COMMISSION STAFF WORKING DOCUMENT Assessment of the 2012 national reform programme and convergence programme for the UNITED KINGDOM Accompanying the document Recommendation for a COUNCIL RECOMMENDATION on United Kingdom's 2012 national reform programme and delivering a Council opinion on United Kingdom's updated convergence programme, 2012-2015
Date: 2012-05-30
Institutions: European Commission
Subjects: United Kingdom, budget deficit, budgetary equilibrium, corporate finance, dropout, energy grid, job creation, property market, transport network, youth unemployment

EUROPEAN COMMISSION 

Brussels, 30.5.2012  
SWD(2012) 309 final 

COMMISSION STAFF WORKING DOCUMENT 

Assessment of the 2012 national reform programme and convergence programme for 
the UNITED KINGDOM 

Accompanying the document 

Recommendation for a 

COUNCIL RECOMMENDATION 

on United Kingdom's 2012 national reform programme and delivering a Council 
opinion on United Kingdom's updated convergence programme, 2012-2015 

{COM(2012) 309 final} 

   EN 

 
 
 
 
 
  
 
 
CONTENT 

1. EXECUTIVE SUMMARY ............................................................................................. 3 

2. INTRODUCTION........................................................................................................... 4 

3. ECONOMIC DEVELOPMENTS AND CHALLENGES .............................................. 5 

3.1. Recent economic developments and outlook ....................................................... 5 

3.2. Challenges ............................................................................................................ 6 

4. ASSESSMENT OF THE POLICY AGENDA ............................................................... 9 

4.1. Fiscal policy and taxation..................................................................................... 9 

4.2. Financial sector................................................................................................... 14 

4.3. Labour market, education and social policy....................................................... 16 

4.4. Structural measures promoting growth and competitiveness............................. 20 

4.5. Modernisation of public administration ............................................................. 26 

5. OVERVIEW TABLE.................................................................................................... 27 

ANNEX ............................................................................................................................. 31 

2

 
 
1. EXECUTIVE SUMMARY 

In  2012,  UK  economic  activity  is  expected  to  remain  subdued,  with  growth  of  0.5  %, 
before regaining momentum in 2013. Unemployment is forecast to reach 8.5 %. 

The  UK  is  delivering  its  planned  programme  of  fiscal  consolidation  measures,  but  the 
deficit  is  now  projected  to  fall  more  slowly  than  previously  expected,  due  to  a  weaker 
growth outlook in the medium term. The government has an extensive legislative reform 
agenda across financial regulation, planning, education and welfare.  

Several  structural  challenges  remain.  Fiscal  consolidation  remains  a  pressing  need  and 
must  be  balanced  with  more  investment,  in  particular  to  improve  essential  network 
infrastructure.  Financing  conditions  remain  tight,  particularly  for  SMEs.  Private  debt 
levels  are  high  and  further  deleveraging  is  necessary.  Skills  mismatches  translate  into 
higher  unemployment  levels,  especially  for  young  people,  and  the  lack  of  high-quality 
and affordable childcare also contributes to the high proportion of workless households. 
There  is  a  significant  shortage  of  housing  and  house  prices  remain  too  high,  which  is 
linked to high levels of mortgage debt. The UK's persistently negative net export position 
calls for a strengthening of the non-cost competitiveness of the UK economy. 

3

 
 
 
2. INTRODUCTION 

In June 2011, the Commission proposed five country-specific recommendations1 (CSRs) 
for  economic  and  structural  reform  policies  for  the  United  Kingdom.  In  July  2011,  the 
Council of the European Union adopted these recommendations which concerned fiscal 
consolidation, public finances, housing, education and training, employment and access 
to finance. 

In  November  2011,  the  Commission  published  its  Annual  Growth  Survey  for  20122 
(AGS  2012)  in  which  it  set  out  its  proposals  for  building  the  necessary  common 
understanding about the priorities for action at national and EU level in 2012. It focused 
on five priorities — growth-friendly fiscal consolidation, restoring normal lending to the 
economy, promoting growth and competitiveness, tackling unemployment and the social 
consequences  of  the  crisis,  and  modernising  public  administration  —  and  encouraged 
Member States to implement them in the 2012 European Semester. 

Against  this  background,  the  UK  presented  updates  of  its  national  reform  programme 
(NRP) and convergence programme (CP) in April 2012. These programmes give details 
on  progress  made  since  July  2011  and  plans  going  forward.  The  UK  government 
recognises  the  challenges  facing  the  economy,  and  the  NRP  sets  out  a  comprehensive 
economic strategy based on five pillars: fiscal consolidation, monetary activism, financial 
sector  reform,  reform  of  the  tax  system,  and  microeconomic  reforms  to  rebalance  the 
economy towards greater exports and investment. 

This Staff Working Document assesses the state of implementation of the 2011 Council 
recommendations in the UK and identifies the UK’s current policy challenges in light of 
the AGS 2012 and the country’s latest policy plans. 

Overall assessment 

Overall, the UK has made significant progress on developing reforms relating to the 2011 
recommendations,  but  most  have  not  yet  been  fully  implemented.  Although  the 
government has started to make progress on reducing the deficit, this is still forecast to 
stand at 6.1 % in 2012-13, one of the highest levels in the EU, and fiscal consolidation 
remains  a  pressing  challenge  for  the  UK.  To  date,  the  government  has  delivered  its 
planned programme of fiscal consolidation measures, but the UK is only part of the way 
through an ambitious multi-year fiscal consolidation plan. 

Wider reforms are also needed to promote the conditions for sustainable, investment-led 
growth. The government has an extensive and ambitious legislative reform agenda across 
financial  regulation,  planning,  education  and  welfare.  It  is  not  yet  fully  clear  to  what 
extent  these  reforms  will  be  successful  and  effective;  final  policy  design  and 
implementation will be key and many of the effects will be gradual. To date, progress on 
indicators related to the recommendations on housing, employment and access to finance 
has  been  limited,  linked  in  large  part  to  the  challenging  economic  environment.  In  this 
respect,  the  challenges  identified  in  July  2011  and  reiterated  in  the  AGS  2012  remain 
valid. 

1SEC(2011) 827 final of 7 June 2011. 
2COM(2011) 815 final of 23 November 2011.  

4

 
 
                                                 
3. ECONOMIC DEVELOPMENTS AND CHALLENGES 

3.1. Recent economic developments and outlook 

Recent economic developments 

The  UK’s  economic  growth  prospects  deteriorated  rapidly  in  the  second  half  of  2011 
with a contraction  of  -0.3 % in the final quarter. However, the economy grew by 0.7 % 
for  the  year  as  a  whole.  Growth  was  largely  driven  by  external  demand,  as  domestic 
disposable income was squeezed by a combination of high inflation, public expenditure 
cuts  and  tax  rises,  low  nominal  wage  growth  and  rising  unemployment.  The  level  of 
investment remained low throughout 2011. 
In the latter months of 2011, inflation began falling rapidly after peaking at 5.2 % year-
on-year  in  September,  which  equalled  the  highest  rate  since  the  introduction  of  the 
Harmonised Index of Consumer Prices in 1997. The latest figures show a drop to 3.0 % 
in April 2012, driven in part by base effects as the 2.5 percentage point (pp) VAT rise in 
January 2011 dropped out of the calculations. The fall in inflation should continue during 
the  year,  owing  to  continuing  subdued  internal  demand  and  greater  price  stability  in 
imports. Inflation expectations of both business and households for 2012 are significantly 
lower than in 2011. Inflation is expected to decrease to an average of 2.9 % in 2012. 

After remaining below 8 % through the first half of 2011, unemployment rose to 8.4 % in 
the final quarter of 2011 and is projected to peak at 8.5 %3 in 2012. High unemployment 
should  continue  to  weigh  down  on  nominal  wage  growth,  domestically-generated 
inflation  and  private  consumption.  Given  that  UK  output  remains  below  its  pre-crisis 
peak, weak productivity and wage growth, and possible labour hoarding, appear to have 
cushioned the rise in unemployment since the onset of the crisis. 

Outlook 

There  had  been  signs  of  improvement  in  the  business  surveys  for  the  first  quarter  of 
2012.  However  the  preliminary  estimate  of  GDP  is  for  a  further  contraction  of  -0.2 %, 
putting the UK economy into recession. Growth is likely to remain subdued in 2012 as 
the fiscal consolidation continues, the outlook for the European economy remains weak, 
and UK consumers remain squeezed, despite gaining some benefit from falling inflation. 
After  a  negative  effect  from  there  being  fewer  working  days  than  usual  in  the  second 
quarter of 2012, GDP growth is likely to pick up in the second half of the year, with the 
positive  momentum  continuing  into  2013.  This  growth  is  expected  to  come  from  an 
uptick in both consumption and corporate investment, which will be aided by the London 
Olympics in the third quarter of 2012. The private consumption and investment outlook 
for 2013 is for growth of 1.0 % and 3.2 % respectively. The Commission’s forecast of the 
expected  drivers  of  growth  is  similar  to  that  of  the  Office  for  Budget  Responsibility 
outlined  in  the  Convergence  Programme.  However,  the  Commission’s  estimate  for 
overall  GDP  growth  for  2012  (0.5  %)  and  2013  (1.7  %)  is  slightly  less  optimistic  than 
that of the Office for Budget Responsibility (0.8 % and 2.0 % respectively). 

Procedural and governance issues 

The  UK  submitted  its  NRP  and  CP  to  the  Commission  on  the  30  April  2012.  They 
outline  in  an  integrated  manner  the  UK’s  fiscal  consolidation  efforts,  key  structural 
reforms  and  reforms  that  underpin  macroeconomic  stabilisation.  The  NRP does  not 
contain the national targets envisaged under the Europe 2020 framework, except for the 
target  on  renewable  energy,  in  line  with  Directive  2009/28/EC.  Instead,  it  describes 

3Commission estimate stems from Eurostat computation of the unemployment rate. 

5

 
 
                                                 
indicators  of  performance  in  areas  connected  to  the  Europe  2020  headline  targets  and 
records  their  current  level.  As  regards  social  inclusion,  the  NRP  refers  only  to  the 
existing numerical targets of the Child Poverty Act 2010. The lack of quantitative targets 
makes it difficult to assess reforms, in particular whether policy efforts are adequate and 
whether they will be implemented promptly enough. 

The  policy  content  of  the  UK  NRP  and  CP  is  primarily  drawn  from  previous 
announcements  and  publications,  mainly  Budget  2012  and  Autumn  Statement  2011,  as 
well  as  various  other  policy  papers  covering  specific  aspects.  While  stakeholder 
engagement events were held in Scotland and Wales, there is no evidence of significant 
stakeholder input in the development of the NRP itself, although the initiatives described 
were subject to separate public consultation. 

The  CP  was  approved  by  the  UK  Parliament  following  debates  in  the  House  of 
Commons  and  the  House  of  Lords,  but  the  NRP  2012  has  not  been  debated  by 
Parliament.  The  House  of  Commons  EU  Scrutiny  Committee  debated  the  AGS  2012. 
The  UK  NRP  includes  information  on  the  policy  programmes  of  the  devolved 
administrations  as  well  as  at  UK  level.  The  Scottish  Government  also  submitted  a 
separate NRP to set out their policy strategy in more detail. 

3.2. Challenges 

The  UK  economy  faces  a  number  of  challenges  to  achieve  sustainable  and  balanced 
growth that were already reflected in the 2011 CSRs, plus a challenge to deliver adequate 
investment in energy and transport infrastructure. 

Fiscal consolidation remains a pressing challenge for the UK. Government debt as a 
percentage of GDP rose from 58.7 % in 2008-094 to 86.8 % in 2011-12.5 The government 
is  implementing  a  fiscal  consolidation  plan  which  has  already  reduced  the  deficit  from 
11.6 %  in  2009-10  to  8.4 %  in  2011-12.  Over  this  period  the  structural  balance  has 
improved  by  an  average  of  1.35  pp6  of  GDP  per  year.  Although  the  government  has 
started  to  make  progress  on  reducing  the  deficit,  it  is  still  forecast  to  stand  at  6.1 %  in 
2012-13 after including a one-off pension fund transfer which reduces the deficit by 1.8 
pp of GDP. The deficit is now expected to fall more slowly than previously envisaged, 
due to weaker medium-term growth prospects. 

The  UK  has  a  considerable  challenge  ahead  in  reconciling  a  need  for  further 
deleveraging  with  the  need  for  more  investment  across  the  economy  to  support 
sustainable and balanced growth. Total private debt stood at 207 % of GDP at the end 
of 2011.7 

The  debt  of  non-financial  corporations  has  been  stable  since  2008,  while  business 
investment  has  remained  at  very  low  levels.  An  unprecedented  drop  in  business 
investment  after  2007  saw  the  UK  level  of  gross  fixed  capital  formation  as  a  share  of 
GDP  fall  to  14.3 %  in  2011,  the  third  lowest  level  in  the  EU-27.  In  2011,  there  was  a 
further reduction of 1.2 % in investment. 

Financing  conditions  remain  tight,  particularly  for  SMEs.  Net  lending  to  the 
corporate  sector  was  negative  in  2011,  while  survey  evidence  shows  that  a  significant 
number  of  SMEs  are  credit  constrained.  Additionally,  access  to  non-bank  lending 
remains  largely  restricted  to  bigger  firms,  and  competition  in  the  banking  industry  is 

420xx-xx refers to the financial year which starts on the 1st April and ends on the 31st March. 
5Eurostat-validated EDP data. 
6Based  on  the  cyclically-adjusted  balance  net  of  one-off  and  temporary  measures,  recalculated  by  the  Commission 
using the commonly agreed methodology. 
7Eurostat data. 

6

 
 
                                                 
limited.  The  Breedon  task  force  on  alternative  debt  markets  estimated  a  substantial 
ongoing financing gap over the next five years, especially for SMEs. 

There  is  a  continued  challenge  to  reform  the  spatial  planning  system  and  housing 
market so that they deliver the housing supply the population needs and are not a 
source of macroeconomic instability. The run-up to the crisis saw the housing market 
overheat, with house price-to-income ratios reaching historic highs and the accumulation 
of high levels  of  mortgage  debt.  An  in-depth review of the UK has  concluded that this 
constitutes  an  internal  imbalance  in  the  UK  economy,  as  set  out  in  Box  1.  Household 
debt,  which  is  mainly  in  the  form  of  mortgages,  has  fallen  modestly,  as  mortgage 
issuance  has  remained  at  unusually  low  levels.  A  sustained  and  significant  fall  in 
household debt is only likely if house prices fall relative to disposable income; however, 
rapid  house  price  falls  would  risk  pushing  many  households  into  negative  equity. 
Residential construction remains at record lows and the housing market is stuck in a low 
transaction equilibrium. The UK property tax system combines a regressive recurring tax 
(Council Tax) with a progressive transaction tax (SDLT). 

The UK’s net export position has been persistently negative and underperformance 
in goods exports appears structural, reflecting a lack of external competitiveness. As 
discussed  in  Box  1,  the  UK’s  current  account  position  saw  a  gradual  and  structural 
deterioration  from  the  late  1990s,  but  in  the  past  three  years  there  has  been  some 
rebalancing of the economy towards external demand, which is forecast to continue. 

The  UK  has  growing  challenges  of  unemployment  and  labour  market  attachment. 
Unemployment in the UK rose to 8.4 % in the final quarter of 2011 and is projected to 
peak in 2012 at 8.5 %. Youth unemployment is much higher, at 22.2 %, and is continuing 
to  rise.  Private  sector  employment  has  been  growing  modestly,  but  not  by  enough  to 
offset  reductions  in  public  sector  employment  and  the  growth  of  the  workforce.  Many 
people,  especially  young  workers,  are  in  precarious  jobs  (part-time  and  temporary 
workers). Long-term unemployment almost doubled between 2007 and 2011, from 1.3 % 
to 2.7 % of the workforce. 

The UK also faces ongoing challenges to increase parental employment and improve 
access to high quality, affordable childcare. The UK has adopted a reform to introduce 
a Universal Credit, intended to improve work incentives and consequently employment; 
this  reform  will  be  implemented  in  autumn  2013.  However,  considerable  risks  remain 
that  poverty  will  continue  to  increase,  particularly  for  families  with  children.  Lack  of 
access  to  suitable  and  affordable  childcare  still  discourages  women  with  children  from 
working, or from increasing their hours.. 

Raising  skill  levels  remains  important  for  the  UK’s  employment  and  productivity 
prospects.  The  UK  has  an  oversupply  of  low-skilled  workers,  for  whom  demand  is 
falling, and a shortage of workers with high-quality vocational and technical skills. The 
main focus in vocational education and training (VET) policy is on basic skills and level 
2  qualifications,  while  the  economy  increasingly  demands  more  advanced  vocational 
education  and  training  qualifications.  The  UK  also  continues  to  have  a  relatively  high 
number  of  adults  with  very  poor  basic  literacy  and  numeracy  skills,  who  are  not  well 
placed to benefit from vocational training. Having increased by 3.3 pp since 2005, early 
school leaving (ESL) is, at 14.9 %, above the EU average. 

The UK has a challenge to improve its energy and transport infrastructure, which is 
linked  to  the  AGS  priorities  of  achieving  fiscal  consolidation  in  a  growth-friendly 
way and laying the foundations for long-term growth and competitiveness. The UK 
needs substantial investment to upgrade its electricity generation capacity, both because a 
large part of the UK’s existing generating capacity will close over the next decade and 

7

 
 
needs to be replaced, and due to the need to meet the renewables obligation and tighter 
carbon emissions standards. The UK’s transport sector faces shortcomings in the capacity 
and  quality  of  its  networks,  which  could  work  against  the  government’s  aim  of 
rebalancing  the  UK  economy  towards  investment  and  exports.  As  part  of  the 
government’s fiscal consolidation strategy, public sector net investment will fall sharply 
by  2014-15,  which  risks  exacerbating  existing  shortcomings  in  transport  infrastructure 
unless alternative funding sources can be secured. 

Box  1.  Summary  of  the  results  of  the  in-depth  review  of  the  UK  under  the 
macroeconomic imbalances procedure 

The  in-depth  review  took  a  broad  view  of  the  UK  economy  to  identify  actual  and 
potential imbalances and the possible macroeconomic risks which they may entail. The 
main findings of the review are:  

•  The  high  levels  of  household  debt  cumulated  over  the  past  decade  mean  that  highly 
indebted  households  are  vulnerable  to  rises  in  interest  rates  and  unemployment.  This 
could potentially have destabilising knock-on effect on the economy as a whole, namely 
via  the  financial  sector.  Households  are  now  undergoing  a  deleveraging  process  which 
may not be sustained if house prices stay high or increase again, especially in relation to 
disposable  income.  While  housing  market  activity  currently  remains  depressed,  the 
insufficient  and  rigid  supply  of  housing  in  the  UK  exposes  the  country  to  higher  and 
volatile house prices. 

•  While  the  UK  is  noticeably  underperforming  as  regards  external  competitiveness  and 
export developments, potential associated macroeconomic risks appear less pressing than 
those  arising  from  internal  developments.  The  UK  continues  to  run  a  trade  surplus  in 
services but has a negative current account balance due to a large trade deficit in goods, 
which gradually opened up from the late 1990s. However the depreciation that took place 
at the end of 2007 appears to have gradually fed through to an improvement in exports. 
The UK’s export market share has stabilised in the past three years and there has been 
some  rebalancing  of  the  economy  towards  external  demand,  which  is  forecast  to 
continue.    

In this  context, relevant  policy  responses include increasing  housing supply, improving 
the functioning of the housing market and discouraging excessive and risky lending. The 
government is reforming the planning system with the aim of supporting an increase in 
housing supply, which should help to reduce house prices and with it the future level of 
associated  mortgage  debt.  Further  simplifying  the  planning  system  or  altering  the 
property  taxation  system  could  improve  the  functioning  of  the  housing  market  and 
provide  better  incentives  for  labour  mobility  and  efficient  capital  allocation.  Fostering 
prudent lending, reducing incentives for households to take on excessive levels of debt, 
and improving their financial information and risk awareness, would lower the demand 
for  mortgages  at  high  loan-to-values  or  high  income  multiples,  which  both  raise  house 
prices and leave households and the financial system most vulnerable.  

Although  developments  in  external  competitiveness  are  not  characterised  as  a 
macroeconomic  imbalance,  improving  export  performance  would  boost  UK  growth. 
Given the poor external performance in trade in goods, as well as a history of low public 
investment, there is a case for targeted investment in infrastructure aimed at meeting the 
needs  of  the  manufacturing  and  distribution  sectors.  Given  a  shortage  of  workers  with 
high-quality vocational and technical skills, addressing skill mismatches faced by goods 
producing and exporting sectors could also prove beneficial. Finally, improving access to 
finance  can  support  the  expansion  of  the  export  sector,  while  fiscal  consolidation  can 
help the economy rebalance away from non-tradable sectors. 

8

 
 
4. ASSESSMENT OF THE POLICY AGENDA  

4.1. Fiscal policy and taxation 

Budgetary developments and debt dynamics 

The goal of the UK’s fiscal strategy is to have the cyclically-adjusted current balance in 
balance by the end of a five-year rolling period, currently ending in 2016-17. This fiscal 
mandate  is  supplemented  by  a  target  that  debt  should  be  falling  by  2015-16.  The  UK 
does not set an explicit medium term objective (MTO), but the new fiscal framework, set 
up  in  2010,  is  a  step  towards  compliance  with  the  Stability  and  Convergence 
Programmes  (SCP)  code  of  conduct  since  it  sets  a  target  designed  to  bring  the  fiscal 
position  close  to  balance  over  the  medium  term.  In  the  UK  2011-12  convergence 
programme, over the six-year period from 2010-11 to 2016-17, the forecast improvement 
in the cyclically-adjusted primary balance averages just over 1 pp per year. Regarding the 
Treaty  deficit,  the  programme  projections  miss  the  excessive  deficit  procedure  (EDP) 
target  of  2014-15  by  one  year,  with  the  deficit  in  the  EDP  year  estimated  at  4.4 %  of 
GDP.8 

In 2011-12, the UK government continued its fiscal consolidation strategy and delivered 
the planned tax increases and spending cuts. The 2011-12 deficit was 8.4 %,9 higher than 
the  8.0%  envisaged  in  the  2010-11  convergence  programme.  The  main  reason  for  this 
difference  is  the  substantial  downward  revision  to  GDP  growth,  not  expenditure 
slippages.  In  the  2010-11  convergence  programme,  the  UK  authorities  had  anticipated 
growth of 1.7 % in 2011 and 2.5 % in 2012, now revised down to 0.8 % for both years in 
the 2011-12 convergence programme. 

Box 2 sets out the new main fiscal policy measures due to come into force from 2012-13 
to  2016-17.10  In  the  Autumn  Statement  published  in  November  2011,  the  government 
made  some  minor  changes  to  taxation  and  spending  which  alter  the  timing  and 
composition  of  the  government’s  fiscal  consolidation  plans,  but  do  not  change  their 
overall  size.  Additional  cuts  to  current  spending  were  made,  including  capping  public 
sector wage increases by an average of 1 % for a further two years after the current pay 
freeze  ends  in  2013.  The  cuts  were  offset  by  spending  on  a  new  Youth  Contract  to 
incentivise  hiring  young  people,  subsidies  to  limit  the  increase  of  regulated  transport 
fares, extra spending on childcare, and a new fund of GBP 6.3 billion (EUR 7.9 billion) 
for infrastructure over the next three years. The consolidation plans were also extended 
for a further two years after the end of the 2010 Spending Review period, until 2016-17, 
in order to adhere to the national fiscal targets. 

8This would imply an average annual improvement in the Treaty deficit of 1.25 pp over the four years to the deadline. 
9Eurostat-validated EDP data. 
10Note that Box 2 does not include the fiscal effect of planned reductions in the budgets of government departments. 
9

 
 
                                                 
Box 2. Main budgetary measures 

  Revenue 

  2012-13 

Expenditure 

  Corporation tax decrease (-0.03 % of GDP)  Alteration  to  child  tax  credit  (-0.07 %  of 

GDP) 

New  infrastructure  funding  (+0.05 %  of 

GDP) 

  2013-14 

Increase  in  personal  income  tax  allowance 

Alteration  to  child  tax  credit  (-0.07 %  of 

(-0.23 % of GDP) 

GDP) 

Corporation tax decrease (-0.05 % of GDP) 
Freeze in age-related allowances (0.03 % of 

Cap on public sector pay (-0.04 % of GDP) 
New  infrastructure  funding  (+0.13 %  of 

GDP) 

  2014-15 

GDP) 

Increase  in  personal  income  tax  allowance 

Alteration  to  child  tax  credit  (-0.07 %  of 

(-0.24 % of GDP) 

GDP) 

Corporation tax decrease (-0.06 % of GDP) 
Freeze in age-related allowances (0.05 % of 

Cap on public sector pay (-0.08 % of GDP) 
New  infrastructure  funding  (+0.15 %  of 

GDP) 

  2015-16 

GDP) 

Increase  in  personal  income  tax  allowance 

Alteration  to  child  tax  credit  (-0.07 %  of 

(-0.25 % of GDP) 

GDP) 

Corporation tax decrease (-0.06 % of GDP) 
Freeze in age-related allowances (0.07 % of 

GDP) 

  2016-17 

Increase  in  personal  income  tax  allowance 

Alteration  to  child  tax  credit  (-0.07 %  of 

(-0.25 % of GDP) 

GDP) 

Corporation tax decrease (-0.07 % of GDP) 
Freeze in age-related allowances (0.09 % of 

GDP) 

  Note: The degree of detail reflects the type of information made available in the convergence programme and, 
where  available,  of  a  multiannual  budget.  A  positive  sign  implies  that  revenue  /  expenditure  increases  as  a 
consequence of this measure.  

The 2012 Budget was broadly fiscally neutral and focused on simplifying the tax system 
and attracting business investment. The measures included a rise in the personal income 
tax allowance to GBP 9 205 (EUR 11 500), a reduction in the top rate of income tax to 
45 %, a new 7 % Stamp Duty Land Tax for houses worth more than GBP 2 million (EUR 
2.5  million),  a  further  reduction  to  24 %  of  the  corporation  tax  rate  with  an  offsetting 
increase in the Bank Levy to 0.105 %, and increased tax allowances and R&D credits for 
certain industries. 

The UK government will continue to implement its fiscal consolidation strategy in 2012-
13. The deficit is forecast to fall to 5.9 % in 2012-13, but the large decline is mainly due 

10

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
to the effect of a one-off measure (1.8 pp) whereby the assets of the Royal Mail pension 
fund are taken on by the government, together with its long-term liabilities. This measure 
allowed the government to attain the deficit target stipulated in the 2011 CSRs which was 
for a deficit of 6.2 % of GDP that year. The UK authorities’ 2012-13 deficit forecast is 
5.9 %, slightly lower than the Commission spring 2012 forecast of 6.1 %. The difference 
is largely due to the Commission's lower growth forecast, which envisages GDP growth 
of  0.5 %  in  2012,  compared  with  the  UK  Office  for  Budget  Responsibility’s  (OBR) 
estimate of 0.8 %. The main risks to the UK’s forecast are a deterioration of the situation 
in  the  euro  area,  which  would  affect  the  UK  via  the  trade,  financial  and  confidence 
channels, externally-driven inflationary pressures, namely oil price rises, and uncertainty 
over spare capacity in the economy and the medium-term rate of potential output growth. 

The UK also has a challenge to deliver the AGS 2012 priority of differentiated growth-
friendly  fiscal  consolidation.  Despite  the  slight  increases  to  planned  capital  spending 
made in the Autumn Statement, public sector net investment is still forecast to fall from 
GBP 38.1 billion (EUR 47.6 billion) in 2010-11 to GBP 23.4 billion (EUR 29.3 billion) 
in 2013-14. 

Almost  40 %  of  the  annual  fiscal  consolidation  planned  for  the  Spending  Review  2010 
period (from 2010-11 to 2014-15) was achieved by the end of 2011-12, with 30 % of the 
spending cuts and two-thirds of the tax consolidation already in place. The government 
plans  a  total  consolidation  of  GBP  155  billion  (EUR  194  billion)  by  2016-17  which 
consists of more than 80 % in the form of expenditure cuts and the remainder in net tax 
increases.11 

The  one-off  measure  involving  the  transfer  of  the  Royal  Mail  pension  fund  to  the 
government sector has a significant effect on the deficit in 2012-13 to the tune of 1.8 pp 
of  GDP  as  the  assets  of  GBP  28  billion  (EUR  35  billion)  are  transferred  immediately. 
However, the long term liabilities outweigh the assets and have a total cost estimated at 
GBP 37.5 billion (EUR 47 billion); GBP 0.2 billion (EUR 0.25 billion) per year of the 
costs  fall  in  the  current  Spending  Review  period,  which  the  government  has  offset  by 
reducing Departmental Expenditure Limit (DEL) reserves. 

The Council recommendation to the UK to adhere to the EDP was for a fiscal effort of 
1.75 % of GDP between 2010-11 and 2014-15. The UK OBR estimates the treaty deficit 
to fall from 9.4 % to 4.4 % thus implying an annual average fiscal effort of 1.25 %. The 
original  consolidation  plans  had  been  thought  sufficient  to  adhere  to  the  EDP  deadline 
but  given  a  large  deterioration  in  the  growth  prospects,  their  estimated  impact  on  the 
deficit has declined significantly. At the time of the Autumn Statement, the OBR revised 
downwards its growth forecasts and the estimate of potential growth. This increased the 
estimated  amount  of  fiscal  effort  required  to  eliminate  the  (recalculated)  structural 
balance.  The  OBR  did  not  make  significant  further  changes  to  its  estimate  of  potential 
growth at Budget 2012. 

UK general government debt almost doubled between 2007-08 and 2011-12, from 43.5 % 
to 86.8 % of GDP.12 This is projected to increase in the short term, with the Commission 
forecast  estimating  91.8%  and  94.7%  in  2012-13  and  2013-14,  respectively.  The 
government  introduced  a  supplementary  debt  target  as  part  of  its  fiscal  rules  package 
when  it  took  office  in  2010.  This  target  envisages  net  debt  as  a  percentage  of  GDP 

11Table III in the Annex refers to the Expenditure benchmark of the UK. This is a theoretical assessment based on the 
minimum MTO established in 2009 as the UK has not set an MTO and is still in EDP. Nonetheless, the projections 
show that the UK net public expenditure growth plans are generally lower than the reference rate and thus are in line 
with the expenditure rule. 
12The  debt  figures  have  been  amended  by  Eurostat  to  take  account  of  differing  treatment  of  financial  defeasance 
structures. 

11

 
 
                                                 
peaking in 2014-15. The 2011 recommendation stipulates that public debt should be on a 
downward  path  when  the  excessive  deficit  is  corrected  which  would  theoretically 
coincide  with  the  national  target.  However,  this  year  is  not  as  yet  included  in  the 
Commission forecast. The slightly higher debt estimate from the Commission stems from 
both a weaker growth outlook and the adjustments made by Eurostat to the UK’s official 
figures based on differing treatments of financial defeasance structures.13 

The  risks  to  the  debt  ratio  stem  mainly  from  lower-than-expected  growth.  The 
government has been so far sticking to their fiscal consolidation plans, with departments 
respecting the DELs. However, should the economy deteriorate further, Annual Managed 
Expenditure  (AME),  which  includes  welfare  benefits,  may  increase  by  more  than 
estimated thereby putting the deficit and subsequently the debt ratio at risk. 

The average maturity of UK gilts is relatively long at more than fourteen years. 31.2 % of 
gilts are in the hands of foreign investors, but the high level of foreign ownership does 
not necessarily pose a problem to the UK, given that the majority of maturities are long-
term. Furthermore, given the historically low levels of interest currently available to the 
government,  the  UK  is  actively  considering  the  issuance  of  bonds  with  a  longer,  or 
possibly indefinite, duration than its current longest-maturity 50-year bonds. 

Long-term sustainability 

The  long-term  change  in  age-related  expenditure  is  below  the  EU  average.  The  initial 
budgetary  position  compounds  the  long-term  costs.  Assuming  no  policy  change,  debt 
would  increase  to  104 %  of  GDP  by  2020.  Additional  fiscal  consolidation  beyond  the 
forecast  horizon  would  be  needed  to  make  progress  towards  the  reference  value  for 
government debt beyond the short-term. However, full implementation of the programme 
would be enough to put debt on a downward path by 2020, but it would still be above the 
60 %  of  GDP  reference  value.  Ensuring  sufficient  primary  surpluses  over  the  medium-
term, as planned in the 2012 programme and beyond, would improve the sustainability of 
public finances. 

Over the last decade, the UK has made significant progress in tackling the adequacy and 
long-term fiscal sustainability of the state pension system. The state pension age is being 
equalised for men and women by 2020. It will rise to 67 between 2026 and 2028, and to 
68  between  2044  and  2046,  subject  to  Parliamentary  approval.  In  Budget  2012,  the 
government  announced  plans  to  automatically  align  the  state  pension  age  with  life 
expectancy.  Employment  rates  for  older  workers  are  already  among  the  highest  in 
Europe,14 and the default retirement age was phased out in 2011 to enable and encourage 
people to work longer. 

Pensioner poverty decreased from 27.3 % to 21.4 % between 2008 and 2010 as benefits 
for  pensioners  rose  faster  than  average  earnings.  However,  occupational  pension 
coverage and private pension saving have been declining in the UK for years, increasing 
the  risk  of  future  pensioner  poverty.  The  UK  is  making  a  staged  introduction  of 
automatic  enrolment  in  a  workplace  pension  to  address  inadequate  private  pension 
provision. From October 2012, workers will automatically be enrolled into occupational 
pension  schemes  (with  a  possibility  to  opt  out),  with  full  implementation  by  2018.  As 
part  of  this  reform,  the  government  has  introduced  a  low-cost,  defined  contribution 
pension  scheme  into  which  employers  can  enrol  their  employees,  namely  the  National 
Employment  Savings  Trust  (NEST).  In  a  separate  reform,  significant  reductions  were 

13Table IV in the Annex refers to the debt benchmark which only applies to the years after the EDP deadline. Given the 
information available, the UK’s plans appear to ensure sufficient progress towards compliance with the debt criterion. 
14In 2010, the employment rate for people aged 50-64 was 64.8 % compared to an EU average of 56.7 %. 

12

 
 
                                                 
made to pension tax relief for high earners in April 2011, saving GBP 4 billion (EUR 5 
billion). 

Fiscal framework 

The UK government introduced a new fiscal framework after taking office in May 2010. 
The three key pillars are: (i) the setting of a new ‘fiscal mandate’ targeting the cyclically-
adjusted current balance; (ii) the setting of a net debt target; and (iii) the establishment of 
the Office for Budget Responsibility (OBR), an independent body tasked with producing 
the  official  forecasts.  The  fiscal  mandate  requires  that  the  cyclically-adjusted  current 
budget  be  on  track  to  be  in  balance  by  the  end  of  a  rolling  five-year  forecast  period, 
currently ending in 2016-17. This is supplemented by a debt sustainability target which 
requires the public sector net debt target as a percentage of GDP to be falling by 2015-
16.  The  OBR  has  to  assess  whether  the  chances  of  the  government  meeting  the  fiscal 
mandate  and  debt  sustainability  rule  are  greater  than  50 %.  Its  latest  assessment  of  the 
government’s budgetary plans, in March 2012, the OBR agreed that this was the case. 

Government spending is set out in the Spending Review, which is published every three 
to  four  years.  This  sets  out  multi-annual  limits  for  predictable  spending  in  every 
department  through  Departmental  Expenditure  Limits  (DELs).  The  remainder  of 
spending, mainly social security, debt interest payments, public sector pensions and EU 
contributions, is classified as Annually Managed Expenditure (AME) and is not capped 
in advance. 

However,  the  UK  does  not  set  an  explicit  medium-term  objective  to  comply  with  the 
Stability  and  Convergence  Programme  (SCP)  Code  of  Conduct.  Furthermore,  despite 
deficit  and  debt  adhering  to  national  targets,  they  do  not  coincide  with  the  Maastricht 
Treaty  definitions  of  these.  The  national  deficit  target  refers  to  the  cyclically-adjusted 
current account balance, excluding financial interventions, whereas the excessive deficit 
procedure  (EDP)  deficit  is  defined  as  general  government  net  borrowing,  including 
investment  expenditure  and  interest  from  swaps  and  forward  rate  agreements.  The 
national authorities’ debt target is defined in net terms, whereas the EDP refers to gross 
debt. 

Tax system 

The  UK’s  implicit  tax  rate  on  labour  is  relatively  low  by  EU  standards.  The  average 
effective corporate tax rate was relatively high, but is on a declining trend following the 
cuts in the headline statutory rate. The country has sizeable property and environmental 
tax revenues relative to GDP, although environmental taxes as a proportion of GDP have 
fallen  over  the  last  decade.  Tax  compliance  costs  are  relatively  low  (110  hours  for  a 
typical medium-sized business, compared to a weighted EU average of 189 hours). Tax 
administrative costs as a percentage of net revenue collections have been relatively stable 
since 2005 and stood at 1.14 % in 2009, similar to the EU average. The government has 
set up an independent Office of Tax Simplification and announced in Budget 2012 that 
they  are  consulting  on  a  new  General  Anti-Abuse  Rule  (GAAR),  recommended  in  the 
Aaronson Report, to tackle artificial and abusive tax avoidance. 

The  UK  has  now  implemented  most  of  the  net  tax  rises  planned  as  part  of  its  fiscal 
consolidation  strategy.  To  promote  investment,  the  standard  corporate  income  tax  rate 
has  been  gradually  reduced  by  4  pp  to  24 %  as  from  April  2012,  and  will  be  further 
reduced in stages to 22 % by 2014, although capital allowances have also been reduced. 
The small profits rate of corporation tax has also been reduced to 20 %. Additionally, the 
system of capital gains tax has been reformed to exempt gains that are invested in Seed 
Enterprise Investment Schemes. A Bank Levy was introduced in January 2011, based on 
bank  balance  sheets.  The  full  rate  was  increased  from  0.078 %  to  0.088 %  in  January 

13

 
 
2012  and  will  rise  further  to  0.105 %  from  January  2013  to  counteract  the  impact  of 
lower corporation tax on banks. 

The current system of property taxation is made up of a Stamp Duty Land Tax (SDLT) 
and a Council Tax. SDLT is charged on land and property transactions at increasing rates 
by bands based on the transfer price and rates vary between 0 % and 7 %.15 Council Tax 
is  recurrent,  paid  by  the  residing  tenant  or  landlord,  where  the  amount  due  is  set 
according to property price bands. UK property taxation revenues as a proportion of GDP 
are  the  highest  in  the  EU-27  (4.23 %  in  2010,  of  which  3.42 %  is  recurrent).  However, 
there are two main problems with Council Tax relevant to the 2011 recommendation on 
housing that property taxation could help to prevent excessive volatility of prices. First, 
the system is based on old valuation bands, linked to the price of housing in 1991. This 
does not capture current absolute or relative house price levels. Second, the tax structure 
is regressive, as the properties in the top band are at least eight times as valuable as those 
in  the  bottom  band,  but  pay  only  three  times  as  much  tax.  In  the  UK,  with  its  rigid 
housing supply, any change in property tax is likely to be largely capitalised into house 
prices.  SDLT  suffers  from  ‘cliff-edge’  effects  and  also  acts  to  discourage  transactions 
and  labour  mobility.  Some  adjustments  were  made  to  SDLT  rates  in  Budget  2012,  but 
overall  only  minor  changes  have  been  made  in  this  field  in  response  to  the  2011 
recommendation on property taxation. 

The  standard  VAT  rate  was  increased  by  2.5  pp  to  20 %  in  January  2011,  and  several 
environment-related taxes were increased in recent years, such as air passenger duty and 
landfill  taxes.  The  UK  VAT  Revenue  Ratio16  of  46.3 %  is  more  than  8  pp  below  the 
arithmetic  EU  average  of  54.4 %  in  2010.  The  reduced  VAT  rate  of  5 %  is  applied  to 
domestic fuel and power (among others), reducing incentives to lower domestic energy 
consumption  through  measures  to  improve  energy  efficiency,  and  leading  to  increased 
CO2 emissions and pollution.17 Zero-rated goods include food, the construction of new 
dwellings, domestic passenger transport and water. Exemptions from VAT include rent 
on domestic dwellings, health services, and finance and insurance. Based on results for 
the year 2006, relatively low VAT compliance in the UK also contributes to low overall 
VAT efficiency.18 Budget 2012 announced a set of measures to close some loopholes in 
the VAT system to prevent avoidance and ensure compliance. 

4.2. Financial sector 

Financial stability 

The  UK  banking  sector  underwent  a  large-scale  government  intervention  aimed  at 
guaranteeing  its  liquidity  and  solvency  in  the  wake  of  the  2008  financial  crisis. 
Government  support  has  gradually  unwound  as  the  UK  banking  sector  has  stabilised. 
Credit  default  swap  rates  on  UK  banks  remained  contained  in  2011.  No  UK  financial 
institutions  were  identified  as  needing  recapitalisation  in  the  context  of  the  temporary 
bank  recapitalisation  exercise  launched  by  the  European  Council  of  October  2011  and 
coordinated  by  the  European  Banking  Authority.  However,  interbank  lending  spreads 

15The tax placed on houses above GBP 2 million (EUR 2.5 million) is 7 % since 22 March 2012. 
16The VAT Revenue Ratio measures actual VAT revenues as a percentage of theoretical revenue if the standard rate 
were applied to all final consumption. 
17See  Annex  2:  Case  studies  for  the  energy  sector  in  Environmentally  Harmful  Subsidies:  Identification  and 
Assessment.  A  study  led  by  IEEP,  with  Ecologic,  IVM  and  Claudia  Dias  Soares  for  the  European  Commission,  DG 
Environment http://www.ieep.eu/assets/466/EHS-case-studies-Energy.pdf. 
18See Reckon (2009), Study to quantify and analyse the VAT gap in the EU-25 Member States. The study compares 
accrued VAT receipts with a theoretical net liability accounting for reduced rates and exemptions. The compliance gap 
for the UK is estimated at 17 %, compared to an EU average of 11 %. 

14

 
 
                                                 
reflect the significant tensions that remain, and the transmission of monetary policy has 
been impaired, with market rates partially decoupling from official rates since 2007. 

The  current  financial  supervision  and  regulation  model  is  being  overhauled  and  the 
Financial  Services  Authority  (FSA)  will  be  abolished  during  the  course  of  2012.  The 
responsibilities of the FSA are to be partitioned and passed on to the Financial Conduct 
Authority  and  the  Prudential  Regulation  Authority,  under  the  auspices  of  the  Bank  of 
England. A Financial Policy Committee of senior economists is also being established as 
a  macro-prudential  complement  to  the  Bank  of  England’s  existing  Monetary  Policy 
Committee. 

The  Independent  Commission  on  Banking  (ICB)  was  set  up  to  consider  reforms  to  the 
UK  banking  sector  to  promote  financial  stability  and  competition,  and  to  draft 
recommendations  to  the  government  on  these  issues.  In  September  2011,  the  ICB 
delivered its report on financial stability and competition, in which it advocated the ring-
fencing of retail banks from their investment counterparts so as to permit their separate 
liquidation in case of failure, as well as a number of measures to increase competition in 
the banking market. 

The  ICB’s  call  for  more  competition  in  banking  has  been  generally  welcomed  by  the 
government. The UK banking industry experienced a strong wave of consolidation in the 
wake of the financial crisis, largely driven by government interventions in the sector. As 
noted  in  the  ICB  report,  the  forthcoming  divestiture  of  Lloyd’s  assets  in  line  with  EU 
state aid rules creates the opportunity for the emergence of a strong challenger bank that 
can  help  to  promote  competition  in  the  UK  banking  system.  To  this  end,  it  is  essential 
that  the  resulting  bank  be  both  sufficiently  large  and  financially  sound  to  act  as  an 
effective  competitor.  Competition  can  also  be  increased  within  the  current  market 
structure by decreasing switching costs and increasing transparency for consumers. This 
can  be  achieved,  in  particular,  by  the  timely  introduction  of  a  seamless  bank  account 
redirection  service,  as  recommended  by  the  ICB,  or  more  fundamentally,  by 
implementing  full  account  portability.  Some  limited  progress  has  been  made  on 
improving market structure, namely through the sale of Northern Rock to Virgin Money, 
but developing stronger banking competition remains an important challenge.19 

Access to finance 

The  UK  has  partially  addressed  the  2011  country-specific  recommendation  on  banking 
and access to finance, the objective of which is to re-establish the flow of credit to the 
real  economy,  particularly  to  SMEs,  and  to  promote  non-bank  lending  channels. 
However,  major  challenges  remain,  including  the  re-establishment  of  a  normal  level  of 
credit flows to the real economy, particularly to SMEs, and promoting non-bank lending 
channels. 

The  gross  lending  targets  agreed  between  the  government  and  the  major  UK  banks  as 
part of Project Merlin, aimed at restoring lending to the real economy, were almost met, 
but  the  impact  of  the  programme  was  affected  by  the  specification  of  the  targets.20  In 
fact,  according  to  Bank  of  England  data,  net  lending  to  the  private  sector  remained 
negative  over  the  course  of  2011,  while  data  from  the  British  Banking  Association 
showed  that  loans  to  small  firms  continued  to  fall  in  the  second  half  of  2011.  While 
credit  rationing  is  partially  explained  by  the  weakness  of  corporate  balance  sheets  and 
prospects, supply-side tensions and constraints have also played an important role. The 

19See Independent Commission on Banking, Final Report Recommendations (September 2011). 
20The Project Merlin targets were set in terms of gross, rather than net lending flows, and included undrawn amounts 
and credit loaned to public non-financial corporations. 

15

 
 
                                                 
latest  Eurostat  Survey  on  access  to  finance  showed  that  a  significant  share  of  SMEs 
remain credit constrained, while spreads with respect to the official rate remain high. 

The  Breedon  task  force’s  report  on  alternative  debt  markets,  published  in  March, 
estimated  a  substantial  ongoing  financing  gap  over  the  next  five  years,  especially  for 
SMEs.21 The government has accepted the need to take further action to build alternative 
‘non-bank’  markets  and  unlock  new  pools  of  capital  for  firms  that  cannot  meet  their 
financing needs from the banking sector alone, namely by promoting access to wholesale 
debt  markets,  peer-to-peer  lending,  private  equity  and  venture  capital.  It  has  already 
undertaken  a  number  of  initiatives  to  promote  access  to  equity  and  venture  capital 
funding,  such  as  the  extension  of  the  Enterprise  Capital  Funds  programme  and  the 
Business Angel Co-Investment Fund. Initiatives in the area of non-bank lending are still 
embryonic,  and  the  difficult  question  of  how  to  improve  access  to  non-bank  lending 
channels,  particularly  for  smaller  companies,  has  not  yet  been  resolved.  However,  the 
expansion  of  the  Enterprise  Finance  Guarantee  Scheme  and  the  introduction  of  the 
National Loan Guarantee Scheme in March 2012 will provide some limited assistance to 
SMEs  in  need  of  credit.  As  well  as  central  government  actions,  the  three  devolved 
administrations have also set out policies to improve access to finance for SMEs. 

4.3. Labour market, education and social policy 

Labour market policies 

The  UK  has  growing  challenges  of  unemployment  and  labour  market  attachment. 
Unemployment in the UK increased to 8.4 % (2.67 million) in the final quarter of 2011 
and is projected to peak in 2012 at 8.5 %. Youth unemployment is much higher at 22.2 %, 
and continues to rise. In all, 17.7 % of young people (18-24 year olds) are NEET (not in 
employment,  education  or  training).22  Private  sector  employment  has  been  growing 
modestly,  but  not  by  enough  to  offset  a  reduction  of  more  than  4 %  in  public  sector 
employment  in  2011.  Many  people,  especially  young  workers,  are  in  precarious  jobs 
(part-time or temporary). In 2010, almost a quarter of 15 to 24 year-olds (23.1 %) worked 
part-time because they could not find a full-time job, up from 15.6 % in 2007. Long-term 
unemployment  almost  doubled  between  2007  and  2011,  from  1.3 %  to  2.7 %  of  the 
workforce. Real wages have been falling since 2009, as inflation has exceeded average 
nominal wage growth. Productivity growth has remained weak. 

Although the UK has not set a national employment target, it recognises the urgency of 
developing  effective  labour  market  policies  and  promoting  business  creation  and  self-
employment.  In  April  2011,  the  UK  launched  the  Work  Programme,  which  delivers 
customised job search and job preparation support to jobseekers and replaces a range of 
previous  programmes.  The  Youth  Contract,  launched  in  April  2012,  is  a  new  tailored 
programme  designed  to  combat  youth  unemployment  by  providing  160 000  wage 
incentives  to  employers  recruiting  18-24  year-olds  from  the  Work  Programme,  and 
40 000  incentive  payments  for  small  firms  who  take  on  young  apprentices.  The  New 
Enterprise  Allowance  has  also  been  launched  to  encourage  people  in  receipt  of  the 
Jobseeker’s Allowance (JSA) to try self-employment. 

Weak  work  incentives  have  been  a  long-running  problem  for  the  UK,  particularly  the 
high marginal withdrawal rates for those moving off benefits into low-paid jobs. Under 
the current system, in nearly 1.1 million workless households, someone taking a job with 
10  hours  of  work  a  week  would  lose  more  than  70 %  of  their  earnings,  due  to  benefit 

21Boosting  Finance  Options  for  Business  (March  2012),  http://www.bis.gov.uk/assets/biscore/enterprise/docs/b/12-
668-boosting-finance-options-for-business.pdf. 
222010 Eurostat data, the latest available for the UK as a whole. 

16

 
 
                                                 
withdrawal and taxes. The incentives to raise the number of hours worked once in a job 
can  also  be  very  weak.  At  present,  around  0.7  million  households  in  low-paid  work 
would lose more than 80 % of any increase in their earnings. In addition, the complexity 
of the benefits and tax credits system makes it difficult for benefit recipients to assess the 
financial  gains  of  working,  and  administrative  delays  in  the  system  can  cause  gaps  in 
payments and short-term financial difficulties for people who move into work. 

To  tackle  these  problems  and  help  ensure  that  work  is  rewarded,  the  government  will 
introduce a Universal Credit in autumn 2013. Most means-tested benefits and tax credits 
for  working  adults  (Income  Support,  income-related  Jobseeker’s  Allowance  and 
Employment  and  Support  Allowance)  will  be  replaced  by  a  single  benefit.  The  reform 
aims to increase work incentives through a lower withdrawal rate (65 %) in future, and 
stricter  rules  on  benefit  loss  if  an  individual  refuses  a  job  offer.  From  May  2012,  lone 
parents will be required to actively seek work when their youngest child begins full time 
education. This is a continuation of the approach to increasingly require workless adults 
with caring responsibilities to seek employment. Some progress has been made despite a 
weak  labour  market,  but  the  overall  employment  rate  for  lone  parents  (57 %)  remains 
relatively  low.  This  is  a  major  reason  for  the  proportion  of  children  in  workless 
households in the UK standing at 17.9 %, which is the second highest rate in Europe. 

The  success  of  this  strategy  will  be  dependent  on  getting  benefit  recipients  into  stable 
jobs,  mainly  though  clearer  work  incentives.  The  government  believes  that  as  many  as 
350 000 children and 500 000 working age adults could be moved out of poverty due to 
these changes by 2020-21, largely due to expected employment benefits. The success of 
the  Universal  Credit  will  also  depend  on  its  successful  administration,  which  will  be  a 
challenge.  A  cap  on  the  total  amount  of  benefit  that  can  be  claimed  could  boost 
incentives to work, as well as generating savings, although high housing costs will still 
mean that households in many areas will continue to face high marginal withdrawal rates 
up  to  a  relatively  high  point  in  the  income  distribution.  The  Universal  Credit  will  be 
focused  on  supporting  a  sole  breadwinner  family  model.  The  emphasis  is  on  the  first 
earner  in  a  family.  On  average,  couples  with  children  will  gain  more  than  couples 
without children, who in turn will gain more than single adults without children. Second 
earners  and  single  parents  will,  on  average,  lose  in  the  long  run.  They  will  see  the 
Universal Credit withdrawn more quickly if they enter work than currently happens with 
tax credits, according to the Institute for Fiscal Studies (IFS).23 

The welfare bill faces reductions of GBP 18 billion (EUR 22.5 billion) by 2014-15, the 
highest  share  in  government  departmental  cuts.  This  is  a  necessary  part  of  the 
government’s  fiscal  consolidation  strategy,  but  in  an  October  2011  report,24  the  IFS 
concluded that the government would miss its targets for reducing child poverty, as set 
down in the Child Poverty Act. The IFS estimates that relative poverty among children 
will rise by 600 000 by 2012-13, and by 800 000 for adults of working age, and that by 
2020-21  absolute  child  poverty  will  be  at  its  highest  level  since  2001-02.  The  most 
significant policy change is that benefits will now be indexed in line with the consumer 
price  index  (CPI)  measure  of  inflation,  which  is  on  average  lower  than  the  retail  price 
index (RPI) measure that was previously used. 

The UK government’s plan for growth includes a focus on further reducing employment 
regulation,  an  area  in  which  the  UK  economy  is  already  relatively  flexible.  The 
government  has  focused  in  particular  on  helping  small  businesses  through  targeted 
measures, such as exempting micro businesses from new regulation, and lower taxes for 

23http://www.ifs.org.uk/comms/comm121.pdf. 
24Ibid. 

17

 
 
                                                 
smaller businesses.25 These have the potential to help stimulate employment and growth, 
although  the  government  may  want  to  monitor  the  effect  of  targeted  deregulation  to 
ensure  it  does  not  unintentionally  create  incentives  for  firms  to  stay  small,  as  has 
happened in some EU countries. 

Childcare 

The government has taken some steps to improve access to childcare for disadvantaged 
children,  and  the  UK  has  a  high  rate  of  participation  in  early  education.  New  plans 
include  extending  these  free  places  to  around  40 %  of  two  year-olds  by  2013,  and  an 
additional investment of GBP 300 million (EUR 375 million) to support around 80 000 
families  with  the  cost  of  childcare  within  the  Universal  Credit  when  it  is  introduced. 
There  is,  however,  much  to  be  done  to  apply  a  life-cycle  approach  to  employment 
policies  and  to  lift  more  families  out  of  poverty.  Full-time  pre-school  childcare  is  still 
rare,  insufficiently  flexible  and  expensive,  which  is  a  constraint  on  single  parents  and 
second earners entering the labour market. Alongside Ireland, childcare costs in the UK 
are higher than in any other EU country and the net costs of childcare are especially high 
for second earners in couples.26 Until these problems are alleviated, there will continue to 
be  substantial  failings  in  the  quantity,  quality  and  affordability  of  childcare.  The 
government  has  trimmed  demand  subsidies  for  childcare  users,  and  some  local 
authorities are reducing subsidised childcare provision to help deliver spending reduction 
targets. 

Overall,  the  2011  recommendation  on  workless  households  has  to  date  been  partially 
implemented.  The  UK  is  engaged  in  ambitious  welfare  reforms  that  should  bring 
employment  benefits  over  time,  but  there  remain  significant  challenges  to  effective 
implementation,  particularly  in  the  context  of  a  weak  labour  market.  Under  current 
policy,  the  overall  availability  and  affordability  of  childcare  does  not  look  set  to 
significantly improve. 

Skills 

The UK continues to  have  too  many people with low skills, resulting in inequality and 
skills mismatches. The economic costs of this problem are likely to increase over time if 
it  is  not  effectively  addressed.  Recent  research  from  the  European  Centre  for  the 
Development of Vocational Training (Cedefop)27 estimates that, between 2010 and 2020, 
low-skilled jobs will decline by approximately 51 %, while medium and high-skilled jobs 
will  increase  by  16 %  and  21 %  respectively.  There  is  a  persistently  large  number  of 
functionally illiterate and innumerate adults in the UK,28 usually with no qualifications. 
The  country  could  gain  significant  economic  and  social  benefits  from  doing  more  to 
address  the  needs  of  this  group,  including  increasing  their  capacity  to  benefit  from 
vocational training. 

The UK has higher levels of early school leavers than the EU average for all subgroups 
except  for  migrants.29  The  UK  has  not  established  a  national  target  for  reducing  early 
school  leaving,  but  has  taken  steps  to  improve  education  and  training  systems,  and  to 
tackle  youth  unemployment.  In  November  2011,  the  government  published  a  strategy 
designed  to  maximise  the  participation  of  16-24  year-olds  in  education,  training  and 
employment  named  Building  Engagement,  Building  Futures.30  The  government  is  also 

25For example more favourable treatment of small business in corporation tax, business rates and VAT. 
26OECD Going for Growth 2012. See Figure 2.8A and 3.9A. 
27http://www.cedefop.europa.eu/en/Files/3052_en.pdf. 
28Skills  for  Life  survey  2011,  http://www.bis.gov.uk/assets/biscore/further-education-skills/docs/0-9/11-1367-2011-
skills-for-life-survey-findings.pdf. See also www.nrdc.org.uk/download2.asp?f=4690&e=pdf. 
29Here migrants are respondents who report being born abroad. In the UK, 11.66 % of 18-24 year olds are in this group. 
30http://www.dwp.gov.uk/docs/building-engagement-building-futures.pdf. 

18

 
 
                                                 
raising the age for leaving compulsory education in England from 16 to 17 in 2013 and to 
18 from 2015. Those who have left school without basic skills in literacy and numeracy 
will continue  to  have access to state-funded training. Those without a first full Level 2 
(intermediate) or Level 3 (advanced or A-Level) qualification will be eligible for fully-
funded  training  until  the  age  of  24.  In  Scotland  the  government  aims  to  offer  post-16 
learning for every young person who wants it, and the Welsh government has highlighted 
learner attainment at age 15 as a priority. However, some reforms risk exacerbating the 
problem  of  early  school  leaving,  particularly  the  withdrawal  of  the  Educational 
Maintenance  Allowance  (EMA)  in  England  to  be  replaced  by  a  smaller  discretionary 
fund.  The  government  draws  on  research  by  the  National  Foundation  for  Education 
Research saying that 90 % of students who receive EMA would still continue with their 
education without the payment. However, IFS research shows that the EMA has raised 
participation as well as boosted grades.31 The Scottish government has retained the EMA 
in Scotland. 

In  the  long  term,  successful  schools  reform  will  be  key  to  addressing  the  UK’s  basic 
skills problem, as remedying the problem at a later stage has proven difficult. However, 
the requirement for all apprenticeship providers to support training in Maths and English 
up to GCSE (intermediate) standard for those who have not already achieved this could 
have significant benefits. 

When the government set out its fiscal consolidation plans, with the exception of Higher 
Education,  the  education  and  training  budget was  relatively  protected  in  comparison  to 
other  policy  areas.  The  government  prioritised  areas  that  support  long-term  growth 
(including  schools,  early  years  provisions  and  apprenticeships),  core  universal  frontline 
services,  and  services  that  protect  the  most  disadvantaged.  However,  schools  and  other 
frontline  services  have  to  make  significant  savings,  and  education  capital  spending  is 
being sharply reduced. 

Vocational training 

The  government  is  reforming  the  vocational  training  system  to  give  greater  control  to 
students  and  abolish  the  central  direction  of  training  available,  so  as  to  match  skills 
provision  and  labour  market  needs  more  effectively.  The  government  accepted  all 
recommendations  of  the  Wolf  Review32  in  May  2011  and  plans  to  complete  its 
implementation by September 2012. If implemented effectively, there is significant scope 
for these reforms to increase the average labour market value of vocational training and 
ensure vocational courses complement rather than replace core academic education. 

Young people can access the Apprenticeship programme from the age of 16, where on-
the-job  training  (by  employers)  as  well  as  school-based  education  (by  the  government) 
are fully funded. After the age of 19, only half the training cost is funded by the state and 
SMEs  receive  an  incentive  payment.  The  programme  expanded  by  140 %  in  the  period 
2006-07  to  2010-11,  with  new  apprenticeship  starts  rising  from  184 400  to  457 200. 
Additional funding will be provided for up to 250 000 more apprenticeships over the next 
four years. 

Expanding the number of apprenticeships is welcome, but the government also needs to 
ensure  they  are  well-targeted  and  are  providing  high-level  skills.  Apprenticeships  are 
offered  at  intermediate  level  (level  2)  and  advanced  level  (level  3  or  A-level).  First 
assessments  by  the  National  Audit  Office  (NAO)33  suggest  that  the  Apprenticeship 
Programme  is  good  value  for  money,  but  that  most  apprenticeships  in  England  are  at 

31http://readingroom.lsc.gov.uk/lsc/National/nat-emaevaluationadministrativedata-jan2008.pdf. 
32https://www.education.gov.uk/publications/eOrderingDownload/The%20Wolf%20Report.pdf. 
33http://www.nao.org.uk/publications/1012/adult_apprenticeships.aspx. 

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lower skill levels, with only 33 % recorded as advanced level in 2010-11. Furthermore, a 
high  proportion  of  apprentices  are  adults  (71 %)  rather  than  young  jobseekers  (29 %). 
Work-based  apprenticeships  are  still  in  limited  supply,  and  there  is  relatively  little 
tradition  among  UK  employers  of  commitment  to  providing  vocational  training 
opportunities  for  young  people.  In  2010,  only  5 %  of  employers  employed  apprentices, 
according to the NAO. 

Work-based  academies  for  young  people  have  been  launched  to  equip  them  with  skills 
matching  the  requirements  of  employers.  Twenty-four  university  technical  colleges 
(UTCs)  will  be  opened  by  2014  in  collaboration  with  employers  and  universities,  at  a 
cost  of  GBP  150  million  (EUR  188  million).  The  UTCs  will  train  up  to  50 000  young 
unemployed people to work in particular sectors, such as engineering, business and other 
practical skills. 

Tertiary education 

The current UK tertiary attainment rate of 43 % (2010) is well above the EU average of 
33.6 %. The UK has not set a national target for tertiary attainment. As the government is 
expecting universities to rely more and more on the income they receive from students, it 
is reducing direct funding accordingly. Tuition fees paid by students are increasing to up 
to GBP 9 000 per year (EUR 11 250) (excluding Scotland). In its place, the government 
will  provide  institutions  with  up-front  loans  of  GBP  3.6  billion  (EUR  4.5  billion)  in 
2012-13,  rising  to  GBP  5  billion  (EUR  6.25  billion)  in  2013-14.  The  premium  that 
universities receive for taking in students from poorer backgrounds remains unchanged. 
The  government  may  wish  to  monitor  the  effect  of  increased  tuition  fees  on  enrolment 
and graduation, as well as the way in which the mix of graduate skills fits with the needs 
of the economy. 

The  2011  recommendation  on  skills  has  also  been  partially  implemented.  The  UK  has 
introduced a large number of relevant and ambitious reforms, particularly in vocational 
training.  While  there  is  much  potential  in  the  current  reforms,  implementation  is  only 
starting and it is too early to make a full assessment of their effectiveness. The expansion 
of apprenticeships is positive, but too many of them are currently at a low level and not 
enough  are  genuinely  work-based.  Given  the  long-term  trends  in  demand  for  higher 
skills,  the  UK  has  not  yet  addressed  its  basic  skills  problems  sufficiently.  Many 
challenges  remain,  and  there  is  no  certainty  that  the  UK  can  ensure  that  enough  of  the 
young people entering the labour market will have adequate skills in the short to medium 
term. Youth unemployment is high and has continued to increase. 

4.4. Structural measures promoting growth and competitiveness 

To address the challenges identified in the European Semester 2011 and the AGS 2012, it 
is important to take action to improve long-term investment and growth. UK investment 
and  productivity  have  been  weak  since  the  onset  of  the  crisis,  and  there  is  significant 
scope for the UK to raise productivity relative to the best performing countries. The UK 
government  published  The  Plan  for  Growth  alongside  the  2011  Budget,  setting  out  a 
wide-reaching programme of structural reforms. 

The  UK  performs  well  in  surveys  on  the  business  environment  and  market  regulation. 
For example, a recent study showed that the UK had the second lowest level of market 
regulation in professional services,34 notably because the UK is not regulating the access 
to  professions  but  the  use  of  professional  titles.  The  UK  has  implemented  the  Services 
Directive,  but  some  restrictions  still  remain.  For  example  the  justification  and 

34Product Market Regulation Database, OECD (2011), using data from 2008. 

20

 
 
                                                 
proportionality  of  shareholding  and  legal  form  requirements  in  certain  professional 
services in parts of the UK could be examined. 

However, a combination of relatively high prices and margins, low capital stock and low 
productivity  suggests  that  parts  of  the  UK  economy  suffer  from  weak  effective 
competition  and  underinvestment.  The  UK  economy  has  a  high  profit  share  and  the 
second  lowest  share  of  investment  in  GDP  in  the  EU.  In  both  manufacturing  and 
services,  gross  operating  margins  in  the  UK  are  among  the  highest  in  the  EU.35  The 
causes of this are complex, but may include high costs and entry barriers created by the 
restrictive  planning  system.  There  is  considerable  scope  to  improve  the  UK’s 
infrastructure,  and  while  the  government  has  set  out  its  aims  in  the  National 
Infrastructure Plan, it is not yet clear where the financing will come from to deliver a real 
improvement. 

Spatial planning 

The UK has a rather rigid planning system, and the poor functioning of the land market is 
at  odds  with  its  generally  flexible  market  economy.  According  to  the  NAO,  planning 
laws  create  the  highest  regulatory  costs  of  any  type  of  regulation  in  the  UK.  This 
constitutes a barrier to investment, growth and efficiency, as it has put tight restrictions 
on  the  supply  of  land  for  development  and  imposed  inflexibility  in  land  use.36  The 
investment  and 
planning  system  delays,  discourages  or  distorts  construction 
modernisation  (in  houses,  plants,  offices,37  transport  infrastructure,  and  both  renewable 
and non-renewable energy capacity).38 This raises the cost of new and existing property, 
and can also affect market entry and competition, as well as labour mobility. Moreover, 
as  discussed  below,  the  UK  has  relatively  poor  transport  infrastructure  as  compared  to 
the EU-15, and high land costs. Together, these factors cause problems, particularly for 
the efficiency of capital-intensive, land-intensive and transport-intensive sectors, such as 
manufacturing, retail39 and distribution.40 

Housing  and  planning  policy  are  devolved  responsibilities.  The  government  is  in  the 
process of undertaking a major, controversial reform of the planning system for England. 
The reforms affect the control of residential, commercial and infrastructure development. 
They  aim  to  devolve  more  power  to  local  authorities  and  simplify  the  process  for 
securing  planning  consent.  The  National  Planning  Policy  Framework  (NPPF),41 
published  in  March,  confirmed  the  government’s  plans  with  some  amendments, 
following  an  extensive  national  debate.  It  is  not  yet  clear  how  significant  the  outcome 
will be in terms of facilitating more, and more timely, construction activity in England. 
In  March  2012,  the  Scottish  government  published  a  progress  update  on  Scotland’s 
National Planning Framework 2, which was launched in 2009.42 

35Commission analysis of Eurostat data. 
36See  Barker  Review  of  Planning  (2006)  for  a  comprehensive  analysis  http://www.ukcip.org.uk/wordpress/wp-
content/PDFs/Barker_review_landuse.pdf. 
37Gross costs of regulation associated with building office property are estimated to be 12 times higher in the City of 
London  than  in  Brussels,  and  higher  in  Manchester  than  Milan,  Paris,  Barcelona  or  Amsterdam.  See  Cheshire  and. 
Hilber (June 2008), Economic Journal vol. 118. 
38A survey by the Killian Pretty Review (2008) found that only 3 out of 64 planning applications went ahead without 
difficulties, while over half encountered substantial problems. 
39In the UK it has been estimated that the planning restriction that encourages smaller shop formats (including through 
Town Centre First), reduces productivity in the sector by up to 16 %. See for example Cheshire, Hilber and Kaplanis 
(2011) http://eprints.lse.ac.uk/31757/1/sercdp0066.pdf. 
40Distribution accounts for the largest part of the UK’s productivity gap with the US — about a fifth.  See for example 
http://www.aimresearch.org/uploads/pdf/Academic%20Publications/rgbrief.pdf. 
41http://www.communities.gov.uk/documents/planningandbuilding/pdf/2116950.pdf. 
42http://www.scotland.gov.uk/Topics/Built-Environment/planning/National-Planning-Policy/npf. 

21

 
 
                                                 
Housing supply 
In  the  UK,  housing  supply  is  relatively  unresponsive  to  demand.43  This  has  led  to  low 
investment  in  residential  construction  and  the  UK  housing  market  impairs  labour 
mobility and distorts household incentives and behaviour. A lack of housing supply has 
contributed to high house prices and a lack of affordability, and as discussed in Box 1 is a 
potential  source  of  macroeconomic  instability.44  As  set  out  in  section  3.3,  high  house 
prices also mean that large numbers of households are reliant on Housing Benefit, which 
both  reduces  work  incentives  and  living  standards  for  younger  and  poorer  households, 
and imposes a large fiscal cost on the government.45 In November 2011, the government 
published  its  housing  strategy  for  England.46  This  argues  that  the  housing  market  is 
currently  not  working,  as  the  supply  of  housing  is  not  sufficient  to  satisfy  current 
demand, and that without effective action, the housing shortage is likely to worsen over 
time. The housing strategy did not mention the issue of property taxation, where, as set 
out  in  section  3.1,  the  UK  system  combines  a  regressive  recurring  Council  Tax  with  a 
progressive  transaction  tax  (SDLT).  The  Scottish  government  published  its  housing 
strategy in February 2011 and the Welsh government will publish a housing strategy in 
2012 to inform a Housing Bill in 2013. 

The government’s reforms aim to increase housing supply through a range of measures, 
including  a  presumption  in  favour  of  sustainable  development  in  the  planning  system. 
While  streamlining  the  planning  decision  process  is  clearly  positive,  local  authorities’ 
response  to  the  abolition  of  national  house  building  targets  has  contributed  to  a  record 
low volume of house building. A lack of confidence, financing constraints and regulatory 
uncertainty currently continues to restrict housing investment. To address this issue, the 
government  has  taken  time-limited  action  to  increase  the  housing  supply  via  financial 
incentives  such  as  the  New  Build  Indemnity  Scheme,  the  New  Homes  Bonus,  the 
Community Infrastructure Levy and the Growing Places Fund. 

If the new planning system is ultimately more supportive of development, it could deliver 
better-functioning  UK  land  and  housing  markets,  promote  macroeconomic  stability, 
support  the  rebalancing  of  the  UK  economy  away  from  debt  towards  investment,  and 
help  to  revitalise  output  and  employment  in  the  construction  sector.  However  it  is 
currently still not clear how far the new system will achieve these aims in practice. The 
government  made  some  revisions  to  the  final  version  of  the  National  Planning  Policy 
Framework that are likely to reduce the extent to which the reforms meet the stated goals 
of  delivering  a  more  streamlined  planning  system  and  increased  housing  development. 
Many  groups  who  benefit  from  high  house  prices  and  restrictions  on  development  are 
strongly opposed to liberalisation, and implementation could face further challenges from 
a  lack  of  administrative  capacity  and  local  political  opposition.  The  planning  aspect  of 
the 2011 recommendation on housing has therefore been partially implemented. 

Energy, climate and resource efficiency 

The UK is well on track to meet its carbon emission reduction target without the need to 
design  additional  policies  or  use  additional  flexibilities.  The  UK  is  committed  to 
reducing its greenhouse gas emissions by 16 % (compared to 2005 and only for emissions 
not  covered  by  the  EU  Emission  Trading  System)  by  2020.  According  to  2011 

43The response of housing supply to demand in the UK has been among the lowest in OECD countries over the last 20 
years, OECD UK country survey 2011. 
44House prices in an average local planning authority in England in 2008 would have been 21.5 % to 38.1 % lower if 
the  planning  system  had  been  completely  relaxed.  Hilber,  and  Vermeulen  (2010)  The  impact  of  restricting  housing 
supply on house prices and affordability. 
45Real  Housing  Benefit  spend  has  nearly  doubled in  the  last  20 years;  just  over  half  is  on  households  in  the  bottom 
third of the income distribution. IEA (2012) Abundance of land, shortage of housing. 
46http://www.communities.gov.uk/documents/housing/pdf/2033676.pdf. 

22

 
 
                                                 
projections taking into account existing measures, the UK is expected to overachieve its 
national target by 6 pp, and part of the reason is the low share of manufacturing in the 
economy.  If  the  UK  succeeds  in  its  aim  of  reducing  economic  imbalances  through 
growing  manufacturing  and  exports,  this  margin  may  be  reduced.  The  current  complex 
framework of climate policies in the UK has led to variations of the implicit carbon price 
across sectors, and there is scope to streamline the system and make it more efficient. 

Under  Directive  2009/28/EC  on  the  promotion  of  the  use  of  energy  from  renewable 
sources, the UK is committed to reaching a target of 15 % of renewable energy sources in 
final energy consumption and a 10 % share of renewable energy in the transport sector by 
2020.  A  large  part  of  the  UK’s  total  existing  electricity  generation  capacity  is  also 
nearing the end of its life or needs upgrading over the next 10 years.47 The UK needs to 
install  adequate  new  generation  capacity  and  meet  its  obligations  while  avoiding 
excessive rises in energy costs.48 In July 2011, the UK came forward with a White Paper 
on  Electricity  Market  Reform  proposing  a  range  of  new  policy  measures,  as  well  as  a 
Renewable Energy Roadmap to ensure that it achieves its target of 15 % renewables. If 
the  UK  clarifies  the  support  regime  to  be  applied  in  both  the  heating  and  electricity 
sectors this, together with the Electricity Market Reform, should ensure the creation of a 
stable  regulatory  environment  that  promotes  the  development  of  new  green  goods  and 
services markets. 

The Green Deal is a market mechanism to improve energy efficiency in commercial and 
residential buildings, expected to be operational from late 2012. The programme aims to 
contribute  to  energy  efficiency  retrofits  by  connecting  financing  to  savings  on  energy 
bills,  with  no  upfront  costs.  The  government’s  independent  advisor  on  climate  change, 
the Committee  on  Climate Change,  has  suggested  that there  may be  a  gap  between the 
likely  achievements  of  the  Green  Deal  and  associated  emissions  targets  set  out  in  the 
UK’s carbon budgets. This gap may arise from insufficient market incentives for private 
sector  investment,  or  the  way  in  which  energy  company  obligations  are  framed.  Thus 
uptake and emissions savings, to be set in relation to the Green Deal, will require careful 
tracking against targets. The Green Investment Bank, with funding of EUR 17 billion, is 
a  potentially  significant  initiative.  However,  it  will  not  be  operational  until  after  2015. 
Almost  half  of  UK  municipal  household  waste  still  goes  to  landfill,  which  some  EU 
countries have almost completely eliminated. To address this issue, the UK plans to raise 
its landfill tax. Beyond the environmental benefits, full implementation of existing waste 
legislation could create around 64,000 jobs in the UK and increase the annual turnover of 
the waste sector by over EUR 6.7 billion.49 

Transport 

The UK faces a challenge to improve its transport infrastructure, which is characterised 
by  capacity  constraints  on  critical  parts  of  its  networks,  sustained  low  levels  of 
investment50 and high costs. The OECD Country survey of the UK 2009 concluded that 
‘improvements  in  public  infrastructure  are  required,  particularly  in  transport  where 
airport  and  road  congestion  and  continuing  problems  with  the  rail  system  constrain 
productivity’.51  The  World  Economic  Forum  (WEF)  Global  Competitiveness  report 

47http://www.decc.gov.uk/assets/decc/11/policy-legislation/EMR/2210-emr-white-paper-full-version.pdf. 
48The UK currently has among the lowest domestic electricity prices in Europe (DECC 2010 energy price statistics) but 
industrial electricity is 6 % above the EU-15 median price. DECC estimate an increase of around 40 % in electricity 
bills if the UK’s carbon and renewable electricity targets are met in full. 
49European Commission, Implementing EU waste legislation for green growth, 2012. 
50Crafts  (2009)  demonstrates  that,  in  particular,  road  investment  levels  have  been  relatively  low  for  the  UK  for 
decades, suggesting relative neglect. 
51http://www.oecd.org/dataoecd/4/59/43037700.pdf. 

23

 
 
                                                 
ranks  the  UK  as  12th  among  the  EU-15  as  regards  ‘quality  of  overall  infrastructure’.52 
Reforms  to  stimulate  increased  investment  and  lower  regulatory  barriers  in  the  UK’s 
transport networks would support the government’s aim of rebalancing the UK economy 
towards  investment  and  exports.  Improved  infrastructure  could  generate  positive 
spillovers, lower costs and improved productivity in the wider economy. 

The  UK  government  acknowledges  the  challenge,  and  set  out  its  plans  in  the  2011 
National Infrastructure Plan. The government is investing over GBP 1 billion (EUR 1.25 
billion)  to  tackle  areas  of  congestion  and  improve  the  national  road  network.  Projects 
include upgrades to major trunk road routes to improve safety and remove bottlenecks, 
and  an  additional  GBP  170  million  (EUR  213  million)  for  local  public  transport. 
However, the new funding committed is low, given the size of the challenge and relative 
to  the  cuts  made  in  the  2010  Spending  Review.  McKinsey  estimate  there  will  be  a 
substantial public sector funding gap for road and rail of around GBP 100 billion (EUR 
125 billion) between 2010 and 2030, the equivalent of GBP 5 billion (EUR 6.25 billion) 
per year.53 

Particular  problems  for  the  road  network  include  congestion  on  the  major  highways 
(especially  those  in  the  London  area  and  the  Midlands),54  regulatory  barriers  to  new 
infrastructure, and relatively high costs in construction and maintenance. On average, for 
each  kilometre  of  motorway,  113  million  passenger  vehicle  kilometres  are  driven 
nationally each year, against 47 million in Germany, 39 million in France and 36 million 
in  the  United  States.  In  addition,  the  UK’s  roads  carry  more  freight  per  kilometre  of 
motorway than any major economy apart from Japan. The congestion problem has eased 
in the short term with the economic downturn, largely because of a drop in heavy goods 
traffic, but is likely to resume with economic recovery. 

In tight fiscal circumstances, it is important to focus on road maintenance, not just new 
road building. The evidence suggests that cutting maintenance could threaten short- and 
longer-term  growth  prospects,  as  well  as  reducing  safety  and  raising  congestion  levels. 
This  holds  in  particular  for  local  road  networks  maintained  by  local  authorities  with 
falling budgets. Neglecting maintenance implies higher maintenance costs in the future, 
reducing funds available for new infrastructure and lessening the overall growth impact 
of transport infrastructure spending. New models of ownership of the roads network are 
currently  under  discussion.  Their  possible  introduction  could  have  a  significant  impact 
and could also serve as an opportunity to introduce a ‘user-pays’ element to the financing 
of road infrastructure. 
In the rail sector, the recent McNulty Report55 called for more effective incentives and 
increased  competition  to  improve  efficiency  and  quality  of  services,  lower  costs  for 
regional railways to make regional and urban travel more affordable, increased capacity 
for  the  West  Coast  Main  Line  and  urban  rail,  and  separating  local  lines  from  long 
distance  lines  on  congested  tracks.  The  total  cost  per  passenger-kilometre  of  the  rail 
network  in  the  UK  is  around  70 %  higher  than  the  average  cost  in  a  sample  of  four 
comparable  rail  systems.  The  report  concluded  that  achieving  a  30 %  efficiency 
improvement by 2019 was a realistic target.56 More than GBP 1.4 billion (1.75 billion) is 
to be invested in railway infrastructure, and the go-ahead has been given to the HS2, a 
new  high-speed  rail  link  between  London,  the  West  Midlands  and  the  North  West. 
However, rail fares continue to be raised from already high levels, and the UK railway 

52http://www3.weforum.org/docs/WEF_GCR_Report_2011-12.pdf. 
53McKinsey (2011), Keeping Britain moving: The United Kingdom’s transport infrastructure needs. 
54The Eddington Study (2006) estimated the economic costs of road congestion at GBP 7-8 billion (EUR 9-10 billion) 
per year excluding reliability and costs for non-business users (vol. 1 p. 12 and vol. 2 p. 100). 
55http://www.dft.gov.uk/publications/realising-the-potential-of-gb-rail/. 
56Civity (2010) Background analysis for the McNulty report. 
24

 
 
                                                 
system  continues  to  suffer  from  relatively  high  costs  and  growing  congestion,  which 
could limit its viability as an effective alternative to road transport. 

Aviation is a major UK industry, carrying over 235 million passengers per year and over 
2.3  million  tonnes  of  freight.  The  UK  is  home  to  Europe’s  busiest  airport,  London 
Heathrow, which handled just under 70 million passengers in 2011. However, air travel 
has been hit by the economic downturn and aviation is taxed more than in other Member 
States via air passenger duty. Moreover, there is a growing shortage of airport capacity in 
the South East, where demand is concentrated.57 To date, the government does not have a 
policy  to  deliver  the  increased  capacity  needed  for  long-haul  connections  and  London 
risks losing out to other European capitals with spare capacity. However the government 
is undertaking an aviation policy review. 

UK ports handle about 95 % of the total volume of UK trade and 75 % of its value, and 
the  private  sector  operates  around  two  thirds  of  this  traffic.58  The  sector  could  benefit 
from  better  transport  connections  with  its  hinterland  through  multi-modal  transport 
networks to reduce costs and delays associated with international trade and distribution 
within  the  UK.  For  example,  the  government  is  supporting  the  development  of  the 
London Gateway Port terminal, but road links to the UK’s largest port, Felixstowe, are 
congested. Planning applications for strategic rail freight interchanges have been rejected 
in the past. In October 2011 the government announced a range of measures to address 
these issues in the National Policy Statement for Ports. 

Research and innovation 

For 2000-2010, the share of R&D spending in GDP was little changed, from 1.81 % to 
1.77 %,  following  a  period  of  decline  from  the  mid-1980s.  The  long-term  fall  and 
relatively  low  level  of  R&D  intensity  is  partly  but  not  wholly  a  function  of  the 
increasingly service-focused structure of the economy, and raises challenges for the UK’s 
long-term competitiveness. 

The UK government’s objective is to maintain and strengthen returns from accumulated 
investments in the science base as a driver of innovation and growth. The UK’s public 
research  base  is  a  national  strength,  producing  a  significant  share  of  highly  cited 
publications.  In  terms  of  doctoral  graduates,  international  scientific  co-publication, 
percentage of employment in knowledge-intensive activities and contribution of medium 
and  high  tech  goods  to  the  trade  balance,  the  UK  outperforms  the  EU  average  and  the 
US.  It  is  therefore  an  important  element  of  delivering  the  AGS  2012  goal  of  growth-
friendly fiscal consolidation that the UK’s academic and research base is in a position to 
retain these strengths. 

Over the current spending review period, the core science budget is being frozen in cash 
terms,  while  cuts  in  other  government  departments  will  result  in  lower  expenditure  on 
defence  and  other  R&D.  Overall,  research  spending  is  therefore  likely  to  fall  in  real 
terms,  though  by  less  than  many  other  items.  The  UK  has  not  set  a  national  target  for 
R&D intensity as part of the Europe 2020 objectives. 

The  UK  government  recognises  the  importance  of  enhancing  the  links  between 
universities  and  industry  to  better  address  the  needs  of  industry,  as  illustrated  in  the 
recent  Innovation  Union  scoreboard,  in  which  the  UK  is  among  a  group  of  innovation 
followers.  The  UK  has  a  new  Innovation  and  Research  Strategy  for  Growth,  which 
includes a new elite national network of technology and innovation centres to foster links 

57Heathrow  airport  is  operating  at  99 %  of  its  runway  capacity  compared  to  other  European  airports  like  Frankfurt 
(74.5 %), Paris CDG (73.5 %) and Amsterdam Schipol (70 %). GLA(2011), A new airport for London. 
58Eurostat (2012) Transport Statistics in Focus. 

25

 
 
                                                 
between academia and business, and support commercialisation of new technologies, as 
well as more R&D tax incentives for small companies. 

4.5. Modernisation of public administration 

As mentioned in section 3.4, the UK government generally performs well in surveys on 
the  ease  of  doing  business,  and  on  the  administrative  burdens  of  the  tax  system.  The 
value  of  public  procurement  is  estimated  to  be  between  4.5 %  and  6.5 %  of  GDP. 
Collaborative  procurement  is  widely  used  for  the  purposes  of  awarding  contracts  and 
framework  agreements  to  enable  the  government  to  achieve  savings,  and  overall, 
European procurement rules are applied correctly. 

As  part  of  the  government’s  fiscal  consolidation  strategy,  public  sector  employment  is 
falling  sharply,  by  over  4 %  in  2011.  The  government  is  taking  action  to  increase  the 
cost-effectiveness  of  the  public  sector  workforce.  Public  sector  pensions  are  being 
reformed  to  raise  employee  contributions  and  reduce  costs.  Following  a  period  of  pay 
restraint across the public sector, the government is looking into ways of making pay in 
the  sector  more  responsive  to  local  labour  market  conditions.  The  government  is  also 
committed  to  a  programme  of  localism,  which  aims  to  give  more  discretion  to  local 
government over policy and budget allocations. 

The  decision  of  the  UK  government  to  abolish  the  Regional  Development  Agencies 
(RDAs)  had  a  strong  impact  on  the  implementation  of  the  European  Regional 
Development  Fund  (ERDF)  (2007-2013)  programmes  in  England,  both  in  terms  of 
management and match funding. Scarce match funding is one of the main challenges for 
the  successful  implementation  of  operational  programmes.  Despite  the  challenging 
circumstances, absorption of the ERDF in the UK is still acceptable. 

26

 
 
5. OVERVIEW TABLE  

2011 commitments 

Summary assessment 

Country specific recommendations (CSRs) 

CSR  1:  Implement  the  planned  fiscal 
consolidation aiming at a deficit of 6.2 % 
of  GDP  in  2012-2013,  in  line  with 
Council  recommendations  on  correcting 
the excessive deficit, and setting the high 
public  debt  ratio  on  a  downward  path 
when  the  excessive  deficit  is  corrected 
by  the  end  of  the  programme  period. 
Ensure  no  slippage  from  the  ambitious 
spending 
thereby 
targets, 
strengthening 
long-term  sustainability; 
and,  subject  to  this,  prioritise  growth-
enhancing expenditure. 

reduction 

CSR 2: Develop a programme of reform 
which addresses the destabilising impact 
of  the  house  price  cycle  on  public 
finances,  the  financial  sector  and  the 
economy,  with  a  view  to  alleviating 
problems  of  affordability  and  the  need 
for state subsidy for housing. A broad set 
of measures and policy instruments could 
be  considered  including  reforms  to  the 
mortgage  market,  financial  regulation, 
property  tax  and  the  planning  system  in 
order to prevent excessive volatility. 

CSR  3:  Take  steps  by  2012  to  ensure 
that a higher share of young people enter 
the  labour  market  with  adequate  skills 
and  to  improve  the  employability  of  18 
to  24-year-olds  who  left  education  or 
training  without  qualifications.  Address 
skill shortages by increasing the numbers 
attaining intermediate skills, in line with 
labour market needs. 

The UK has implemented the CSR. However due to a slower 
growth  path,  the  UK  is  likely  to  miss  its  EDP  deadline  of 
reducing  the  deficit  below  3 %  of  GDP  by  2014-15  by  one 
year.  The  Office  for  Budget  Responsibility  forecasts  that 
public debt will peak in 2014-15. 

The government has so far stuck to the fiscal consolidation 
strategy  it  announced  in  June  2010.  The  deficit  fell  from 
9.5 % in 2010-11 to 8.4 % in 2011-12, though this still one of 
the highest levels in the EU. 

Due  to  weakening  of  the  medium-term  outlook  for  growth, 
the  deficit  will  fall  more  slowly  than  previously  projected 
and for 2012-13 is now forecast to be 6.1 % (and would be 
7.9 % without an upcoming one-off pension fund transfer). 

Some  adjustments  were  made  to  the  government’s  existing 
fiscal  plans  in  the  2011  Autumn  Statement  to  prioritise 
growth-enhancing expenditure, but public sector investment 
is still set to fall sharply by 2014-15. 

The UK has partially implemented the CSR. 

In  November  2011,  the  government  published  its  housing 
strategy  for  England.  The  government’s  reforms  aim  to 
deliver  increased  housing  supply  through  a  range  of 
measures  including  a  presumption  in  favour  of  sustainable 
development. 

the  new  system 

If 
is  more  supportive  of  housing 
development, it could substantially increase housing supply 
and,  over  time,  alleviate  the  problem  of  high  prices  and 
strong  housing  cycles.  However,  significant  uncertainty 
about the net impact of the new system remains. There could 
also be difficulties with a lack of administrative capacity and 
local  political  opposition  to  a  more  streamlined  planning 
system. 

A  lack  of  confidence,  financing  constraints  and  regulatory 
uncertainty currently continue to restrict housing investment. 

However, the housing strategy does not mention the issue of 
property  taxation,  where  the  UK  system  combines  a 
regressive  recurring  tax  (council  tax)  with  a  progressive 
transaction  tax  (SDLT),  which  may  play  a  role  in  such 
cyclical  developments  and  their  impact  on  budget  revenues 
and  financial  stability.  Minor  changes  to  SDLT  in  Budget 
2012 did not deal with the main issue. 

The UK has partially implemented the CSR. 

The  UK  undertook  a  series  of  measures  to  reduce  youth 
unemployment in 2011, but it continues to rise. The Council 
Recommendation to address skills shortages at intermediate 
level has not yet been fully implemented and will take time. 
It remains a major challenge to reduce youth unemployment 
by meeting labour market needs. 

The  Apprenticeships  programme 
the  government’s 
flagship initiative to address the challenge of improving the 

is 

27

 
 
 
employability  of  18  to  24-year-olds  and  equip  them  with 
adequate skills for the labour market. While the programme 
is  expanding  and  has  the  right  ambitions,  it  is  still  too 
focused on the lower skills level. The number of work-based 
apprenticeships  is  still  low  and  the  involvement  of  social 
partners 
improved.  The  Apprenticeships 
programme  could  target  even  more  low  achievers  and 
NEETs. The success of school reform will largely determine 
whether  the  UK  can  reduce  the  number  of  young  people 
lacking basic skills. 

could  be 

Overall,  the  UK  has  introduced  a  large  number  of  relevant 
and ambitious reforms, particularly in school education and 
vocational  training.  While  there  is  a  lot  of  potential  in  the 
current  set  of  reforms, 
implementation  of  many 
the 
programmes,  including  raising  the  age  for  completing 
compulsory education, Free Schools, the Youth Contract and 
the  expansion  of  Apprenticeships,  has  just  started.  Many 
challenges remain and there is no certainty that the UK can 
ensure  that  in  the  short  to  medium  term  a  sufficiently  high 
share of young people enter the labour market with adequate 
skills. 

The UK has partially implemented the CSR. 

The government has an active welfare reform agenda which, 
once  fully  implemented,  should  bring  employment  benefits 
over time. However, the introduction of the Universal Credit 
in  autumn  2013  will  be  administratively  challenging.  In 
addition  declining  benefit  amounts  are  likely  to  offset  the 
positive 
incomes, 
impact  of  employment  policies  on 
particularly for families with children.  

Access to childcare still causes significant problems and the 
government  has  not  yet  come  up  with  adequate  plans  on 
how  to  tackle  this  challenge.  Cuts  to  support  for  supply  of 
childcare  alongside  growing  demand  also  risk  exacerbating 
the problem. 

The UK has partially implemented the CSR. 
Net  lending  remained  negative  in  2011.  Gross  lending 
targets  agreed  between  the  government  and  the  major  UK 
banks aimed at restoring lending to the real economy as part 
of  Project  Merlin  were  broadly  met.  However,  Project 
Merlin targets suffered from important issues which affected 
their effectiveness, such as including undrawn amounts and 
lending  to  public  corporations.  The  UK  continued  the 
Enterprise Finance Guarantee scheme, and a National Loan 
Guarantee  Scheme  is  also  being  introduced  in  2012. 
Notwithstanding a number of positive initiatives in the area 
of  access  to  finance,  survey  evidence  shows  that  a 
significant share of businesses, in particular SMEs, remains 
credit constrained. 

The 
(ICB) 
Independent  Commission  on  Banking 
recommended  improving  bank  competition  through  the 
creation of a new bank. However, the details and the date for 
its  creation  by  means  of  a  divestiture  of  Lloyds’  assets  are 
still 
increasing 
competition  in  the  banking  industry,  such  as  the  account 
redirection  service,  are  set  to  be  implemented  over  an 
extended time period. 

to  be  set.  Other  measures  aimed  at 

The  Enterprise  Capital  Funds  programme  and  the  newly-
created Business Angel Co Investment Fund have supported 

28

CSR  4:  Take  measures,  within  current 
budgetary plans, to reduce the number of 
workless  households  by  targeting  those 
who  are 
inactive  because  of  caring 
responsibilities, including lone parents. 

CSR  5:  Implement  measures  already 
announced  and  continue  to  work  to 
improve the availability of bank and non-
bank  financing  to  the  private  sector  and 
in  particular  to  SMEs  while  recognising 
potential challenges on the demand side. 
Encourage 
the 
banking  sector  and  explore  with  the 
market  ways  to  improve  access  to  non- 
bank  financing  such  as  venture  and  risk 
capital  and  debt 
issued  on  public 
markets. 

competition  within 

 
 
equity  investment  in  SMEs.  The  promotion  of  non-bank 
lending channels to the corporate sector has yet to lead to a 
significant  improvement,  notwithstanding  the  industry-led 
report  commissioned  by  the  government  on  the  matter  and 
the announced Business Finance Partnership. 

Significant challenges therefore remain in re-establishing the 
flow  of  credit  to  the  real  economy,  and  in  particular  to 
SMEs,  in  increasing  competition  in  the  banking  industry, 
and in promoting the non-bank lending channel. 

Europe 2020 (national targets and progress) 

Employment rate — no target in NRP 

73.6 % of the population aged 20-64 was employed in 2010 
(73.9 % in 2009). 

No  progress  has  been  made  in  contributing  to  this  target. 
After  remaining  stable  at  75.2 %  from  2005-2008,  the 
employment  rate  has  dropped  by  1.6  pp,  reflecting  rising 
unemployment. The UK employment rate is now marginally 
below the Europe 2020 target of 75 %. 

In  the  short  term,  private  sector  employment  has  been 
growing modestly, but not by enough to offset reductions in 
public sector employment and the growth of the workforce. 
To raise employment in the longer term, the UK also faces 
challenges 
incentives  and  parental 
employment,  to  improve  access  to  high-quality,  affordable 
childcare, and to raise skill levels. 

increase  work 

to 

R&D as a % of GDP — no target in NRP  1.86 % (2009), 1.77 % (2010). 

Greenhouse  gas  emissions  target:  -16 % 
to  2005  emissions,  ETS 
(compared 
this 
emissions  are  not  covered  by 
national target) 

The  share  of  R&D  spending  in  UK  GDP  is  slightly  below 
the  EU  average  and  well  below  the  Europe  2020  target  of 
3 %.  Between  2000  and  2010  it  was  little  changed,  from 
1.81 %  to  1.77 %,  following  a  period  of  decline  from  the 
mid-1980s.  

Change  in  greenhouse  gas  emissions  between  2005  and 
2010:  -8 %  (this  estimate  corresponds  to  the  current  ETS 
scope). 

This  evolution  is  consistent  with  the  2020  greenhouse  gas 
emissions  target  but  it  partially  results  from  the  economic 
crisis. 

15 %  of  gross  final  energy  consumption 
from renewable sources 

Starting from 1.3 % in 2005, the share of renewable energy 
in gross final energy consumption rose to 2.9 % (in 2009). 

in 

July  2011 

The  UK  set  out  its  strategy  to  meet  the  target  in  the 
and 
Renewable  Energy  Roadmap 
acknowledges  that  further  efforts  are  needed  to  reach  the 
2011-2012  interim  target.  Last  year’s  proposal  on  an 
electricity  market  reform  will  have  to  be  substantiated  and 
followed  up.  Support  schemes  in  both  the  heating  and 
electricity  sector  should  be  clarified  to  create  the  necessary 
stable investment framework. 

Energy  efficiency  — 
in 
primary energy consumption by 2020 (in 
Mtoe) 

reduction 

The  UK  has  not  yet  specified  its  national  target  for  energy 
efficiency. 
The  energy  efficiency  objectives  are  set  according  to 
national  circumstances  and  national  formulations.  As  the 
methodology  to  express  the  2020  energy  consumption 
impact  of  these  objectives  in  the  same  format  was  agreed 
only recently, the Commission is not yet able to present this 
overview. 

Early school leaving — no target in NRP  No  progress  has  been  made  to  contribute  to  this  target. 
29

 
 
Starting  from  11.6 %  in  2005,  the  share  of  early  school 
leavers  has  increased  by  3.3  pp  to  14.9 %  in  2010,  well 
above the EU target of 10 %. 

In  the  meantime,  the  government  has  undertaken  further 
steps  to  contribute  to  the  EU  target.  The  government  plans 
include to raise the age for leaving compulsory education in 
England from 16 to 17 in 2013 and to 18 from 2015. Those 
who  have  left  school  without  basic  skills  in  literacy  and 
numeracy  will  continue  to  have  access  to  state  funded 
training,  with 
full  Level  2 
(advanced  or  A-Level) 
(intermediate)  or  Level  3 
qualification  eligible  for  fully  funded  training  until  the  age 
of 24. However, some reforms risk exacerbating the problem 
of  early  school  leaving,  particularly  the  withdrawal  of  the 
Educational Maintenance Allowance. 

those  without  a 

first 

Tertiary education — no target in NRP 

Compared  to  the  EU  average,  the  UK  has  high  and 
increasing tertiary completion rates. The UK has progressed 
significantly from 29 % in 2000 to a tertiary attainment rate 
of  41.5 %  in  2009  and  43 %  in  2010,  well  above  the  EU 
average (33.6 %). 

Reduction  of  population  at  risk  of 
poverty or social exclusion in number of 
persons  —  existing  numerical  targets  of 
the 2010 Child Poverty Act 

The percentage of the population at risk of poverty or social 
exclusion was 22 % in 2009 and 23.1 % in 2010 (according 
to  the  definition  of  the  EU  target).  This  is  close  to  the  EU 
average. 

So  far  the  UK  has  not  made  progress  towards  meeting  the 
EU 2020 poverty and social exclusion target. Between 2007 
and 2010, the number of people at-risk-of-poverty and social 
exclusion has increased from 13.5 million to 14.2 million. 

Reductions  in  welfare  spending  are  a  necessary  part  of  the 
in  an 
government’s  fiscal  consolidation  strategy,  but 
October  2011  report,  the  Institute  of  Fiscal  Studies  (IFS) 
concluded  that  the  government  would  miss  its  targets  for 
reducing  child  poverty,  as  set  down  in  the  Child  Poverty 
Act. The IFS estimates that relative poverty among children 
will rise by 600 000 by 2012-13, and by 800 000 for adults of 
working  age,  and  that  by  2020-21  absolute  child  poverty 
will be at its highest level since 2001-02.  

30

 
 
 
ANNEX 

Table I. Macroeconomic indicators 

1995-
1999

2000-
2004

2005-
2008

2009

2010

2011

2012

2013

-11.5
69.6
n.a
40.1
51.6
2.0

-4.4
-4.3
2.2
-5.4
7.6
15.0
12.8

-3.5
46.3
n.a
41.5
45.0
2.2

-1.0
39.2
n.a
39.6
40.6
2.2

-2.3
48.5
n.a
38.7
41.0
3.4

1.8
2.1
2.6
1.6
5.3
17.1
15.0

3.3
1.8
1.2
3.7
5.0
16.8
15.2

3.3
0.0
2.0
3.8
7.0
17.1
16.6

Core indicators
GDP growth rate
Output gap 1
HICP (annual % change)
Domestic demand (annual % change) 2
Unemployment rate (% of labour force) 3
Gross fixed capital formation (% of GDP)
Gross national saving (% of GDP)
General Government (% of GDP)
Net lending (+) or net borrowing (-)
Gross debt
Net financial assets 
Total revenue 
Total expenditure
  of which: Interest
Corporations (% of GDP)
Net lending (+) or net borrowing (-)
Net financial assets; non-financial corporations
Net financial assets; financial corporations
Gross capital formation
Gross operating surplus
Households and NPISH (% of GDP)
Net lending (+) or net borrowing (-)
Net financial assets
Gross wages and salaries
Net property income
Current transfers received
Gross saving
Rest of the world (% of GDP)
Net lending (+) or net borrowing (-)
Net financial assets
Net exports of goods and services
Net primary income from the rest of the world
Net capital transactions 
Tradable sector
Non tradable sector
  of which: Building and construction sector
Real effective exchange rate (index, 2000=100)
Terms of trade goods and services (index, 2000=100)
Market performance of exports (index, 2000=100)
Notes:
1 The output gap constitutes the gap between the actual and potential gross domestic product at 2000 market prices.
2 The indicator on domestic demand includes stocks.

-0.9
n.a
-0.3
-0.2
0.1
44.2
44.8
5.5
87.6
98.6
110.8

-2.3
n.a
-3.1
1.5
0.2
37.2
52.0
6.7
100.3
100.8
98.8

-1.9
n.a
-2.4
0.9
0.1
40.5
48.4
6.2
98.9
101.6
100.7

2.4
n.a
45.8
10.9
22.5
5.9

-1.3
n.a
47.0
8.8
21.2
3.3

-3.2
n.a
45.2
7.8
21.2
2.1

-1.0
n.a
n.a
12.3
23.1

4.3
n.a
n.a
10.2
22.0

0.4
n.a
n.a
10.8
20.7

7.0
n.a
n.a
8.2
22.2

2.7
n.a
46.6
8.4
24.3
5.4

-1.2
n.a
-1.8
1.4
0.3
36.5
53.7
6.3
83.3
100.0
99.5

2.1
-3.1
3.3
2.9
7.8
14.9
11.8

-10.2
79.6
n.a
40.2
50.4
2.9

5.0
n.a
n.a
9.1
21.3

1.7
n.a
45.3
7.9
23.7
5.0

-3.1
n.a
-2.5
0.4
0.3
35.4
53.8
6.2
86.0
99.4
97.2

0.7
-3.3
4.5
-0.8
8.0
14.3
13.2

-8.3
85.7
n.a
40.8
49.1
3.2

5.4
n.a
n.a
8.6
20.7

1.4
n.a
44.9
8.3
23.5
5.1

-1.7
n.a
-1.8
1.3
0.2
35.3
53.0
6.1
85.9
98.5
97.8

0.5
-3.7
2.9
-0.1
8.5
14.1
12.9

-6.7
91.2
n.a
40.8
47.4
3.4

3.7
n.a
n.a
8.1
25.7

1.5
n.a
44.5
8.4
23.5
5.1

-1.5
n.a
-1.1
0.9
0.2
n.a
n.a
n.a
89.2
99.2
99.3

1.7
-3.1
2.0
0.8
8.4
14.2
13.8

-6.5
94.6
n.a
40.8
47.2
3.5

4.2
n.a
n.a
8.3
37.4

1.4
n.a
43.9
8.5
23.2
5.0

-0.8
n.a
0.2
0.3
0.2
n.a
n.a
n.a
89.6
100.2
99.7

3  Unemployed persons are all persons who were not employed, had actively sought work and were ready to begin working immediately or within two weeks. The 
labour force is the total number of people employed and unemployed. The unemployment rate covers the age group 15-74. Eurostat computation.

Source :
Commission spring 2012 forecast

31

 
 
 
 
Table II. Comparison of macroeconomic developments and forecasts 

Real GDP (% change)
Private consumption (% change)
Gross fixed capital formation (% change)
Exports of goods and services (% change)
Imports of goods and services (% change)
Contributions to real GDP growth:
- Final domestic demand
- Change in inventories
- Net exports
Output gap1
Employment (% change)
Unemployment rate (%)2
Labour productivity (% change)
HICP inflation (%)
GDP deflator (% change)
Comp. of employees (per head, % change)
Net lending/borrowing vis-à-vis the rest of the 
world (% of GDP)

2011
COM CP
0.8
-0.8
-1.7
4.8
0.6

0.7
-1.2
-1.2
4.6
1.2

2012
COM CP
0.8
0.5
-0.3
2.9
1.4

0.5
0.3
-0.6
3.1
1.3

2013
COM CP
2.0
1.3
6.2
5.3
3.8

1.7
1.0
3.2
4.7
1.8

-0.9
0.1
1.0
-3.3

0.4
8.0

0.2
4.5
2.3
1.9
-1.7

-0.7
0.0
1.2
-3.3

0.6
8.1

0.3
4.5
2.3
0.9
-2.5

0.2
-0.3
0.5
-3.7

0.4
8.5

0.1
2.9
2.7
2.4
-1.5

0.4
-0.1
0.4
-3.6

-0.3
8.7

1.1
2.8
2.5
2.9
-1.7

0.9
0.0
0.9
-3.1

0.5
8.4

1.2
2.0
2.3
2.6
-0.8

1.5
0.0
0.5
-3.2

0.4
8.6

1.6
1.9
2.5
3.2
-1.3

2014
CP
2.7
2.3
8.6
5.7
4.6

2.3
0.0
0.3
-2.2

0.7
8.0

2.0
1.9
2.5
4.3
-1.2

2015
CP
3.0
3.0
8.9
5.5
4.8

2.8
0.0
0.2
-1.2

1.0
7.2

2.0
2.0
2.5
4.5
-0.8

2016
CP
3.0
3.0
8.7
5.3
4.9

2.9
0.0
0.1
-0.5

1.0
6.3

2.0
2.0
2.5
4.6
-0.6

Note:
1In percent of potential GDP, with potential GDP growth according to the programme as recalculated by Commission services.

2Commission estimate stems from Eurostat computation of the unemployment rate.

Source :
Commission spring 2012 forecast (COM); Convergence programme (CP).

32

 
 
 
 
Table III. Composition of the budgetary adjustment 

2011-
12

2012-13

2013-14

COM COM
40.7
40.4

13.4
15.7
8.5
2.9
48.9

13.4
16.1
8.3
2.9
48.6

CP
37.1

13.6
12.8
6.7
4.0
43.0

COM
39.8

13.4
16.2
7.3
2.9
46.9

CP
37.3

13.6
12.8
6.7
4.2
43.3

2014-15 2015-16 2016-17 Change: 
2011-12 : 
2016-17
CP
-3.3

CP
37.4

CP
37.2

CP
37.5

13.6
13.1
6.7
4.0
41.8

13.4
13.0
6.8
4.0
40.2

13.3
13.3
6.9
4.0
38.7

0.0
-2.4
-1.6
0.7
-10.4

45.6

45.1

40.1

43.4

40.5

38.7

36.9

35.4

-10.5

23.6

23.6

n.a.

22.8

n.a.

n.a.

n.a.

n.a.

n.a.

(% of GDP)

Revenue
of which:
- Taxes on production and imports
- Current taxes on income, wealth, etc.
- Social contributions
- Other (residual)
Expenditure
of which:
- Primary expenditure

of which:
Compensation of employees and
intermediate consumption
Social payments
Subsidies
Gross fixed capital formation
Other (residual)

n.a.
0.2
-0.6
-1.4
0.1
7.1
7.2
0.0
7.1

n.a.
0.7
1.6
2.7
3.3
-1.2
2.1
0.0
-1.2

15.4
0.5
2.1
4.0
3.3
-8.4
-5.1
0.0
-8.4

15.2
0.5
2.2
3.6
3.5
-6.1
-2.6
1.8
-7.9

n.a.
0.7
1.9
1.6
2.9
-5.9
-3.0
0.0
-5.9

14.7
0.5
2.0
3.4
3.5
-6.5
-3.0
0.0
-6.5

n.a.
0.7
1.8
3.4
2.8
-6.0
-3.1
0.0
-6.0

n.a.
0.7
1.8
3.2
3.1
-4.4
-1.3
0.0
-4.4

n.a.
0.7
1.6
2.9
3.3
-2.9
0.3
0.0
-2.9

2.8

-5.1

-3.1

-2.2

-0.5

-1.0

-1.2

-2.4

-5.1

-3.7

-3.5

-3.7

-6.9

-3.3

-3.6

-4.4

-3.2

-4.6

-6.9

-5.1
1.8

-4.4
2.5

-6.9
0.0

- Interest expenditure
General government balance (GGB)
Primary balance
One-off and other temporary measures
GGB excl. one-offs
Output gap2
Cyclically-adjusted balance2
Structural balance3
Change in structural balance
Structural primary balance3
Change in structural primary balance
Expenditure benchmark4
Public expenditure growth5 (real)
Reference rate6,7
Lower reference rate6,8
Deviation in % GDP 
   against applicable reference rate
Two-year average deviation in % GDP 
   against applicable reference rate
Notes:
1On a no-policy-change basis.
2Output gap (in % of potential GDP) and cyclically-adjusted balance according to the programme as recalculated by Commission services on the 
basis of the information in the programme; calendar year basis.
3Structural (primary) balance = cyclically-adjusted (primary) balance excluding one-off and other temporary measures; calendar year basis.

0.09
-1.04

0.09
-0.61

0.09
-3.35

0.09
-1.87

0.09
0.25

0.09
1.06

-4.6
-0.3

-1.8
-0.4

-3.5
1.2

-2.4
1.1

-1.0
1.4

-1.5
2.2

-3.5
0.2

-1.6
1.9

-0.4
1.5

n.a.
n.a.

n.a.
n.a.

0.9
1.3

2.3
1.4

-0.82

-1.55

-7.25

-0.40

-4.33

-2.53

-1.53

1.19

1.19

1.19

1.19

1.19

1.19

0.01

0.67

2.78

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

5.9

6.0

5.9

     4This assessment is based on the minimum MTO established in 2009.

5Modified expenditure aggregate used for the expenditure benchmark, growth rates net of non-discretionary changes in unemployment benefit and 
of discretionary measures.
6The reference rates applicable to 2014 onwards will be available from mid-2012. For illustrative purposes, the current reference rates have also 
been applied to the years 2014 onwards.
7The (standard) reference rate applies starting in the year following which the country has reached its MTO.
8The lower reference rate applies as long as the country is adjusting towards its MTO, including the year in which it reaches the MTO.

Source :
Convergence programme (CP); Commission spring 2012 forecast (COM); Commission calculations.

33

 
 
 
 
Table IV. Debt dynamics 

(% of GDP)

average 2006-
07 : 2010-11

2011-12

59.7
7.7

4.4
0.9

2.3
-0.2
-1.3
2.4

86.8
6.5

5.1
1.0

3.3
-0.2
-2.1
0.5

Gross debt ratio1
Change in the ratio
Contributions 2 :

1. Primary balance
2. “Snow-ball” effect

Of which:
Interest expenditure
Growth effect
Inflation effect

3. Stock-flow adjustment

Of which:
Cash/accruals diff.
Acc. financial assets

Privatisation

Val. effect & residual

2012-13

2013-14

COM
91.8
4.9

2.6
0.5

3.5
-0.8
-2.2
1.8

CP
89.0
5.0

3.0
0.2

2.9
-0.7
-2.0
1.8

COM
94.7
3.0

3.0
-0.1

3.5
-1.6
-1.9
0.0

CP
91.9
2.9

3.1
-1.0

2.9
-1.7
-2.2
0.8

2014-15
CP
92.7
0.8

2015-16
CP
91.4
-1.3

2016-17
CP
n.a.
-2.8

1.3
-1.5

3.1
-2.4
-2.2
1.0

-0.3
-1.6

3.2
-2.6
-2.2
0.7

-2.1
-1.5

3.3
-2.6
-2.2
0.8

(% of GDP)

2011-12

2012-13

2013-14

2014-15

2015-16

2016-17

COM/CP3 CP4 COM/CP3 CP4

CP4

CP4

CP4

Gap to the debt benchmark3,4
Structural adjustment5
To be compared to:
Required adjustment6

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

1.1

0.4

-

3.8

0.0

Notes:
1End of period.
2The snow-ball effect captures the impact of interest expenditure on accumulated debt, as well as the impact of real GDP growth and inflation 
on the debt ratio (through the denominator). The stock-flow adjustment includes differences in cash and accrual accounting, accumulation of 
financial assets and valuation and other residual effects. 
3Assessment of the consolidation path set in the CP assuming growth follows the COM forecasts.
4Assessment of the consolidation path set in the CP assuming growth follows the CP projections.
5Not relevant during EDP that were ongoing in November 2011 and in the three years following the correction of the excessive deficit.
6Shows the difference between the debt-to-GDP ratio and the debt benchmark. If positive, projected gross debt-to-GDP ratio does not comply 
with the debt reduction benchmark.

7Applicable only during the transition period of three years from the correction of the excessive deficit for EDP that were ongoing in 
November 2011.

8Defines the remaining annual structural adjustment over the transition period which ensures that - if followed – Member State will comply 
with the debt reduction benchmark at the end of the transition period, assuming that COM (SP) budgetary projections are achieved.

Source :

Convergence programme (CP); Commission spring 2012 forecast (COM); Commission calculations

34

 
 
 
 
 
Table V. Long-term sustainability indicators 

UK

EU-27

No policy 
change 
scenario 

CP 
scenario

No policy 
change 
scenario 

SCP 
scenario

5.2

2.6
2.5

1.1
1.4
0.1
5.1

1.2

-1.4
2.7

1.4
1.2
0.1
0.6

2.9

0.7
2.3

1.1
1.5
-0.3
2.2

85.7
22.2

82.8
25.8

0.7

-1.6
2.4

1.2
1.5
-0.3
-0.1

S2
of which:

Initial budgetary position (IBP)
Long-term change in the primary balance (LTC)
 of which:
Pension
Care (HC and LTC)
Others

S1 (required adjustment)*

Debt,  % of GDP (2011)
Age-related expenditure, % of GDP (2011)
Notes:

The ‘no policy change’ scenario depicts the sustainability gap under the assumption that the budgetary position evolves according to 
the spring 2012 forecast until 2013. The ‘convergence programme’ (CP) scenario depicts the sustainability gap under the assumption 
that the budgetary plans in the programme are fully implemented. 

* The required adjustment of the primary balance until 2020 to reach a public debt of 60% of GDP by 2030.

Source : Commission, 2012 stability and convergence programmes

Figure I. Medium-term debt projection 

(% of GDP)

120

Gross debt as % of GDP - UK - Medium term debt projections

100

80

60

40

20

0

0
0
0
2

2
0
0
2

4
0
0
2

6
0
0
2

8
0
0
2

0
1
0
2

2
1
0
2

4
1
0
2

6
1
0
2

8
1
0
2

0
2
0
2

COM no-policy change scenario
COM + Shock ( -1p.p. in the short-term/long-term interest rate on maturing and new debt from 2014)
COM + Shock (+1p.p. in the short-term/long-term interest rate on maturing and new debt from 2014)
COM consolidation scenario (0.5% per year on SB) in order to achieve MTO
COM consolidation scenario (1% per year on SB) in order to achieve MTO
SP scenario

35

 
 
 
 
 
 
 
 
Table VI. Taxation indicators 

Total tax revenues (incl. actual compulsory social contributions, % of GDP)
Breakdown by economic function (% of GDP)1
     Consumption
              of which:
              - VAT
             - excise duties on tobacco and alcohol
             - energy
             - other (residual)
     Labour employed
     Labour non-employed
     Capital and business income
     Stocks of capital/wealth
     p.m.  Environmental taxes2
VAT efficiency3
     Actual VAT revenues as % of theoretical revenues at standard rate

2001

36.5

2005

36.0

2007

36.3

2008

37.9

2009

34.8

2010

35.6

11.6

11.1

6.6
1.4
2.2
1.4
14.2
0.2
6.2
4.3
2.8

6.7
1.3
2.0
1.3
14.2
0.2
6.1
4.4
2.5

10.8

6.5
1.1
1.8
1.3
14.3
0.2
6.4
4.6
2.5

10.8

6.4
1.2
1.8
1.3
14.5
0.2
6.6
5.8
2.4

10.3

5.7
1.3
1.9
1.4
14.3
0.2
5.5
4.4
2.6

11.2

6.6
1.3
1.9
1.5
14.1
0.2
5.8
4.3
2.6

47.9

47.7

47.8

46.2

46.7

46.3

Note: 
1 Tax revenues are broken down by economic function, i.e. according to whether taxes are raised on consumption, labour or capital. See European Commission (2012), Taxation trends in the 

European Union, for a more detailed explanation.

2 This category comprises taxes on energy, transport and pollution and resources included in taxes on consumption and capital.

3 The VAT efficiency is measured via the VAT revenue ratio. The VAT revenue ratio is defined as the ratio between the actual VAT revenue collected and the revenue that would theoretically be 

raised if VAT was applied at the standard rate to all final consumption. A low ratio can indicate a reduction of the tax base due to large exemptions or the application of reduced rates to a wide range 

of goods and services ('policy gap') or a failure to collect all tax due to e.g. fraud ('collection gap'). See European Commission (2011), Tax reforms in EU Member States, European Economy 5/2011, 

for a more detailed explanation.

Source: Commission

36

 
 
 
 
 
Table VII. Financial market indicators 

Total assets of the banking sector (% of GDP)
Share of assets of the five largest banks (% of total assets)
Foreign ownership of banking system (% of total assets)
Financial soundness indicators:
              - non-performing loans (% of total loans) 
              - capital adequacy ratio (%) 1) 
              - return on equity (%) 2)
Bank loans to the private sector (year-on-year % change)
Lending for house purchase (year-on-year % change)
Loan to deposit ratio
CB liquidity as % of liabilities
Banks' exposure to countries receiving official financial assistance  (% of GDP)4)
Private debt (% of GDP)
Gross external debt (% of GDP) 4)
            - Public
            - Private
Long term interest rates spread versus Bund (basis points)*
Credit default swap spreads for sovereign securities (5-year)*
Notes: 
1) The capital adequacy ratio is defined as total capital devided by risk weigthed assets.   
2) The capital adequacy ratio is defined as total capital divided by risk weighted assets.   
3) Covered countries are IE, EL, PT, RO, LV and HU.
4) Latest data 2011Q3.
* Measured in basis points.
Source :

2007

2008

2009

2010

2011

485.3
40.7
53.3

0.9
12.6
6.2
7.9
-4.8
123.3
…
7.9
…

11.4
122.6
84.3
…

484.7
36.5
50.9

1.6
12.9
-10.3
-14.9
-27.5
117.1
…
9.9
…

13.8
118.4
51.7
48.0

572.6
40.8
45.8

3.5
14.8
2.6
3.2
24.1
110.0
…
9.6
213.8

17.4
135.1
13.7
84.8

537.7
42.5
…

4.0
15.9
1.0
4.6
18.0
106.2
…
8.6
197.5

23.1
139.1
62.1
72.8

555.6
…
…

...
...
...
-1.6
3.9
103.9
…
7.6
…

24.3
139.6
43.8
72.4

Bank for International Settlements and Eurostat (exposure to macro-financially vulnerable countries), IMF (financial soundness indicators), 
Commission (long-term interest rates), World Bank (gross external debt), ECB (all other indicators).

37

 
 
 
 
 
 
Table VIII. Labour market and social indicators 

Labour market indicators
Employment rate 
(% of population aged 20-64)
Employment growth 
(% change from previous year)
Employment rate of women 
(% of female population aged 20-64)
Employment rate of men 
(% of male population aged 20-64)
Employment rate of older workers 
(% of population aged 55-64)
Part-time employment 
(% of total employment)
Part-time employment of women  
(% of women employment)
Part-time employment of men  
(% of men employment)
Fixed term employment 
(% of employees with a fixed term contract)
Unemployment rate1 (% of labour force)
Long-term unemployment2  (% of labour force)
Youth unemployment rate 
(% of youth labour force aged 15-24)

2006

2007

2008

2009

2010

2011

75.2

75.2

75.2

73.9

73.6

73.6

0.9

0.6

0.8

-1.5

0.1

0.5

68.6

68.4

68.8

68.2

67.9

67.9

82.0

82.2

81.8

79.6

79.3

79.4

57.3

57.4

58.0

57.5

57.1

56.7

25.8

25.7

25.9

26.7

27.6

27.6

43.2

42.9

42.5

43.4

44.3

44.2

10.8

11.0

11.6

12.1

13.0

13.1

5.8

5.4

1.2

5.9

5.3

1.3

5.4

5.6

1.4

5.7

7.6

1.9

6.1

7.8

2.5

6.2

8.0

2.7

14.0

14.3

15.0

19.1

19.6

21.1

Youth NEET3 rate (% of population aged 15-24)

8.5

11.9

12.1

13.3

13.7

:

:

:

-0.1

-1.1

1.0

-1.7

1.6

-0.7

Early leavers from education and training (% of 
pop. 18-24 with at most lower sec. educ. and not in 
further education or training)
Tertiary educational attainment (% of population 
30-34 having successfully completed tertiary 
education)
Labour productivity per person employed (annual 
% change )
Hours worked per person employed  (annual % 
change)
Labour productivity per hour worked (annual % 
change; constant prices)
Compensation per employee (annual % change; 
constant prices)
Nominal unit labour cost growth (annual % 
change)

11.3

16.6

17.0

15.7

14.9

36.9

37.9

38.6

40.1

41.2

1.7

-0.3

2.0

1.6

2.8

2.8

0.1

2.6

2.6

2.1

-1.8

-1.3

-0.6

-1.4

3.6

0.5

-2.8

-0.4

-2.5

1.0

5.7

4.0

1.9

-0.6

2.5

0.7

1.7

-1.2

Real unit labour cost growth (annual % change)

-0.4

-0.2

Notes:

1 According to ILO definition, age group 15-74.
2 Share of persons in the labour force who have been unemployed for at least 12 months.
3 NEET are persons that are neither in employment nor in any education or training.

Sources: 
Commission (EU Labour Force Survey and European National Accounts) 

38

 
 
 
 
 
 
 
 
 
Table VIII. Labour market and social indicators (continued) 

Expenditure on social protection 
benefits (% of GDP)
Sickness/Health care
Invalidity
Old age and survivors
Family/Children
Unemployment
Housing and Social exclusion n.e.c.
Total
of which:  Means tested benefits
Social inclusion indicators
Risk-of-poverty or exclusion1 (% of total 
population)
Risk-of-poverty or exclusion of children (% of 
people aged 0-17)
Risk-of-poverty or exclusion of elderly (% of 
people aged 65+)
At-risk-of-poverty rate2 (% of total population)
Value of relative poverty threshold (single 
household per year) - in PPS
Severe material deprivation3  (% of total 
population)

Share of people living in low work intensity 
households4 (% of people aged 0-59 not student)

In-work at-risk-of poverty rate (% of persons 
employed)

Notes:

2005

2006

2007

2008

2009

7.96
2.30
10.76
1.60
0.68
1.44
26.3
3.99
2006

8.02
2.42
10.52
1.51
0.63
1.45
26.0
3.94
2007

7.65
2.46
8.51
1.60
0.51
1.15
23.3
3.59
2008

7.88
2.75
10.82
1.68
0.59
1.23
26.3
3.70
2009

8.67
2.98
12.00
1.82
0.84
1.47
29.2
4.23
2010

23.7

22.6

23.2

22.0

23.1

30.1

27.6

29.6

27.4

29.7

27.5

19.0

27.9

18.6

28.5

18.7

23.1

17.3

22.3

17.1

10578

11267

11126

10250

10241

4.5

4.2

4.5

3.3

4.8

12.0

10.3

10.4

12.6

13.1

7.8

8.0

8.5

6.7

6.8

1 People at risk of poverty or social exclusion (AROPE): individuals who are at risk of poverty (AROP) and/or 
suffering from severe material deprivation (SMD) and/or living in households with zero or very low work intensity 
(LWI).

2 At-risk-of poverty rate: share of people with an equivalised disposable income below 60% of the national 
equivalised median income. 

3 Share of people who experience at least 4 out of 9 deprivations: people cannot afford to i) pay their rent or utility 
bills, ii) keep their home adequately warm, iii) face unexpected expenses, iv) eat meat, fish, or a protein equivalent 
every second day, v) enjoy a week of holiday away from home once a year, vi) have a car, vii) have a washing 
machine, viii) have a colour TV, or ix) have a telephone.

4 People living in households with very low work intensity: share of people aged 0-59 living in households where 
the adults work less than 20% of their total work-time potential during the previous 12 months.
Sources: 
For expenditure on social protection benefits ESSPROS; for social inclusion EU-SILC.

39

 
 
 
 
 
 
 
 
 
Table IX. Product market performance and policy indicators 

Performance indicators

Labour productivity1 total economy (annual growth in 
%)
Labour productivity1 in manufacturing (annual 
growth in %)
Labour productivity1 in electricity, gas, water (annual 
growth in %)
Labour productivity1 in the construction sector 
(annual growth in %)
Patent intensity in manufacturing2 (patents of the 
EPO divided by gross value added of the sector)

Policy indicators

Enforcing contracts3 (days)
Time to start a business3 (days)
R&D expenditure (% of GDP)
Tertiary educational attainment 
(% of 30-34 years old population)
Total public expenditure on education 
(% of GDP)

2002-
2006

1.8

4.6

6.2

0.2

2.5

2002-
2006
n.a.

n.a.
1.7

33.5

2007

2008

2009

2010

2011

2.8

2.5

-1.8

-2.8

1.9

-5.4

1.5

6.9

1.4

n.a.

-11.7

-6.6

n.a.

n.a.

n.a.

0.6

-0.2

-5.9

11.9

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

2007

2008

2009

2010

2011

404

13
1.8

38.5

404

13
1.8

39.7

399

13
1.9

41.5

399

13
1.8

43.0

399

13
n.a.

n.a.

n.a.

5.3

5.4

5.4

n.a.

n.a.

Product market regulation4, Overall
(Index; 0=not regulated; 6=most regulated)
Product market regulation4, Retail
(Index; 0=not regulated; 6=most regulated)
Product market regulation4, Network Industries5
(Index; 0=not regulated; 6=most regulated)

2005

2006

2008

2009

2010

2011

n.a.

n.a.

n.a.

n.a.

0.8

2.0

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

3.1

2.9

0.9*

n.a.

n.a.

n.a.

Notes:
1Labour productivity is defined as gross value added (in constant prices) divided by the number of persons employed. 
2 Patent data refer to applications to the European Patent Office (EPO). They are counted according to the year in which they were 
filed at the EPO. They are broken down according to the inventor's place of residence, using fractional counting if multiple 
inventors or IPC classes are provided to avoid double counting. 
3 The methodologies, including the assumptions, for this indicator are presented in detail on the website 
http://www.doingbusiness.org/methodology. 
4 The methodologies for the product market regulation indicators are presented in detail on the website 
http://www.oecd.org/document/1/0,3746,en_2649_34323_2367297_1_1_1_1,00.html. The latest available product market 
regulation indicators refer to 2003 and 2008, except for Network Industries.
5 Aggregate ETCR.
*figure for 2007.

Source :

Commission, World Bank - Doing Business (for enforcing contracts and time to start a business) and OECD (for the product 
market regulation indicators). 

40

 
 
 
 
 
 
Table X. Indicators on green growth 

Green Growth performance

Macroeconomic
Energy intensity 
Carbon intensity 
Resource intensity (reciprocal of resource productivity)
Waste intensity 
Energy balance of trade 
Energy weight in HICP
Difference between change energy price and inflation 
Environmental taxes over labour taxes
Environmental taxes over total taxes

Sectoral 

Industry energy intensity 
Share of energy-intensive industries in the economy
Electricity prices for medium-sized industrial users 
Public R&D for energy 
Public R&D for the environment
Recycling rate of municipal waste
Share of GHG emissions covered by ETS
Transport energy intensity
Transport carbon intensity
Change in the ratio of passenger transport and GDP

Security of energy supply
Energy import dependency
Diversification of oil import sources 
Diversification of energy mix
Share of renewable energy in energy mix

2001-
2005

0.13
0.38
0.43
n.a.
0.2%
6
3.44
19.2%
7.5%

0.12

10.2

0.06
n.a.
n.a.
26.6%
n.a.
0.46
1.10
-1.3%

-2.1%
n.a.
0.30
1.3%

2006

2007

2008

2009

2010

0.12
0.34
0.39
0.18
-0.4%
7
22.5
16.8%
6.5%

0.11
n.a.
0.08
0.00%
0.01%
39.5%
39.0%
0.47
1.08
-1.4%

21.2%
0.42
0.29
1.8%

0.12
0.32
0.38
0.17
-0.4%
8
4.9
17.2%
6.8%

0.11
n.a.
0.10
0.00%
0.01%
42.9%
40.5%
0.48
1.09
-1.7%

20.0%
0.45
0.30
2.1%

0.11
0.32
0.36
0.17
-0.7%
7
14.9
17.0%
6.4%

0.12
n.a.
0.09
0.00%
0.02%
46.7%
42.7%
0.47
1.05
-1.1%

26.0%
0.42
0.31
2.5%

0.11
0.31
0.34
n.a.
-0.4%
8
4.8
18.5%
7.4%

0.13
n.a.
0.11
0.01%
0.02%
49.8%
41.0%
0.45
1.01
n.a.

26.6%
0.44
0.30
3.0%

0.12
n.a.
n.a.
n.a.
-0.5%
9
-6.1
n.a.
n.a.

n.a.

n.a.
0.09
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.

n.a.

n.a.
n.a.
n.a.
n.a.

kgoe / €
kg / €
kg / €
kg / €
% GDP
%
%
ratio
ratio

kgoe / € 
% GDP
€ / kWh
% GDP
% GDP
ratio
%
kgoe / €
kg / €
%

%
HHI
HHI
%

Country-specific notes: 
The year 2011 is not included in the table due to lack of data.
General explanation of the table items:
Source: Eurostat unless indicated otherwise; ECFIN explanations given below
All macro intensity indicators are expressed as a ratio of a physical quantity to GDP (in 2000 prices)
          Energy intensity: gross inland energy consumption (in kgoe) divided by GDP (in EUR)
          Carbon intensity: Greenhouse gas emissions (in kg CO2 equivalents) divided by GDP (in EUR)
          Resource intensity: Domestic Material Consumption (in kg) divided by GDP (in EUR)
          Waste intensity: waste (in kg) divided by GDP (in EUR)
Energy balance of trade: the balance of energy exports and imports, expressed as % of GDP  
Energy weight in HICP: the share of the "energy" items in the consumption basket used in the construction of the HICP
Difference between energy price change and inflation: energy component of HICP, and total HICP inflation (annual %-change)
Environmental taxes over labour or total taxes: from DG TAXUD's database "Taxation trends in the European Union"
Industry energy intensity: final energy consumption of industry (in kgoe) divided by gross value added of industry (in EUR) 
Share of energy-intensive industries in the economy: share of gross value added of the energy-intensive industries in GDP
Recycling rate of municipal waste: ratio of municipal waste recycled over total municipal waste
Public R&D for energy or for the environment: government spending on R&D (GBAORD) for these categories as % of GDP
Share of GHG emissions covered by ETS: based on greenhouse gas emissions as reported by Member States to EEA (excl LULUCF)
Transport energy intensity: final energy consumption of transport (in kgoe) divided by gross value added of industry (in EUR) 
Transport carbon intensity:  greenhouse gas emissions in transport divided by gross value added of the transport sector
Passenger transport growth : measured in %-change in passenger kilometres
Energy import dependency: net energy imports divided by gross inland energy consumption incl. of international bunkers
Diversification of oil import sources: Herfindahl index (HHI), calculated as the sum of the squared market shares of countries of origin 

Diversification of the energy mix: Herfindahl Index over natural gas, total petrol products, nuclear heat, renewable energies and solid fuels

Share of renewable energy in energy mix: percentage-share in  gross inland energy consumption, expressed in tonne oil equivalents

41