar of Social Rights is a compass for a renewed process of upward convergence towards better working and living conditions in the EU. It sets out 20 essential principles and rights in the areas of equal opportunities and access to the labour market; fair working conditions; and social protection and inclusion. The UK performs relatively well on a number of indicators on the Social Scoreboard that supports the European Pillar of Social Rights, but some challenges remain. The la bour market shows strong performance in terms of employment creation and unemployment. However, slower growth in labour productivity, employment polarisation, a high incidence of atypical types of contract and a persistent gender employment gap remain impo rtant challenges. There has been a rise in the prevalence of zero ‑hour contracts, which are characterised by lower levels of social protection, skills progression and productivity. Female labour market inactivity due to caring responsibilities is higher th an the EU average. This is partly due to high childcare costs, especially for low-income earners. The risk of poverty or social exclusion has considerably increased and surpassed the EU average, going from 22% to 23.6% between 2017 and 2018. This translates into 1.1 million more people at risk of poverty or social exclusion. More people have turned to food banks in the UK over the last year. Market income inequality is high, but social transfers have a strong impact on poverty reduction. In-work poverty and child poverty remained high and predicted to rise further. The extent of homelessness shows no signs of abating. The UK has recently introduced pay transparency to help reduce the gender pay gap. The gender pay gap remained stable in 2017, with women earning on average 20.8% less than men. The pay transparency reform introduced in 2017 has led to mandatory pay transparency reporting for companies with 250 or more employees in the private and voluntary sectors in England, Scotland and Wales. In 2018 and 2019, this highlighted that almost 80% of companies pay their male staff more per hour than their female colleagues. The data also reveal that the highest gender pay gaps among the firms covered by the gender pay gap reporting are in the sectors of construction, finance, mining and communications. As a result of the findings, as of June 2019, 52% of in-scope employers had published an action plan to tackle the gender pay gap in their company. Implementing the apprenticeship reform is proving a challenge, with registrations down on previous years. The apprenticeship levy introduced in 2017 provides an opportunity for employers and training providers to improve the technical education of young people, yet the way this funding has been used is proving controversial. According to a recent report, the funding has increasingly been used to train more senior staff, not only in the private sector but also in academia, while entry-level apprenticeships have fallen (Richmond, 2019). The proportion of workless households and children living in them has slightly decreased. In January to March 2019, the percentage of all households with dependent children where no one worked was 8.2% (663 000), down 0.5pps on the same period a year ago. Compared to some EU Member States, the concentration of joblessness at the household level does not pose a main labour market challenge for the UK. However, the quality of employment and underemployment, which is strongly correlated with in-work poverty, remain a cause for concern, delaying progress towards SDG 8 (Decent work and economic growth). The gender employment gap remains a challenge. While the rate of women in employment (74.4% in Q3-2019) is the highest in recent decades, the gender employment gap is close to 10pps (74.4% vs. 84.2%). This is driven, among other factors, by inadequate provision of affordable childcare and social services. In 2018, 37.6% of women reported inactivity due to family and caring responsibilities, which is well above the EU average of 31.8%. These figures are more striking for the 25-49 age group, where up to 61% of economically inactive women attribute their inactivity to family responsibilities. In addition, 42% of women worked part-time in 2018 due to caring responsibilities. These rates are amongst the highest in the EU. Childcare provision has been extended but it is limited by capacity constraints and remains out of reach for many due to high costs. The government maintained its investment in childcare after the financial crisis. In 2019 it extended the 30-hour entitlement to free childcare for children aged 0-3. However, the rollout of free, full-time early education and care provided for 30 hours per week is facing constraints and delays due to insufficient funding and lack of capacity among providers. The Childcare Survey 2019 found that only just over half of local areas had enough childcare capacity to support all full-time working parents. Average childcare costs are not only higher in the UK than in EU Member States, but the difference between the relative cost of childcare among income groups is also greater. Low-income families pay much higher net childcare costs as a percentage of their disposable income (45% on average) than medium- and high-income families in the UK (see Graph 3.3.1). Graph 3.3.1:Net childcare-related costs and benefits as a percentage of disposable income, by three earning levels Source: ESDE 2019 Childcare providers in more disadvantaged areas risk closing due to financial unsustainability. A funding gap between government financial provision for free childcare (30 hours per week childcare allowance) and the running costs for providers, may lead nurseries to be less financially viable. Many providers consider that they will be forced to limit places, raise fees or introduce extra charges in order to remain financially sustainable (Pre-school learning Alliance, 2017). The funding gap has been estimated at £660 million (€752.4 million) and around 17% of childcare providers surveyed in the most deprived areas of the country anticipate closure in the next 12 months (BBC, 2019a). A recent regulatory reform introduces more transparency into the debate on gender pay gap. Mandatory gender pay gap reporting came into force on 6 April 2017. It requires all private and voluntary sector employers in England, Scotland and Wales with more than 250 employees to publish information about gender pay gaps or face a fine for non-compliance. The gender pay gap reporting from March 2019 and April 2019 show that almost 8 in 10 companies (78%) still pay their male employees more than their female employees based on median hourly pay. The legislation does not require employers to do anything to address their pay gap, which reduces the pressure for employers to take any actions. 3.3.2.education & skills The level of basic skills has improved somewhat, except in science. UK pupils’ performance in reading, mathematics and science has been usually ranked above the EU average in successive PISA surveys. Results of the PISA 2018 survey (OECD, 2019a) indicate a broadly stable long-term (2006-2018) trend, and in the short-term (2015-2018) improved mean performance in mathematics, and stable performance in reading and science. PISA 2018 also shows that the proportion of students aged 15 who underachieve in reading, mathematics and science remained stable. There are differences in PISA performance between the UK nations, but these are not significant. Disparities in reading performance between students with different socio-economic background are small, as are differences between migrant and non-migrant pupils. Both narrowed further in 2018. Disadvantaged pupils are less likely to complete tertiary education. Data from the PISA tests carried out between 2003 and 2015 indicate that the academic level of parents, especially mothers, has a significant influence on student results, with average differences in the mathematics test scores of 76 points over an average total of 446 points (Volante et al., 2019). The school attainment gap in England remains a matter of concern. The attainment gap between disadvantaged pupils and their peers has narrowed by 13% since 2011. A report from the Education Policy Institute shows, however, that the gap for pupils aged 16 stopped narrowing between 2017 and 2018. Disadvantaged 16 year olds are now an average of 18 months behind their non-disadvantaged peers, with large variation across England (Hutchinson et al., 2019). The gap in reading, writing and mathematics (combined) between pupils at the end of primary school whose first language is not English and those who speak it as their first language has almost disappeared. However, the gap between males and females widened from 8 to 10pps (70% females, 60% males), in reading in particular (DfE, 2019a). A recent analysis reveals that in England in 2018, 18% of people aged 18 left education without substantive qualifications, a higher rate than in 2015 (CCO, 2019). Ongoing reforms and measures have been undertaken in secondary education. In England, the government encourages schools to join Multi-Academy Trusts (MATs). MATs are viewed by the government as the best way of driving up standards and giving schools independence from local authority control. However, not all MATs have been successful. In some cases, public funding of MATs was terminated following ongoing concerns about educational performance (BBC, 2017) and some MATs closed (The Guardian, 2017). In contrast, the Scottish government continued with a process of empowering schools and parents and children through a mechanism very different to the one in England – close involvement of local authorities rather than moving schools away from local authority control. In September 2019, the Scottish government set out its work programme for 2019-2020, including funding provisions for participation in early childhood education and care, investment in new or refurbished schools, the attainment challenge and equity fund, and a teacher innovation fund for teacher training. The Welsh government plans a curricular reform including provision of education in the Welsh language and potential changes to religious education. For Northern Ireland, the continuing lack of a functioning government has led to little policy development. Teachers consider themselves well prepared for information and communication technology (ICT) teaching, to teach in multicultural settings or to train students in transversal skills. According to the 2018 OECD Teaching and Learning survey (TALIS), 50.7% of lower secondary school teachers in England feel well or very well prepared to use ICT for teaching when they finished their studies (increasing to 63.7% for teachers who completed their formal teacher education and training in the last five years) (OECD, 2019b). Only 5.3% of teachers reported a high level of need for professional development in ICT skills for teaching. TALIS 2018 also reports that the proportion of teachers who feel well or very well prepared to teach in a multicultural and/or multilingual setting is above the EU average (42.7%, EU 23.8%). The proportion who report a high level of need for continuing professional development in this area (4.9%) is lower than the EU average of 13.4%. With regard to teaching transversal competences (for example, creativity, critical thinking and problem solving), 47.3% feel well or very well prepared; the number is even higher (61.5%) for newly qualified teachers. Teacher retention is a concern. The number of teachers leaving the profession continues to increase. In 2018, 8.3% of teachers who left state-funded schools in England for reasons other than retirement (DfE, 2019b). In the 2018 TALIS, only 77.5% of teachers in England reported that they were satisfied with their job, well below the EU average of 89.5% (OECD, 2019b). The government has flagged teacher recruitment and retention in England as a priority. Authorities aim particularly to reduce departures during teachers’ early careers, since ‘over 20% of new teachers leave the profession within their first 2 years of teaching, and 32% leave within their first 5 years’ (DfE, 2019a). Digital skills The UK performs relatively well in relation to the basic digital skills of its population but remains behind the leading countries in the EU. The proportion of the UK population aged 16-74 who have at least basic digital skills (74%) is higher than the EU average (59%), as indicated by the Social Scoreboard. However, after years of the UK lagging behind other digitally advanced economies in this regard the UK is now catching up with the leaders. The UK also suffers from a structural deficit of ICT specialist skills, as the supply of new graduates falls short of the demand for these skills in the labour market. A large number of companies in the UK report difficulty in filling ICT posts — 50% of companies trying to recruit ICT specialists report difficulties finding people with the right skills. Despite strong growth in demand for these skills, domestic supply is not responding sufficiently. Indeed, while ICT specialist jobs now account for 5.1% of total employment (though for only 1.8% of women in work), the proportion of graduates in ICT (3.8%) remains relatively low. In order for the UK to achieve its goal of becoming a technological leader, investments in digital technologies need to be accompanied by improved digital skills. The UK economy is already a relatively highly digitised economy (European Commission, 2019e). It has the ambition to be a digital leader, and is investing significantly in digitising its economy further. However, these investments will only produce the desired effects for growth and competitiveness if they go hand-in-hand with investments to support their adoption and use through improving the digital skills of the public and the labour force. In recent years, the UK has introduced a broad set of measures to increase the digital skills of the UK population. However, these will take time to achieve their full effect. These measures include reforming curricula and introducing new qualifications (in schools, for adult learning and in vocational education and training), providing new funds and creating a digital skills partnership with the private sector. More recently, the government has also introduced specific measures to support the development of advanced digital skills, such as a programme to create 1,000 new PhDs in artificial intelligence over the next 5 years, as part of its Artificial Intelligence Sector Deal. 3.3.3.Social policy

The risk of poverty or social exclusion significantly increased from 2017 to 2018. Overall, relative poverty, measured by the at-risk-of-poverty or social exclusion rate (AROPE), increased by 1.6pps to 23.6% in 2018 (exceeding the EU average of 21.9%). This increase can be explained by a rise both in relative poverty and in material deprivation. The at-risk-of-poverty rate increased from 17% to 18.9% (exceeding the EU average of 17.1%), while the severe material deprivation rate increased from 4.1% in 2017 to 4.6% in 2018. Due to major reforms of the social security system, the poverty reducing effect of social transfers decreased from 41.8% in 2017 to 35.9% in 2018, bringing it closer to the EU average of 33.2%. As a result, income inequality after transfers, measured by the income quintile share ratio increased from 5.4% in 2017 to 5.95% in 2018. With these poverty outcomes, the UK has moved away from reaching SDG 10 (reducing inequalities) in the past five years. More people than ever have turned to food banks in the UK over the last year. The Trussell Trust, which runs two thirds of the UK’s food banks, reports that it distributed a record 823,145 food parcels between April and September 2019, including 301,653 that went to children. This was a 23% increase on the same period the previous year, representing the steepest rise the charity has witnessed since its network of food banks was fully established. People with disabilities are at a higher risk of poverty and exclusion. The proportion of people with disabilities who are at risk of poverty or social exclusion in the UK is 32.2% (EU average: 30.1%). The AROPE gap between people with and without disabilities is wider than the EU average (14.6pps vs 9.2pps). The UK also has a much wider employment rate gap between people with and without disabilities than the EU (33.5pps vs the EU average of 25.8pps). The Disability Employment Strategy targets include getting a million more people with disabilities in work by 2027 and providing a more comprehensive offering encompassing welfare, health, local authority and employer initiatives. Good progress h