COMMISSION STAFF WORKING DOCUMENT Assessment of the 2013 national reform programme and convergence programme for UNITED KINGDOM Accompanying the document Recommendation for a COUNCIL RECOMMENDATION on United Kingdom’s 2013 national reform programme and delivering a Council Opinion on United Kingdom’s convergence programme for 2012-2017
Date: 2013-05-29
Institutions: European Commission
Subjects: United Kingdom, administrative reform, banking system, competitiveness, economic infrastructure, education policy, labour market, tax reform

EUROPEAN 
COMMISSION 

Brussels, 29.5.2013  
SWD(2013) 378 final 

COMMISSION STAFF WORKING DOCUMENT 

Assessment of the 2013 national reform programme and convergence programme for 
UNITED KINGDOM 

Accompanying the document 

Recommendation for a COUNCIL RECOMMENDATION 

on United Kingdom’s 2013 national reform programme and delivering a Council 
Opinion on United Kingdom’s convergence programme for 2012-2017 

{COM(2013) 378 final}

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CONTENTS 

Executive summary .................................................................................................................... 3 

1. 

2. 

2.1. 

2.2. 

3. 

3.1. 

3.2. 

3.3. 

3.4. 

3.5. 

4. 

5. 

Introduction .................................................................................................................. 5 

Economic developments and challenges...................................................................... 8 

Recent economic developments and outlook............................................................... 8 

Challenges .................................................................................................................... 9 

Assessment of policy agenda ..................................................................................... 12 

Fiscal policy and taxation........................................................................................... 12 

Financial sector .......................................................................................................... 18 

Labour market, education and social policies ............................................................ 20 

Structural measures promoting growth and competitiveness..................................... 24 

Modernisation of public administration ..................................................................... 30 

Overview table ........................................................................................................... 32 

Annex ......................................................................................................................... 37 

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EXECUTIVE SUMMARY 

Economic Outlook 

The UK has experienced a subdued and stuttering recovery from the financial crisis. In 
2012  as  a  whole  the  economy  grew  at  a  meagre  0.3%,  after  recovering  from  a  double  dip 
recession in the first half of the year. The Commission's spring 2013  forecast predicts GDP 
growth  of  0.6%  in  2013  and  1.7%  in  2014.  Unemployment,  which  has  been  relatively  low 
given the weakness of GDP, is projected to remain relatively stable, at around 8.0% in 2013. 
Inflation, which peaked at 5.2% in September 2011, is set to average at 2.8% in 2013, before 
falling back through 2014 to 2.5%. 

Progress  in  reducing  the  fiscal  deficit  stalled  in  2012-13  in  a  context  of  weak  GDP 
growth,  although  the  UK  government  has  stuck  to  its  fiscal  consolidation  strategy. 
According to the Commission's spring 2013 forecast, the headline budget deficit is expected 
to  be  6.9%  of  GDP  in  2013-14  and  6.1%  in  2014-15.  The  average  annual  structural  effort 
(excluding one-off and temporary measures) made by the UK since 2010-11 is 1.1% of GDP 
a  year,  which  is  lower  than  the  1.¾%  recommended  by  the  EU  and  will  be  insufficient  to 
correct the excessive deficit by the 2014-15 deadline. Meanwhile, government debt has been 
increasing  steadily  for  more  than  a  decade,  with  the  Commission  predicting  an  increase  to 
98.7% of GDP by 2014-15 (up from 90.7% in 2012-13). 

Key Issues 

In  the  last  year,  the  UK  government  has  made  significant  progress  in  designing  and 
legislating  for  an  extensive  reform  agenda  in  financial  regulation,  spatial  planning, 
education  and  welfare.  The  reforms  are  relevant  and  ambitious  in  their  stated  aims,  but  in 
most cases, it is not yet fully clear how effective they will be. Indicators on housing, access to 
finance and infrastructure have been either stagnant or deteriorating, linked in large part to the 
challenging economic environment.  

In  the  short  to  medium  term,  the  UK  faces  considerable  challenges  and  tensions  in 
reconciling  needs  for  deleveraging,  maintaining  financial  stability  and  avoiding 
compromising  investment  and  growth.  Fiscal  consolidation  remains  a  pressing  challenge 
for  the  UK,  and  needs  to  be  balanced  with  fairness  and  growth-promoting  investment.  To 
provide the conditions for sustainable, investment- and export-led growth, the UK also needs 
to  address  the  economy’s  structural  weaknesses,  including  a  lack  of  housing  supply,  skills 
gaps, and the need to renew and upgrade transport and energy infrastructure. These and other 
shortcomings also contribute to the UK's consistently weak  net export  position. The current 
account deficit grew to 3.7% of GDP in 2012 and the UK has a large goods trade deficit (-
6.9% of GDP). 

•  Public  finances:  While  the  UK  government  has  continued  to  implement  its  fiscal 
consolidation strategy, the deficit is now expected to fall more slowly than previously 
envisaged, due to weaker medium-term growth prospects, while government debt is on 
the rise. The UK deficit for 2013-14 is forecast to be 6.9% of GDP, one of the highest 
in the EU. Total public investment remains low, following sharp cuts in 2011, and the 
UK  has  a  challenge  to  correct  its  excessive  deficit  while  achieving  differentiated, 
growth-friendly fiscal tightening and structural reforms. In this context, the potential 
revenue contribution from tax reforms, for example extending the standard VAT rate, 
remains relatively under-exploited. 

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•  Private debt and housing: Household and corporate debt is relatively high (206% of 
GDP at the end of 2011, above the euro area average of 164%) and has been identified 
by  the  Commission  as  a  macroeconomic  imbalance.  At  the  same  time  there  is  not 
enough housing to meet the demands of a growing population and to help bring down 
house prices relative to incomes, and the level of residential construction remains low.  

•  Unemployment  and  skills:  Unemployment  stood  at  7.8%  at  the  start  of  2013,  but 
youth unemployment is considerably higher at 20.7%. There are too many low-skilled 
workers,  for  whom  demand  is  falling,  and  a  shortage  of  workers  with  high-quality 
vocational and technical skills. This is a particular problem amongst the young, where 
the  numbers  of  early  school  leavers  and  those  not  in  employment,  education  or 
training (NEET) are high.  

• 

 Welfare reform and childcare:  At 17.3%, the proportion of UK children living in 
workless households is the second-highest in the EU, which has a significant impact 
on  child  poverty.  A  lack  of  access  to  suitable,  affordable  childcare  still  discourages 
many  parents  from  working,  or  from  increasing  the  number  of  hours  they  work.    In 
2011, 22.7% of the population was at risk of poverty, slightly below the EU average. 
The UK Government aims to increase employment through welfare reform measures, 
such  as  Universal  Credit,  which  will  provide  clearer  work-incentives,  but  successful 
implementation and monitoring will be essential.   

•  Access  to  finance  and  the  banking  sector:  Net  lending  to  the  corporate  sector 
remained negative in 2012 and corporate investment is very low (gross fixed capital 
formation  fell  to  14.2%  of  GDP  in  2012).  While  larger  firms  with  strong  balance 
sheets  are  able  to  borrow  at  a  historically  low  cost,  many  other  firms,  particularly 
SMEs,  are  having  difficulty  accessing  credit,  and  there  are  signs  of  less-than-viable 
companies  being  kept  in  business  through  low  interest  rates  and  bank  forbearance. 
Access to non-bank lending remains largely restricted to bigger firms, and competition 
in the banking industry is still limited. 

•  Energy and transport infrastructure: The UK needs substantial investment in new 
electricity generation capacity by 2020, and has a low share of energy from renewable 
sources (only  3.8% in 2011). Shortcomings in transport networks are a problem for 
the whole economy, especially goods producers, distributors and exporters, and there 
is  a  significant  gap  between  investment  needs  and  committed  funding.  The  costs  of 
transport infrastructure construction and maintenance also remain high in the UK. 

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1.  INTRODUCTION 

In  May  2012,  the  Commission  proposed  a  set  of  country-specific  recommendations  (CSRs) 
for  economic  and  structural  reform  policies  for  the  United  Kingdom.  On  the  basis  of  these 
recommendations,  the  Council  of  the  European  Union  adopted  six  CSRs  in  the  form  of  a 
Council  Recommendation  in  July  2012.  These  CSRs  concerned  growth-friendly  fiscal 
consolidation,  housing,  youth  employment,  education  and  training,  welfare  reform  and 
childcare, access to finance and infrastructure. This Staff Working Document (SWD) assesses 
the state of implementation of these recommendations in the UK. 

The  SWD  assesses  policy  measures  in  light  of  the  findings  of  the  Commission’s  Annual 
Growth Survey 2013 (AGS)1 and the second annual Alert Mechanism Report (AMR)2, which 
were  published  in  November  2012.  The  AGS  sets  out  the  Commission’s  proposals  for 
building the necessary common understanding about the priorities for action at national and 
EU  level  in  2013.  It  identifies  five  priorities  to  guide  Member  States  to  renewed  growth: 
pursuing differentiated, growth-friendly fiscal consolidation; restoring normal lending to the 
economy;  promoting  growth  and  competitiveness  for  today  and  tomorrow;  tackling 
unemployment  and  the  social  consequences  of  the  crisis;  and  modernising  public 
administration.  The  AMR  serves  as  an  initial  screening  device  to  determine  whether 
macroeconomic  imbalances  exist  or  risk  emerging  in  Member  States.  The  AMR  found 
positive signs that macroeconomic imbalances in Europe are being corrected. To ensure that a 
complete  and  durable  rebalancing  is  achieved,  the  UK  and  12  other  Member  States  were 
selected for a review of developments in the accumulation and unwinding of imbalances3. 

Against  the  background  of  the  2012  Council  Recommendation,  the  AGS  and  the  AMR,  the 
UK  presented  updates  of  her  national  reform  programme  (NRP)  and  of  her  convergence 
programme  on  30  April  2013.  These  programmes  provide  detailed  information  on  progress 
made since July 2012 and on the future plans of the government. The information contained 
in  these  programmes  provides  the  basis  for  the  assessment  made  in  this  Staff  Working 
Document. 

The  NRP  and  the  convergence  programme  outline  in  an  integrated  manner  the  UK’s  fiscal 
consolidation  efforts,  key  structural  reforms  and  reforms  that  underpin  macroeconomic 
stabilisation. The NRP does not include 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 indicators of performance in areas connected to the Europe 2020 headline 
targets  and  records  their  current  level4.  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  convergence  programme  is  drawn  exclusively  from 
previous announcements and publications, mainly the Autumn Statement 2012, Budget 2013, 
and  the  Office  for  Budget  Responsibility’s  (OBR)  Economic  and  fiscal  outlook,  as  well  as 
other  publicly  available  documents  and  data.  In  parliamentary  debates  on  the  convergence 

1 COM (2012) 750 final 
2 COM (2012) 751 final 
3 SWD (2013) 125 final. 13 in-depth reviews were published on 10 April 2013. While selected for an in-depth 
review  in  the  AMR,  Cyprus  was  ultimately  not  reviewed  under  the  Macroeconomic  Imbalance  Procedure  in 
view of the advanced preparations for a financial assistance programme 
4 As regards social inclusion, last year’s NRP referred to numerical targets of the Child Poverty Strategy 2011. 
There is no such reference in this year’s NRP 

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programme,  the  government  underlined  that  it  contained  no  new  information  and  that  no 
additional  costs  were  incurred.  The  government  defended  its  decision  not  to  fully  align  the 
convergence  programme  with  guidance  provided  by  the  Commission,  noting  timetable 
constraints related to the UK financial year and Budget. 

Stakeholder engagement events were held in Scotland and Wales, attended by representatives 
of  the  UK  government,  the  European  Commission,  devolved  administrations  and  other 
stakeholders.  However,  there  is  no  evidence  of  significant  stakeholder  input  in  the 
development of the NRP itself. Since the NRP draws on publicly available information, it is 
not subject to formal consultation. The NRP is illustrated with examples of how stakeholders 
are  involved  in  the  delivery  of  policies.  The  UK  NRP  includes  information  on  the  policy 
programmes  of  the  devolved  administrations  in  addition  to  UK-level  information.  As  in 
previous years, the Scottish Government also submitted a separate NRP to set out its policy 
strategy in more detail.  

The House of Commons debated the country-specific recommendations addressed to the UK 
on 25 June 2012. The convergence programme was approved by the UK Parliament following 
debates  in  the  House  of  Commons  and  the  House  of  Lords.  The  2013  NRP  has  not  been 
debated  by  Parliament.  The  House  of  Lords  EU  Committee  has  asked  that  the  NRP  be 
covered in the annual debate on the convergence programme, but the government has rejected 
this on the basis that there is no legal obligation and no precedent. The House of Commons 
European Scrutiny Committee and the House of Lords debated the AGS. 

Overall assessment 

The  analysis  in  this  SWD  leads  to  the  conclusion  that  the  UK  has  made  some  progress  on 
measures taken to address the CSRs of the Council Recommendation. To date, these reforms 
have only been partially implemented and progress in improving relevant outcomes has been 
limited. 

While the UK government has stuck to its fiscal consolidation strategy, progress in reducing 
the structural deficit has stalled in 2012-13 in a context of weak GDP growth. The UK deficit 
for  2013-14  is  forecast  to  be  6.9 %,  one  of  the  highest  in  the  EU.  Fiscal  consolidation 
therefore remains a pressing challenge for the UK, and needs to be balanced with fairness and 
growth-promoting investment. 

The challenges identified in July 2012 and reflected in the AGS remain valid. To provide the 
conditions  for  sustainable,  investment-led  growth,  the  UK  needs  to  both  maintain 
macroeconomic  stability  and  succeed  in  reforms  to  address  the  UK  economy’s  structural 
weaknesses.  

The  policy  plans  submitted  by  the  United  Kingdom  address  almost  all  the  challenges 
identified  in  last  year's  Staff  Working  Document,  and  broad  coherence  between  the  two 
programmes  has  been  ensured.  The  national  reform  programme  confirms  the  United 
Kingdom's  commitment  to  address  shortcomings  in the areas of  the financial  sector and  the 
labour  market.  The  NRP  sets  out  the  significant  progress  the  government  has  made  in 
designing  and  legislating  for  an  extensive  reform  agenda  across  financial  regulation,  spatial 
planning, education and welfare. The reforms are relevant and ambitious in their stated aims, 
but  in  most  cases  it  is  not  yet  clear  how  far  they  are  likely  to  be  effective  in  addressing 
difficult challenges. Successful implementation will be key and many of the impacts will be 
gradual.  To  date,  indicators  related  to  the  CSRs  on  housing,  access  to  finance  and 
infrastructure show stagnant or deteriorating investment. These trends are largely linked to the 
challenging economic environment, but in the cases of capital investment and welfare reform, 
other  government  spending  cuts  run  counter  to  the  stated  aim  of  headline  policy  initiatives. 

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Necessary  reforms  to  secure  financial  stability  are  also  constraining  access  to  credit. 
Employment has been surprisingly resilient, but skills gaps remain. Working age poverty rates 
could increase due to real terms benefit cuts.  

The convergence programme demonstrates the United Kingdom's commitment to improving 
the budgetary position and ensuring the long-run sustainability of public finances. 

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2.  ECONOMIC DEVELOPMENTS AND CHALLENGES 

2.1. 

Recent economic developments and outlook 

Recent economic developments  

The UK has experienced a subdued and stuttering recovery from the financial crisis. As of the 
first quarter of 2013, the level of real UK GDP was nearly 3 % below the pre-crisis peak five 
years  earlier  in  the  first  quarter  of  2008  (real  per  capita  GDP  is  approximately  6 %  lower). 
Over  the  course  of  2012,  the  picture  for  growth  in  the  UK  was  bleak,  and  the  economy 
entered  recession  in  the  first  half  of  the  year.  Growth  was  markedly  volatile,  with  an  extra 
bank  holiday  in  the  second  quarter  of  the  year  being  offset  by  the  boost  from  the  London 
Olympics contributing to growth of +0.9 % in the third quarter. This was followed by negative 
growth of -0.3 % in the final quarter of 2012 but the UK avoided a ‘triple dip’ recession by 
posting  growth  of  0.3 %  in  the  first  quarter  of  2013.  Overall,  the  UK  economy  is  suffering 
from  a  lack  of  investment  and  extremely  weak exports  coupled with quite resilient imports. 
The  UK’s  net  investment  income  also  fell  sharply  in  2012.  Growth  in  2012  came  entirely 
from  domestic  demand,  namely,  household  consumption,  with  some  help  from  government 
expenditure.  Investment  growth  showed  positive  signs  in  the  first  half  of  the  year  but  this 
petered out in the second half, when annual growth was positive, but very weak. 

The  government’s  on-going  fiscal  consolidation  plan  continues  to  attract  much  focus  as 
despite an adherence to departmental expenditure limits (DELs), borrowing has not fallen by 
as much as expected, linked in part to weaker growth. Consequently, the fiscal deficit remains 
high.  Tax  receipts  over  2012  were  less  buoyant  than  anticipated,  and  there  was  higher 
spending  from  the  part  of  government  spending  that  allows  the  automatic  stabilisers  to 
operate, Annually Managed Expenditure (AME). 

Inflation has generally been on a downward trend since September 2011, when it peaked at 
5.2 %, but in recent months, the trend has been reversed. Inflation was 2.8 % in both February 
and March 2013, up from 2.7 % in each of the previous four months and 2.2 % in September 
2012. However, the increase in October was due to a rise in university tuition fees in England, 
and utility prices kept inflation from falling in December. Increases in utility prices were also 
the  main  source  of  the  further  rise  in  inflation  in  early  2013.  Higher  inflation  curtails 
household consumption and increases inflation-linked government expenditure items, thereby 
leading to rises in AME. Inflation has now been above the Bank of England’s target of 2 % 
continuously  for  three  years,  implying  negative  real  interest  rates  on  10-year  government 
bonds. 

Unemployment  has  been  falling  in  each  quarter  since  the  end  of  2011,  when  it  peaked  at 
8.3 %, to reach 7.8 % in early 20135. Overall, the rate of unemployment for 2012 was 7.9 %. 
The strength of the labour market has been surprising, given the weakness in GDP. It can be 
explained  partly  by  a  strong  rise  in  self-employment  and  part-time  work,  and  also  under-
employment.  Labour  hoarding  is  less  likely  to  be  the  cause  the  longer  this  phenomenon 
continues although the lower price of labour relative to the price of capital may play a role. 
Nominal  wage  growth  was  weak  throughout  2012,  with  stubbornly  high  inflation,  so  real 
wage growth remained negative. 

Productivity growth has been very weak in the UK since the start of the financial crisis. As 
well as weak investment, there is evidence of a lack of the economic restructuring needed to 

5 November 2012 – January 2013, Eurostat definition. On the national definition unemployment was 7.9 % in 
December 2012 – February 2013 

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foster  competition  and  innovation  in  the  economy,  and  it  is  important  that  this  does  not 
become entrenched. 

Economic outlook 

According to the 2013 Commission spring forecast, UK GDP growth is forecast at 0.6 % in 
2013 and 1.7 % in 2014. Private consumption and investment should improve gradually over 
the year, into 2014, as uncertainty fades and credit constraints ease further. Inflation is set to 
remain high through  2013, averaging  2.8 %,  before falling back through  2014 to 2.5 %. The 
fall in inflation is likely to occur later and to be smaller than previously forecast, due mainly 
to  higher  utility  prices.  Private  consumption  is  forecast  to  grow  by  0.8 %  and  1.3 %,  and 
investment is expected to rise by 1.8 % and 4.5 % in 2013 and 2014 respectively. Net exports 
are not expected to contribute positively to growth in 2013, as growth in the UK's main export 
markets remains weak. Net exports are expected to contribute 0.4 pp. to GDP growth in 2014, 
with UK exports expanding at a modest rate as economic activity in the UK’s main trading 
partners picks up and the value of sterling remains low. Unemployment may have bottomed 
out and it is expected to remain relatively stable over the forecast horizon, averaging 8.0 % in 
2013 and 7.9 % in 2014. 

The  Commission’s  estimates  for  overall  GDP  growth  are  similar  to  those  of  the  Office  for 
Budget Responsibility  (OBR) outlined in the Convergence Programme  (0.6 % and 1.8 % for 
2013 and 2014 respectively). The Commission’s forecast of the expected drivers of growth is 
similar  to  that  of  the  OBR,  although  in  2013  the  Commission  forecasts  a  slightly  larger 
contribution from private consumption, and a smaller contribution from investment. 

The UK NRP does not directly quantify the likely impact of structural reforms on economic 
growth.  The  macroeconomic  scenario  in  the  NRP  is  based  on  the  forecast  produced  by  the 
independent  OBR,  which  does  incorporate  the  OBR’s  assessment  of  the  likely  impact  of 
government  policies  on  growth6.  The  OBR  has  tended  to  note  the  upside  potential  of  the 
government’s  structural  reform  agenda  on  growth,  but  has  been  cautious  about  changing  its 
growth forecast significantly until the impact of reforms is seen in the data. The government 
has  an  extensive  reform  agenda  across  financial  regulation,  spatial  planning,  education  and 
welfare, which is relevant and ambitious in its stated aims, but in most cases, it is not yet fully 
clear  how  effective  the  reforms  will  be.  As  headline  indicators  related  to  the  CSRs  on 
housing, access to finance and infrastructure are either stagnant or deteriorating, the approach 
that the OBR has taken is appropriate. 

2.2. 

Challenges 

The UK faces tensions between a need for deleveraging, maintaining financial stability, 
and the need to avoid compromising investment and growth. In the short to medium term, 
fiscal consolidation needs to be balanced with fairness and growth-promoting investment. To 
provide the conditions for sustainable, investment- and export-led growth, the UK also needs 
to  address  the  economy’s  structural  weaknesses,  including  a  lack  of  housing  supply,  a 
persistently weak net export position, skills gaps, and a need to renew and upgrade transport 
and energy infrastructure. 

Fiscal  consolidation  remains  a  priority  for  the  UK.  Government  debt  as  a  percentage  of 
GDP rose from 56.2 % in 2008-097 to 90.7 % in 2012-138. The government is implementing a 
fiscal consolidation plan that has reduced the deficit from 11.5 % in 2009-10 to 5.6 % in 2012-

6 See for example Office for Budget Responsibility (2013), Economic and Fiscal Outlook, March 2013 
7 20xx-xx refers to the financial year which starts on 1 April and ends on 31 March 
8 Eurostat-validated EDP data 

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13,  although  the  2012-13  deficit  would  have  been  approximately  7.6 %  without  one-off 
revenues. The one-offs are a transfer of the Royal Mail pension fund worth 1.8pp. of GDP, 
and the sale of the 4G mobile phone licence spectrum. While the UK government has stuck to 
its fiscal consolidation strategy, the structural deficit only improved by 0.3 pp. between 2011-
12 and 2012-13. The deficit is now expected to fall more slowly than previously envisaged, 
due to weaker medium-term growth prospects. The deficit is forecast at 6.9 % in 2013-14 and 
6.1 % in 2014-15. Total public investment remains low, following sharp cuts in 2011, and the 
UK has a challenge to achieve differentiated, growth-friendly fiscal tightening.  

Corporate  debt  remains  quite  high,  but  investment  is  low,  and  many  firms  are  having 
difficulty accessing adequate funding for investment. Total private debt stood at 206 % of 
GDP at the end of 2011, above the euro area average of 164 %. The stock of UK corporate 
debt  is  rather  high  yet  some  firms  are  having  difficulty  accessing  credit  and  business 
investment  remains  at  very  low  levels.  An  unprecedented  drop  in  business  investment  after 
2007 caused gross fixed capital formation to fall to 14.2 % of GDP in 2012. This is the third 
lowest level in the EU-27. More specifically, the UK has a low level of business expenditure 
on R&D, which fell from 1.17 % of GDP in 2001 to 1.09 % in 20119. Business investment has 
started  to  pick  up  slightly,  with  an  annual  increase  of  4.9 %  in  2012,  but  remains  low.  Net 
lending  to  the  corporate  sector  remained  negative  in  2012.  While  larger  firms  with  strong 
balance sheets are able to borrow at a historically low cost, and there are signs of less-than-
viable  companies  being  kept  in  business  through  low  interest  rates  and  bank  forbearance, 
many  other  firms,  particularly  SMEs,  are  having  difficulty  accessing  credit.  Access  to  non-
bank  lending  remains  largely  restricted  to  bigger  firms,  and  competition  in  the  banking 
industry is still limited. 

There  is  a  continued  challenge  to  deliver  the  housing  that  people  need,  and  to  ensure 
that  the  housing  market  and  household  debt  are  not  a  source  of  macroeconomic 
instability.  As  set  out  in  Box  1,  the  high  level  of  household  debt  constitutes  an  internal 
imbalance in the UK economy. Household deleveraging continued in 2012, but it may not be 
sustained once the economy improves and housing transactions return to more normal levels, 
given  that  house  prices  remain  high  in  the  context  of  a  housing  shortage  and  low  levels  of 
residential construction. 

The  UK’s  persistently  weak  net  export  position  reflects  a 
lack  of  external 
competitiveness.  The  UK’s  current  account  position  saw  a  gradual  and  structural 
deterioration  from  the  late  1990s  until  the  onset  of  the  financial  crisis.  A  large  goods  trade 
deficit persisted despite the depreciation of sterling in 2008, and the net trade outturn for 2012 
was surprisingly poor, driven by weaker net exports and a fall in net investment income. As 
set out in Box 1, while some rebalancing of the economy towards external demand is forecast 
over the next few years, to make sustained improvements to its goods trade balance, the UK 
needs  to  do  more  to  successfully  confront  structural  challenges  in  the  areas  of  transport 
infrastructure, skills and access to finance. 

The  UK  has  significant  unemployment  and  underemployment,  especially  among  the 
young. Unemployment stood at 7.8 % at the start of 201310 and is expected to remain broadly 
flat through 2012 and 2013. Youth unemployment, at 20.7 %11, and the NEETS rate, 14.0 %12, 
are  much  higher.  Growth  in  private  sector  employment  was  surprisingly  strong  in  the  last 

9 Eurostat (2013). Provisional figure 
10 November 2012 – January 2013, Eurostat definition  
11 Eurostat data, 2012 Q4 
12 Eurostat data, 2012 Q4 

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year, given the weakness of GDP growth. Productivity and real wages have remained weak. 
Many people, especially young workers, are in precarious part-time or temporary jobs. Long-
term unemployment was 2.8 % of the working-age population in Q4 201213. 

The  UK  also  faces  on-going  challenges  to  improve  access  to  high  quality,  affordable 
childcare,  to  increase  parental  employment  and  to  combat  poverty.  At  17.3 %14  the 
proportion of UK children living in workless households is the second highest in the EU. A 
lack of access to suitable, affordable childcare still discourages many parents from working, 
or  from  increasing  the  number  of  hours  they  work.  It  is  likely  that  poverty  among  those  of 
working age will increase in coming years, due to cuts in the real value of benefits. 

The UK has too many low-skilled workers, and a shortage of workers with high-quality 
vocational and technical skills. Despite some progress in recent years, a significant minority 
of  young  people  continue  to  leave  secondary  education  without  the  skills  and  qualifications 
they need to compete successfully in the labour market. Early school leaving remains slightly 
above the EU average. Vocational education and training policy has been too focused on basic 
skills and relatively low-level qualifications, while the economy increasingly demands more 
advanced qualifications. 

The  UK  needs  to  renew  and  upgrade  its  energy  and  transport  infrastructure.  The  UK 
needs  substantial  investment  in  new  electricity  generation  capacity  by  2020,  and  has  a  low 
share  of  energy  from  renewable  sources.  Regulatory  certainty  will  be  required  to  facilitate 
adequate  and  timely  investment.  Shortcomings  in  the  capacity  and  quality  of  the  UK’s 
transport networks are a structural problem for the economy, especially for goods producers, 
distributors  and  exporters.  There  is  currently  a  significant  gap  between  committed  funding, 
public  and  private,  and  the  pipeline  of  transport  investment  needs.  Unit  costs  in  transport 
construction and maintenance also remain high in the UK. The UK also has a challenge ahead 
if it is to deliver additional hub airport capacity. 

Box 1. Summary of the 2013 in-depth review (IDR) under the Macroeconomic 
Imbalances Procedure (MIP) 

The  second  in-depth  review  of  the  UK  economy  concluded  that  the  UK  is  experiencing 
macroeconomic  imbalances,  which  deserve  monitoring  and  policy  action.  In  particular, 
macroeconomic  developments  in  the  areas  of  household  debt,  linked  to  the  high  levels  of 
mortgage  debt  and  the  characteristics  of  the  housing  market,  as  well  as  unfavourable 
developments  in  external  competitiveness,  especially  as  regards  goods  exports  and  weak 
productivity growth, continue to deserve attention. 

The main findings of the review were the following: 

• The UK is confronted with the twin challenge of sustaining pre-crisis dynamism in service 
exports and boosting the underlying drivers of productivity in the industrial sectors to regain 
the  external  competitiveness  that  was  partly  eroded  in  the  pre-crisis  years.  The  UK 
experienced a large drop in export market shares from 2007 to 2010 and the trade balance has 
been negative since 1997, mainly as a result of a chronic deficit in goods trade. Nevertheless, 
export  volumes  have  been  a  modest  net  driver  of  growth  in  the  UK  economy  in  the  crisis 
period.  External  performance  in  2012  was  worse  than  anticipated,  driven  by  weaker  net 
exports  and  a  fall  in  net  investment  income.  The  current  account  is,  however,  expected  to 
move towards a more balanced position in the medium term. 

13 Eurostat definition, 2012 Q4 
14 Children aged 0-17 years living in jobless households, Eurostat definition 

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• Many of the drivers of the UK’s persistent trade deficit relate to structural weaknesses that 
have a disproportionate impact on capital-intensive sectors and goods producers. As regards 
transport  infrastructure,  there  is  evidence  of  shortages  in  airport  and  seaport  capacity.  Road 
congestion  is  a  problem,  and  there  are  identified  investment  needs  in  the  rail  network.  As 
regards  technical  skills,  evidence  suggests  that  gaps  and  recruitment  difficulties  persist  in 
manufacturing sectors. Finally, access to finance is crucial for UK firms seeking to enter or 
expand  in  exporting  sectors.  Difficulties  in  accessing  finance  are  a  cross-cutting  problem  at 
present, particularly for smaller and younger companies.   

•  The  UK  faces  tensions  between  the  needs  for deleveraging,  maintaining  financial  stability 
and  the  need  to  avoid  compromising  investment  and  growth.  Household  debt  is  currently 
falling, largely due to low levels of new mortgage lending, but it is likely to remain at a high 
level.  Low  interest  rates  and  forbearance  mask  risks  associated  with  a  minority  of  over-
indebted households. The stock of UK corporate debt is quite high and there are signs of less-
than-viable companies being kept in business through low interest rates and bank forbearance, 
while other firms are having difficulty accessing adequate funding for investment. 

• A shortage of housing in the UK increases the risk of persistent imbalances related to high 
house prices and household debt. There have been attempts to liberalise the spatial planning 
laws  but  the  planning  system  continues  to  be  an  important  constraint  on  the  supply  of 
housing,  including  through  tight  restrictions  on  development  in  many  parts  of  the  country. 
The  UK  property  tax  system  combines  a  regressive  recurring  tax  (Council  Tax)  with  a 
progressive  transaction  tax  (Stamp  Duty  Land  Tax).  Council  Tax  is  based  on  outdated 
valuations  and  undeveloped  land  with  planning  permission  is  not  currently  subject  to 
recurrent  taxes.  This  system  may  not  provide  adequate  incentives  to  release  land  and 
properties  onto  the  market  in  a  timely  way.  Most  tenants  do  still  not  see  long-term  private 
renting as an attractive option, and rental contracts do not typically offer much security. The 
preference for home ownership increases the pressure on households to take on high levels of 
mortgage debt. 

3.  ASSESSMENT OF POLICY AGENDA  

3.1. 

Fiscal policy and taxation  

Budgetary developments and debt dynamics 

The  UK  is  continuing  to  implement  its  fiscal  consolidation  programme,  which  is 
designed to have the cyclically-adjusted current balance in balance by the end of a five-
year rolling period, currently ending in 2017-18. This fiscal mandate is supplemented by a 
debt target whereby the rate as a percentage of GDP should be falling by 2015-16. The UK 
does not set an explicit medium term objective (MTO) in its convergence programme, but its 
fiscal  framework,  set  up  in  2010,  is  a  step  towards  compliance  with  the  Stability  and 
Convergence Programmes (SCP) code of conduct, as it is designed to bring the fiscal position 
close to balance over the medium term. 

The  improvement  in  the  headline  balance  foreseen  in  the  2012-13  convergence 
programme,  which  covers  the  period  2011-12  to  2017-18,  is  insufficient  for  correcting 
the  excessive  deficit  by  the  deadline  set  by  the  Council  on  2  December  2009.  The 
programme,  based  on  forecasts  carried  out  by  the  UK’s  OBR,  envisages  an  average 
improvement  of  approximately  0.9  pp  per  annum  over  the  six-year  period.  The  programme 
projects  that  the  excessive  deficit  procedure  (EDP)  deadline  set  by  the  Council  on  2 
December 2009 of 2014-15 would be missed by three years and estimates a deficit of 6.0 % of 
GDP  in  the  deadline  year.  The  convergence  programme  envisages  that  the  deficit  will  fall 

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below  3 %  only  in  2017-18,  three  years  after  the  deadline  previously  recommended  by  the 
Council. On its current estimates, the deficit would fall to 5.2 % in 2015-16, 3.5 % in 2016-17 
and 2.3 % in 2017-18. 

The planned deficit path is less favourable in the 2012-13 convergance programme than 
it  was  in  the  2011-12  programme. The  difference  between  the  deficit  forecasts  of  the  two 
programmes is accounted for by certain classification changes, one-off measures and a lower 
GDP forecast. Growth had been estimated at 0.8 % in 2012, 2.0 % in 2013 and 2.7 % in 2014. 
These numbers were revised to 0.2 %15, 0.6 % and 1.8 %, respectively. 

The  improvement  in  the  structural  balance  foreseen  in  the  2012-13  convergence 
programme  is  also  lower  than  what  was  recommended  by  the  Council  on  2  December 
2009. The Council recommended an annual average improvement in the structural balance16 
of  1¾ %  of  GDP  to  the  UK  between  2010-11  and  2014-15.  By  contrast,  the  adjusted  fiscal 
effort  undertaken  so  far  since  the  opening  of  the  EDP  (i.e.  the  three-year  period  between 
2010-11 and 2012-13) averaged at just 1.0 % of GDP per annum. The UK’s nominal deficits 
imply an annual average structural effort of 0.7 % over the final two years of the deadline to 
2014-15.17 

In  the  Autumn  Statement,  published  in  December  2012,  the  government  announced 
fiscally  neutral  measures  over  the  current  parliamentary  period  (to  2015-16)  with 
increases  in  capital  spending  being  offset  by  decreases  in  current  expenditure.  A 
subsequent  year  of  fiscal  consolidation  to  2017-18  was  also  added,  following  the  previous 
addition  of  extra  years.  The  main  spending  measures  introduced  in  the  Autumn  Statement 
were a GBP 5.5 billion  (EUR 6.5 billion) capital package and support for long-term private 
investment to fund new roads, science infrastructure and free schools, funded by savings from 
welfare and departmental expenditure cuts, the creation of a Business Bank to allocate GBP 1 
billion  (EUR  1.18  billion)  of  additional  capital  for  small  firms,  mainly  those  involved  in 
exporting,  and  an  increase  of  2.5 %  in  the  basic  state  pension.  The  main  taxation  measures 
were  a  further  1 pp.  cut  in  the  main  rate  of  corporation  tax  to  21 %  from  April  2014,  an 
increase in the personal income tax allowance by GBP 235 (EUR 275) to GBP 9 440 (EUR 11 
110) from April 2013, and a cancellation of the 3.02p per litre fuel duty increase that had been 
planned for January 2013. 

The 2013 Budget, published in March 2013, was also fiscally neutral as the government 
continued with its consolidation strategy. The main expenditure items announced were an 
increase  in  capital  spending  by  GBP  3  billion  (EUR  3.5  billion)  per  year  from  2015-16, 
funded  by  reductions  in  current  spending,  GBP  1.6  billion  (EUR  1.9  billion)  of  funding  to 
support  11  sectors,  including  aerospace  technology,  cars  and  agri-technology,  as  part  of  an 
industrial  strategy,  the  introduction  of  a  new  housing  scheme,  ‘Help  to  Buy’,  designed  to 
support  those  with  small  deposits  who  aspire  to  purchase  a  property,  the  introduction  of  a 
single-tier  state  pension  in  2016-17,  the  cancellation  of  the  fuel  duty  increase  planned  for 
September  2013  and  a  reduction  in  beer  duty  by  1p  on  a  pint  of  beer.  The  key  taxation 
measures were an additional 1pp. cut in the corporation tax rate to 20 % from April 2015, a 
GBP  2 000  (EUR  2 350)  employment  allowance  to  reduce  employer  national  insurance 
contributions,  an  increase  in  the  personal  income  tax  allowance  of  GBP  560  (EUR  660)  to 

15 Subsequent revisions to 2012 now estimate growth at 0.3 % 
16 Cyclically-adjusted balance net of one-off and temporary measures, recalculated by the Commission services 
on the basis of the information provided in the programme, using the commonly agreed methodology 
17 Idem 

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GBP  10 000  (EUR  11 800)  in  April  2014,  and  the  introduction  of  a  new  tax-free  childcare 
scheme to support working families. 

  Revenue 

Box 2. Main measures 

Main budgetary measures 

2013-14 

Expenditure 

•  Corporation  tax  decrease  to  23  %  (-0.05 % 

of GDP) 

•  Capital package (+0.2 % of GDP) 
•  Help to Buy scheme (+0.07 % of GDP) 

•  Increase  in  personal  income  tax  allowance 
to  GBP  9  440  (EUR  11  100)  (-0.07 %  of 
GDP) 

•  Duty changes overall (-0.15 % of GDP) 

2014-15 

•  Corporation tax decreases to 21 % (-0.05 % 

of GDP) 

•  Increase  in  personal  income  tax  allowance 
to  GBP  10  000  (EUR  11  800)  (-0.07 %  of 
GDP) 

•  Employment allowance (-0.09 % of GDP) 
•  Tax avoidance (+0.07 % of GDP) 

2015-16 

•  Corporation  tax  decrease  to  20 %  (-0.05 % 

•  Capital spending (+0.2 % of GDP) 

of GDP) 

2016-17 

•  Capital spending (+0.2 % of GDP) 

2017-18 

•  Capital spending (+0.2 % of GDP) 

  Note: The budgetary impact in the table is the impact reported in the programme, i.e. by the 
national  authorities.  A  positive  sign  implies  that  revenue  /  expenditure  increases  as  a 
consequence of this measure.  

The convergence programme shows that the deficit is estimated to increase from 5.6 % 
in 2012-13 to 6.8 % in 2013-14. This increase is due to the fact that two one-off items appear 
in  the  fiscal  figures  of  2012-13  that  account  for  a  reduction  of  almost  2 pp.  in  the  deficit. 
These are the transfer of the Royal Mail pension fund (GBP 28 billion, EUR 33 billion) to the 
government  accounts  and  the  sale  of  4G  mobile  phone  licences  (GBP  2.3  billion,  EUR  2.7 
billion).  The  deficit  for  2014-15  is  estimated  at  6.0 %.  Both  deficits  in  the  convergence 
programme  are  similar  to  the  Commission’s  2013  spring  forecast,  in  which  the  deficits  are 
estimated at 6.9 % and 6.1 %, respectively. The difference is due to the slightly lower growth 
rate in 2014 of 1.7 %, compared with the convergence programme’s 1.8 %. The outturns for 
the deficits in 2011-12 and 2012-13 were both lower than in the previous year’s convergence 
programme,  due  to  somewhat  lower-than-expected  borrowing  and,  for  the  latter  year,  the 
transfer  of  the  Asset  Purchase  Facility  (APF)  from  the  Bank  of  England  to  the  government 
accounts.  The  decision  to  transfer  the  APF  to  the  general  government  accounts  entails  a 
reduction  in  the  deficit  over  a  number  of  years,  but  a  potential  increase  in  the  deficit  in 
subsequent  years.  As  quantitative  easing  is  unwound,  the  government  would  be  liable  for 
capital losses related to its bond holdings. 

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The consolidation programme outlined in the Spending Review 2010 and implemented 
since then front-loads the taxation measures. At the end of 2012-13, approximately 70 % of 
the annual fiscal consolidation planned for the Spending Review 2010 period (from 2010-11 
to 2014-15) had been implemented, including 90 % of the planned tax increases and 65 % of 
the  planned  expenditure  reductions.  For  the  last  two  years  of  the  Spending  Review  period, 
over 90 % of the further net consolidation planned is in the form of spending cuts. By 2015-
16,  the  share  of  spending  reductions  in  the  total  of  consolidation  measures  that  have  been 
undertaken is foreseen at 80 %. 

Box 3. Excessive deficit procedure for the United Kingdom 

On 8 July 2008, the Council decided that an excessive deficit existed in the United Kingdom. 
The  most  recent  Council  Recommendation  under  Art.  126(7)  TFEU  in  conjunction  with 
Article 126(13) thereof was adopted on 2 December 2009. The Council recommended that the 
UK authorities should put an end to the present excessive deficit situation by 2014-15.  

The  United  Kingdom  authorities  should  bring  the  general  government  deficit  below  3 %  of 
GDP  in  a  credible  and  sustainable  manner  by  taking  action  in  a  medium-term  framework. 
Specifically,  to  this  end,  the  United  Kingdom  authorities  should:  (a)  implement  the  fiscal 
measures in 2009-10 as planned in the 2009 Budget, avoiding further measures contributing 
to the deterioration of public finances, and start consolidation in 2010-11 in order to bring 
the  deficit  below  the  reference  value  by  2014-15;(b)  to  this  end  ensure  an  average  annual 
fiscal effort of 1¾ % of GDP between 2010-11 and 2014-15, which should also contribute to 
bringing  the  government  gross  debt  ratio  back  on  a  declining  path  that  approaches  the 
reference value at a satisfactory pace by restoring an adequate level of the primary surplus; 
(c) further specify the additional measures that are necessary to achieve the correction of the 
excessive deficit by  2014-15, cyclical conditions permitting, and accelerate the  reduction of 
the  deficit  if  economic  or  budgetary  conditions  turn  out  better  than  currently  expected.  In 
addition, the United Kingdom authorities should seize opportunities beyond the fiscal effort, 
including from better economic conditions, to accelerate the reduction of the gross debt ratio 
back towards the reference valueand ensure that its revised fiscal framework limits the risks 
to  the  adjustment  and,  after  the  excessive  deficit  has  been  corrected,  underpins  sustained 
budgetary  consolidation.  Finally,  the  Council  invited  the  United  Kingdom  authorities  to 
implement reforms with a view to raising potential GDP growth, including reforms conducive 
to  enhancing  the  quality  of  public  finances,  in  particular  those  consistent  with  achieving 
expenditure efficiency savings. 

An  overview  of  the  current  state  of  excessive  deficit  procedures,  including  additional  steps 
adopted  after 
is  available  on: 
http://ec.europa.eu/economy_finance/economic_governance/sgp/deficit/index_en.htm  (please 
refer to country sections at the bottom of the page). 

this  Staff  Working  Document, 

finalisation  of 

this 

The general government debt ratio has been increasing steadily for more than a decade, 
with the largest annual jump taking place between 2008-09 and 2009-10 due to financial 
interventions  in  the  banking  sector.  The  convergence  programme  envisages  that  the  debt 
ratio  will  peak  above  100 %  in  2015-16  and  2016-17  before  reversing  the  trend.  The 
Commission’s  spring  forecast  also  predicts  an  increasing  debt  ratio  to  2014-15,  reaching 
98.7 %  that  year.  The  slightly  higher  debt  rate  of  the  Commission  forecast  is  due  to  the 
marginally  lower  than  expected  growth  rate.  This  means  that  the  supplementary  debt  target 
that was introduced as part of the new government’s fiscal rules, based on public sector net 
debt, is now set to be breached, according to the OBR forecast. The rule aimed to put debt on 
a  downward  trajectory  in  2015-16,  but  it  is  now  unlikely  to  start  declining  until  2017-18. 

EN 

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Medium-term  debt  projections  (see  Graph  below  Table  V  in  annex)  indicate  that  full 
implementation  of  the  programme  could  put  debt  on  a  downward  path  by  2020,  although  it 
would still be above the 60 % of GDP reference value. 

Long-term sustainability 

The  United  Kingdom  does  not  appear  to  face  a  significant  risk  of  fiscal  stress  in  the 
short  term,  but  there  are  some  indications  of  future  fiscal  sustainability  challenges. 
Sustainability risks appear to be high in the medium and long term. The latter is influenced by 
the costs implied by an ageing population. It is therefore appropriate for the UK to continue to 
implement measures that reduce risks to fiscal sustainability in the short term, and to enable 
government debt to be reduced. Moreover, containing age-related expenditure growth further 
would contribute to the sustainability of public finances in the long term. In January 2013, the 
government  published  a  bill  to  introduce  a  single-tier  pension  in  2016-17.  This  will  end 
contracting out of the State Second Pension so that everyone has access to the same pension 
and pays the same rate of National Insurance Contributions (NICs). In addition, private social 
care costs for the elderly are to be capped at GBP 72 000 (EUR 85 000) per person from April 
2016. 

Long-term  expenditure  projections  for  healthcare  indicate  an  expected  increase  in 
healthcare expenditure of 1.1 pps of GDP by 2060. In addition, while UK life expectancy is 
slightly  above  the  EU  average,  infant  mortality  and  the  share  of  people  reporting  a  long-
standing  illness  or  health  problem  are  above  the  EU  average.  The  UK  has  seen  a  large 
increase in healthcare funding in recent years, but the outlook for health spending is tighter in 
coming  years18.  Efforts  could  therefore  be  pursued  in  the  healthcare  sector  to  improve  the 
productivity  and  cost-effectiveness  of  the  system,  to  avoid  reductions  in  access  and  to 
improve the quality of healthcare. The government’s current plans for health service reform 
(in NHS England) entail ambitious targets for efficiency gains that the government plans to 
in  management  and  administration  staff,  encouraging  greater 
attain  via  reductions 
involvement  of  the  private  sector  and  devolving  budgets  and  decisions  down  to  local  areas. 
Further  action  could  include  improving  e-health  mechanisms  for  monitoring  activity  and 
quality, performance-related payment, stepping up information to promote health, and disease 
prevention19. 

Fiscal framework 

The UK government introduced a new fiscal framework after taking office in May 2010, 
and  is  currently  off-track  against  its  own  debt  sustainability  target.  The  independent 
Office for Budget Responsibility (OBR) is tasked with producing official economic and fiscal 
forecasts  and  assessing  whether  the  chances  of  the  government  meeting  the  fiscal  mandate 
and  debt  sustainability  rule  are  greater  than  50 %.  In  its  latest  assessment  (March  2013 
Economic and Fiscal Outlook), the OBR concluded that the government remains on course to 
meet the fiscal mandate. This requires the cyclically-adjusted current budget to be on track to 
be in balance by the end of a rolling five-year forecast period, currently ending in 2017-18. 
However,  the  OBR  forecasts  that  the  government  will  miss  the  debt  sustainability  target  by 
two  years.  The  debt  sustainability  target  requires  public  sector  net  debt  as  a  percentage  of 
GDP to be falling by 2015-16. 

18 See Office for Budget Responsibility (July 2012) Fiscal Sustainability Report Table 3.6 
19  See  OECD  (2013),  OECD  Economic  Surveys  –  United  Kingdom,  and  European  Commission  (2010),  Joint 
Report on Health Systems 

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The  UK  does  not  set  an  explicit  medium-term  objective  to  comply  with  the  code  of 
conduct  of  the  Stability  and  Convergence  Programme  (SCP).  Furthermore,  the  UK 
authorities’ definitions of national debt and deficit targets differ from those in the Maastricht 
Treaty.  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. 

The UK’s most recent Spending Review was published in 2010 and it set out its spending 
plans until 2014-15; the next Review will be in June 2013. The Spending Review 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 has not historically been capped in advance. In its 2013 Budget, the 
government announced that in future, it will introduce a firm limit on a significant proportion 
of AME, including some welfare payments. 

Tax system 

Since the 2012 European Semester, tax measures have been taken in the direction of the 
AGS  priorities  and  a  2012  Council  Recommendation  for  the  UK  to  deliver 
differentiated, growth-friendly fiscal consolidation. The standard corporate income tax rate 
has  already  been  reduced  by  a  total  of  5  pp.  from  28 %  to  23 %  since  2010,  and  will  be 
reduced by a further 3 pp. to 20 % by April 2015. In order to promote investment by SMEs, 
the Annual Investment Allowance for plant and machinery has been increased for two years 
from April 2013, although this follows earlier cuts to investment allowances. Recent increases 
in  the  annual  allowance  in  the  personal  income  tax  mean  that  2.4  million  people  have  now 
been  taken  out  of  the  income  tax  system.  The  government  has  also  introduced  measures  to 
combat tax evasion and fraud, including the UK’s first General Anti-Abuse Rule. 

No significant reforms have been carried out in relation to the property taxation element 
of the 2012 Council Recommendation on housing. UK property tax revenues as a share of 
GDP (4.2 %) are double the EU average. The UK system combines a regressive recurring tax 
(Council Tax) with a progressive transaction tax (Stamp Duty Land Tax or SDLT). There are 
two  problems  with  the  current  Council  Tax  system.  First,  the  system  is  based  on  outdated 
property  valuations  (which  are  linked  to  the  price  of  housing  of  1991),  and  second,  it  is 
regressive  as  households  owning  property  in  the  lower  valuation  bands  pay  more  tax  in 
proportion to the value of their house than properties in higher valuation bands. Undeveloped 
land with planning permission is currently taxed on sale or transfer, but not recurrently on its 
annual  economic  value,  which  can  encourage  land  value  speculation,  rather  than  timely 
residential construction. 

The UK’s total tax-to-GDP ratio (36.1 % in 2011) is slightly below the EU-27 weighted 
average,  and  there  is  scope  to  raise  revenue  by  broadening  the  base  of  existing  taxes. 
While taxation of labour as a share of GDP and the implicit tax rate on labour are relatively 
low by EU standards, the UK has high levels of tax expenditure in relation to personal income 
tax20.  In  2010-11,  over  half  of  the  GBP  33  billion  (EUR  39  billion)  allowances  for  savings 
into pension schemes were claimed by higher-rate taxpayers.   

20 OECD (2010), Tax expenditures in OECD Countries 

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The UK standard VAT rate was increased to 20 % in April 2011 but there is significant 
scope for reducing the number of goods and services to which non-standard VAT rates 
apply. While total UK revenues from VAT are around the EU average, the UK ranks 22nd in 
the EU in terms of actual VAT revenues collected as a percentage of theoretical revenues at 
standard rates (46.5 % in 2011). The VAT base was widened very marginally in Budget 2012. 
The  UK  currently  has  a  reduced  rate  of  5 %  for  domestic  gas  and  electricity  and  a  limited 
number  of  other  goods  and  services.  A  zero  rate  applies  to  a  broad  range  of  goods  such  as 
food,  books,  children’s  clothes,  water  supply  and  sewerage  services  to  domestic  customers. 
Though overall UK environmental tax revenues are above the EU average, the reduced VAT 
rate  for  domestic  energy  consumption  provides  a  substantial  subsidy  to  fossil  fuel 
consumption, which is not targeted at low-income households. This has the effect of lessening 
pressure  to  reduce  domestic  energy  consumption  (mostly  home  heating)  through  energy 
efficiency  measures.  The  Mirrlees  Review21  concluded  that  a  comprehensive  broadening  of 
the VAT base would benefit the economy and could raise a net GBP 3 billion (EUR 5 billion) 
of tax revenue22, even after using the tax-benefit system to compensate households, especially 
poorer households, for the increase in their cost of living. The Mirrlees Review also proposes 
an  alternative  reform  which  is  redistributional  (i.e.  compensates  only  poorer  households) 
which would raise a net GBP 10 billion (EUR 11.8  billion). However, the report points out 
that this reform could reduce incentives to work. 

3.2. 

Financial sector 

The UK banking and financial sector has returned to relative stability, but has not yet 
fully recovered from the impact of the crisis. The UK financial sector underwent a period 
of  turmoil  because  of  the  2008  financial  crisis,  which  led  the  government  to  inject  public 
funds  into  a  number  of  systemically  important  UK  banks  to  guarantee  their  solvency  and 
liquidity. Despite higher bank capitalisation levels, the flow of credit to the corporate sector 
remained negative in 2012, and many SMEs are facing credit constraints. In 2012, the Council 
Recommendations for the United Kingdom included a CSR concerning improvements needed 
in the availability of financing, especially for SMEs, promoting the non-bank lending channel, 
and increasing competition in the banking sector. 

The  UK  has  made  some  progress  on  measures  taken  to  address  the  2012  CSR  on 
improving access to finance, non-bank lending and bank competition. The challenge for 
the financial sector to support private sector investment and growth more effectively remains. 
Although the government has put in place a number of schemes designed to increase lending, 
net  lending  to  firms  continued  to  be  negative  in  2012,  while  net  lending  to  households 
remained depressed23. Many firms, especially SMEs, are still having trouble obtaining credit 
to  finance  investment.  Post-crisis  loan  rejection  rates  for  SMEs  have  increased  markedly 
compared to the pre-crisis period24. It is not clear when and to what extent private investment 
will pick-up, so the flow of credit may remain constrained until broader economic conditions 
improve. Corporate credit conditions have improved somewhat since the second half of 2012, 
but less so for smaller companies25.  

21 Mirrlees et al (2011), Tax by Design: the Mirrlees Review. Chapter 9 – Broadening the VAT base 
22 Based on the old 17.5 % rate of VAT. The authors state that the welfare gain would increase under the new 
VAT standard rate of 20 % 
23 Bank of England (2013), Trends in Lending, April 2013 
24 See Federation of Small Business (2013) Voice of Small Business Index Quarter 1, 2013. This recent survey 
on SME access to bank loans puts loan rejection rates at approximately 40 % 
25 Bank of England (2013), Credit Conditions Survey 2013 Q1 

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Monetary policy has struggled to re-establish the flow of credit, even as it continues to 
venture into unconventional territory. In 2012, the Bank of England activated the Extended 
Collateral  Term  Repo  Facility,  expanded  the  quantitative  easing  programme  by  GBP  50 
billion (EUR 59 billion) to GBP 375 billion (EUR 440 million) and introduced the Funding 
for Lending Scheme (FLS) which seeks to incentivise lending by reducing the funding costs 
of  banks  and  building  societies.  In  April  2013,  the  FLS  was  extended  by  one  year  to  2015, 
and  partially  redesigned  to  incentivise  lending  to  SMEs.  Preliminary  evidence  suggests  that 
the FLS has contributed to an increase in mortgage lending, but has so far been less successful 
in boosting corporate lending, particularly to SMEs. 

The government has announced or put in place a range of initiatives to promote access 
to finance. In December 2012, it pledged GBP 1 billion (EUR 1.18 billion) in capital to a new 
Business  Bank  to  support  the  provision  of  long-term  loans  to  SMEs  via  existing  financial 
institutions.  While  plans  are  still  under  development,  the  Business  Bank  will  enable  the 
consolidation  of  numerous  existing  initiatives  promoting  access  to  finance  under  a  single 
institution,  which  should  raise  the  awareness  of  SMEs  and  help  them  navigate  through  the 
various schemes. The government also published its progress report on the implementation of 
the  recommendations  of  the  Breedon  review  on  SME  access  to  non-bank  finance  in 
November  2012.  Peer-to-peer  lending  is  expanding,  as  is  supply-chain  financing  by  larger 
companies  and  platforms  that  allow  the  exchange  of  receivables  for  cash.  All  these 
alternatives to bank lending are, however, still small-scale, and SME funding continues to rely 
extensively on bank lending and internal sources. 

The  difficulties  for  many  firms  in  accessing  finance  appear  to  be  due  in  part  to  the 
persistent  lack  of  competition  in  the  banking  sector.  The  four  main  players  cover  more 
than  80 %  of  the  market,  and  there  are  only  tentative  signs  of  other  players  increasing  their 
presence  in  the  corporate  credit  market.  The  Independent  Commission  on  Banking 
recommended  the  creation  of  a  strong  challenger  bank  through  the  divestiture  of  assets 
belonging to Lloyds Bank, which is partly owned by the government. However, the planned 
divestiture of 632 branches, which is also required to comply with state aid decisions, has yet 
to  take  place.  Also,  the  government-controlled  Royal  Bank  of  Scotland  has  yet  to  reach  an 
agreement with potential buyers that would allow it to meet the branch divestiture deadline set 
by  state  aid  rules.  The  UK  authorities  have  sought  to  decrease  barriers  to  entry  by  easing 
capital  requirements  for  bank  start-ups  and  accelerating  the  authorisation  process.  Further 
options  to  help  to  increase  bank  competition  include  facilitating  access  to  shared  databases 
and standard risk models, so as to lower costs for smaller banks, and to introduce full bank 
account portability to decrease switching costs. 

Current  bank  capitalisation  levels,  though  nominally  adequate,  may  not  reflect  a 
sufficiently  prudent  calculation  of  risk  weights  and  provisions  for  expected  losses.  The 
aggregate core tier 1 capital ratio of the UK banking sector compares favourably with other 
EU countries, the share of non-performing loans is relatively small, and credit  default swap 
spreads  on  UK  banks  remain  contained.  There  is,  however,  evidence  of  continued  bank 
forbearance  in  the  post  crisis-period,  with  respect  to  both  corporate  and  household  debt. 
Corporate  insolvencies  have  remained  low  in  the  UK  although  many  more  companies  are 
making  losses.  Also,  R3,  the  insolvency  industry  trade  body,  found  that  a  large  and  rising 
number companies are only able to pay the interest on their debt but do not see a prospect of 
being  able  to  pay  back  the  principal.  Though  this  provides  some  immediate  support  to  the 
economy,  it  could  store  up  hidden  risks  in  banks’  balance  sheets  and  delay  necessary 
structural  adjustments  in  the  economy.  Proper  implementation  of  the  Financial  Policy 

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Committee’s  recommendations26  on  prudent  reckoning  of  bank  capital  requirements  and  on 
addressing identified capital shortfalls without hindering lending to the economy should help 
reinforce the financial stability of the UK banking system. 

3.3. 

Labour market, education and social policies 

Employment has risen despite the lack of significant GDP growth, productivity growth 
is  weak,  and  skills  gaps  persist.  The  UK’s  flexible  labour  market  has  few  large  collective 
bargaining  arrangements  outside  the  public  sector,  which  has  seen  widespread  pay  freezes, 
and very little automatic wage indexation. Real wages have been falling for three years, which 
has had a negative impact on household consumption, but helped to support employment. The 
overall  unemployment  rate  is  7.8 %27  though  youth  unemployment  and  the  NEETs28  rate 
remain  substantially  higher.  Many  people,  especially  young  workers,  are  in  precarious  and 
often  involuntary  part-time  or  temporary  jobs.  The  challenge  of  providing  sustainable 
employment,  especially  for  young  people,  is  complicated  by  two  factors:  the  UK  has  too 
many low-skilled workers, for whom demand is falling, and a shortage of workers with high-
quality  vocational  and  technical  skills.  The  UK  also  faces  on-going  challenges  to  improve 
access to high-quality, affordable childcare, raise parental employment and combat poverty. 
The  percentage  of  the  population  at  risk  of  poverty  or  social  exclusion  fell  from  23.1 %  in 
2010 to 22.7 % in 2011, slightly below the EU average, but this fall was partly explained by a 
fall  in  the  poverty  threshold  due  to  falling  real  median  income.  In  2012,  the  Council 
Recommendations  for  the  United  Kingdom  contained  CSRs  concerning  welfare  reform, 
poverty  and  childcare,  youth  employment,  and  improving  vocational  education  and  skills 
provision. 

Employment, welfare reform and social inclusion 

The UK has made some progress on measures taken to address the 2012 CSR on welfare 
reform, poverty and childcare. Early evidence on the impact of the new Work Programme 
for  the  unemployed  is  disappointing,  but  the  programme  is  still  at  an  early  stage,  and  it  is 
essential to provide appropriate support for those who are likely to find it particularly difficult 
to gain employment. The UK authorities have introduced a wide range of policies to address 
unemployment,  especially  youth  unemployment,  including  the  Work  Programme  and  the 
Youth  Contract  (discussed  below).  The  Work  Programme  was  launched  in  April  2011  and 
seeks  to  provide  people  further  from  the  labour  market  with  relevant  work  experience  and 
skills. Early results from the Work Programme29 show that the total number of jobs gained by 
participants is below target, many of these jobs are part time, and a significant proportion has 
not  turned  out  to  be  sustainable.  While  the  early  evidence  is  not  definitive,  it  does  suggest 
there  is  scope  for  refining  the  design  and  contracting  of  the  Work  Programme  to  improve 
outcomes for harder-to-help clients. 

The introduction of Universal Credit in place of existing working age benefits should be 
a  positive  step,  with  its  focus  on  simplifying  benefits  and  improving  work  incentives. 
Weak  work  incentives  have  been  a  long-running  problem  for  the  UK,  particularly  the  high 
marginal  benefit  withdrawal  rates  for  those  moving  off  benefits  into  low-paid  jobs.  Most 
means-tested  out-of-work  benefits  and  in-work  tax  credits  for  working  adults  (Income 
Support, income-related Jobseeker’s Allowance and Employment and Support Allowance) are 

26 See the Financial Policy Committee’s statement from its policy meeting of 19 March 2013 
27 November 2012 – January 2013, Eurostat definition 
28 ‘NEET’ refers to a young person who is not in education, employment, or training 
29  Department  for  Work  and  Pensions  (2012),  Work  Programme  evaluation:  Findings  from  the  first  phase  of 
qualitative research on programme delivery 

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to  be  replaced  by  a  single  benefit,  Universal  Credit,  as  set  out  in  the  Welfare  Reform  Act 
2012. The new system will allow individuals to keep more of their income as they move into 
work, and will introduce a slower withdrawal rate (65 %) of benefits when they increase their 
earnings. 

However,  the  net  impact  of  Universal  Credit  on  employment  will  depend  on  effective 
implementation and support services. While improved incentives for households to accept 
some work should help to reduce the high level of workless households, the structure of the 
new  system  could  induce  some  second  earners  to  reduce  their  hours  or  to  stop  work.  The 
government’s stated intention is to introduce more work search conditionality into Universal 
Credit in future, to mitigate these risks, but as yet there are no clear plans for when or how 
this might be done. It will also be important to get the delivery of Universal Credit payments 
right, as delays and errors could cause severe short-term poverty and lead to scepticism and 
risk aversion among people looking to move off benefits and into work. Universal Credit is 
currently being piloted and is due to be rolled out for new claimants in stages from late 2013, 
with  all  existing  claimants  being  transferred  to  the  new  system  by  the  end  of  2017.  The 
government recognises the implementation risks and has indicated that it is willing to adapt 
the timetable if necessary. 

Poverty, including child poverty, is likely to increase due to cuts in real terms in welfare 
payments for those of working age. As set out in the Welfare Benefits Up-rating Act, many 
working-age  benefits  and  tax  credits  will  be  increased  by  1 %  a  year  from  2013  until  2016. 
This is below the projected inflation rate so it means three years of cuts in real terms. Most 
working-age households receiving state support will be affected, but the poorest households 
will see the biggest proportionate fall in their incomes. A range of other reforms to welfare 
benefits  were  also  introduced  in  April  2013.  One  element  is  a  benefit  cap,  being  rolled  out 
from April 2013, which limits maximum weekly benefit payments to GBP 500 (EUR 590) for 
families, or GBP 350 (EUR 410) for single adults who do not have children or whose children 
do  not  live  with  them.  This  will  primarily  affect  larger  families  living  in  areas  with  high 
housing  costs.  For  disabled  people  who  face  additional  living  costs,  Personal  Independence 
Payments will gradually replace working age Disability Living Allowance. The main reason 
for cutting benefits is to make fiscal savings, but these cuts are likely to lead to an increase in 
poverty  among  those  of  working  age.  In  contrast,  the  scope,  level  and  uprating  of  both 
universal and means-tested payments to pensioners have been largely exempt from cuts. 

The  decentralisation  of  Council  Tax  Benefit  from  April  2013  has  added  complexity  to 
the  benefits  system  by  creating  a  range  of  different  systems,  which  conflicts  with  the 
simplification rationale for Universal Credit30. As total funding for working age claimants 
has  been  reduced  this  reform  is  likely  to  contribute  to  increasing  poverty.  Local  authority 
losses  associated  with  Council  Tax  Benefit 
administrative  burdens  and  financial 
administration and rent collection could also rise. 

The  UK’s  Social  Justice  Strategy  emphasises  a  more  multi-dimensional  approach  to 
measuring  and  tackling  child  poverty,  with  more  focus  on  enabling  services  and 
prevention.  In  October  2012,  the  government  also  published  the  Social  Justice  Outcomes 
Framework31.  This  strategy  includes  an  ambitious  set  of  measures  to  complement  those 
launched  in  2011,  the  Child  Poverty  Strategy  (on  the  basis  of  the  Child  Poverty  Act  2010), 

30 Institute for Fiscal Studies (2012), Reforming Council Tax Benefit, IFS Commentary C123  
31  This  framework  aims  to  support  future  policy  by  highlighting  priorities,  identifying  where  good  progress  is 
being made and where more works needs to be done 

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and the Social Mobility Strategy32. This approach, with a focus on prevention, is positive in 
principle.  However,  income  poverty  remains  an  important  issue,  and  budgets  for  wider 
support services provided at local level are being reduced. 

Childcare and parental employment 

Although  the  supply  of  childcare  places  has  risen  in  recent  years,  the  cost  and 
availability  of  childcare  remain  as  barriers  to  parental  employment.  Childcare  poses 
particular  problems  for  second  earners  in  couples,  and  for  single  parents33.  Currently, 
childcare  costs  in  the  UK  are  among  the  highest  in  the  EU.  In  2010,  only  4 %  of  children 
under the age of three had full-time places in formal childcare, well below the EU average of 
14 %34. The overall employment rate for single parents, 59.9 %35, remains relatively low, and 
is the main reason why the proportion of children in workless households in the UK (17.3 %) 
is  the  second  highest  rate  in  Europe.  In  2012,  the  employment  rate  was  19.2  pp.  higher  for 
single  women  aged  25-49  who  had  no  children  (80.6 %)  than  for  single  women  who  had 
children (61.4 %)36. Since May 2012, single parents are required to actively seek work when 
their youngest child begins full-time education.  

The  government  is  improving  the  availability  of  childcare  for  preschool  children,  but 
recognises  that  there  is  still  a  need  to  improve  access  to  affordable,  high-quality  and 
adequate  childcare  services.  In  January  2013,  it  published  More  Great  Childcare37,  which 
sets out a plan of action for delivering high-quality early childhood education and childcare, 
with a strong focus on child development to help break the cycle of disadvantage. In February 
2013,  the  government  presented  the  Children  and  Families  Bill  to  Parliament,  proposing 
reforms  to  boost  the  number  of  high-quality,  affordable  childcare  places.  It  also  aims  to 
introduce child minder agencies to reverse a decline in registered child minders and to offer 
more  support  and  quality  control.  Budget  2013  announced  that  tax-free  childcare  vouchers 
will be introduced from autumn 2015, supporting 20 % of childcare costs up to a limit of GBP 
1 200 (EUR 1 410) per child per year. Budget 2013 also announced an additional GBP 200 
million (EUR 235 million) of support, to be phased in from April 2016, which is equivalent to 
85 % of childcare costs, for qualifying households in which a single parent or both earners in a 
couple  pay  income  tax.  It  remains  important  to  ensure  that  the  benefits  of  these  additional 
resources  are  not  offset  by  the  impact  of  other  tax-benefit  reforms,  in  particular  for  low 
income households. 

Employability of young people, education and skills 

The UK has made some progress on measures taken to address the CSR on improving 
the  employability  of  young  people,  vocational  education  and  basic  skills  provision. 
Despite  some  progress  in  recent  years,  a  significant  proportion  of  young  people  still  leave 
secondary education without the skills and qualifications they need to compete in the labour 
market38. As a result of this persistent record of underachievement, the UK has a large number 
of  functionally  illiterate  and  innumerate  adults,  usually  with  no  qualifications.  Young  low-

32  HM  Government  (2012),  Opening  Doors,  Breaking  Barriers:  A  Strategy  for  Social  Mobility.  Update  on 
progress since April 2011 
33 OECD (2012), OECD Family Database 
34 Eurostat (Formal child care by duration and age group) 
35 Eurostat (Employment rate by sex, age groups, highest level of education attained and household composition) 
36 Eurostat (Employment rate by sex, age groups, highest level of education attained and household composition) 
37 Department for Education (2013), More Great Childcare – Raising Quality and Giving Parents More Choice 
38  Harding,  C  et  al.  (2011),  2011  BIS  Research  Paper  Number  57,  Skills  for  Life  Survey:  Headline  Findings. 
28 % of 16-18 year olds are functionally innumerate and 14 % are functionally illiterate. The figures for 16-65 
year olds are 24 % and 15 % respectively 

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skilled  workers  have  seen  their  job  prospects  disproportionately  affected  by  the  economic 
crisis.  The  unemployment  rate  of  low-skilled  15-24  year-olds  is  significantly  above  the  EU 
average (37.2 % in the UK compared to an EU average of 30.3 % in 2012). Skills mismatches 
are  also  likely  to  become  more  serious  in  the  medium  term.  The  European  Centre  for  the 
Development of Vocational Training projects that low skilled posts could represent only 11 % 
of total jobs in the UK in 2020, down from 21 % in 2010 (compared with an EU average of 
18 % in 2020 and 23 % in 2010). Although the UK performs well above the EU average with 
regard to the tertiary attainment rate, university applications declined slightly in England for 
the academic year 2012-2013, following an increase in tuition fees to up to GBP 9 000 (EUR 
10  600)  per  year  in  England39.  The  government  is  in  the  midst  of  a  number  of  significant 
education reforms, whose effects on the economy will be primarily long term. 

It  is  too  early  to  judge  the  effectiveness  of  the  Youth  Contract.  The  Youth  Contract 
supports  tailored  measures  addressing  youth  unemployment  by  providing  additional 
apprenticeships,  giving  financial  incentives  to  employers  taking  on  young  people,  and 
increasing  support  for  the  public  employment  service,  Jobcentre  Plus.  The  Youth  Contract 
will be subject to an independent evaluation in 2013. The Youth Employment Initiative will 
deliver measures targeting young people, including by implementing a Youth Guarantee40 and 
using ESF funding, and will need to build on the Youth Contract. The Scottish government 
has  developed  a  package  of  measures  to  support  youth  unemployment  and  SME  growth, 
including a recruitment incentive for employers taking on job-ready young people aged 16-24 
who have had difficulty in securing employment. 

A  number  of  recent  reforms  to  the  apprenticeships  system  may  increase  the  labour 
market relevance of apprenticeships, but there is more to be done. The government has 
announced  or  enacted  changes  to  improve  the  quality  of  apprenticeship  programmes, 
including their level and duration, but their impact will depend on effective implementation. 
The  number  of  apprenticeships  continues  to  grow  and  there  is  some  evidence  of  a  shift  to 
high-level qualifications. There were 520 600 apprenticeship starts in the 2011-12 academic 
year  (compared  to  457  200  in  2010-11),  of  which  291 300  were  taken  up  by  young  people 
(compared to 275 100 in 2010-2011). There was a 22 % growth in advanced level (Level 3) 
apprenticeships  and  a  68 %  increase  in  higher-level  (Levels  4  and  5)  apprenticeships41.  To 
make  apprenticeships  more  focused  on  high-level  skills,  from  2013,  Level  6  (graduate)  and 
Level  7  (postgraduate)  apprenticeships  will  be  available  in  subjects  including  law, 
accountancy  and  advanced  engineering.  In  addition,  24  University  Technical  Colleges 
(UTCs), a new type of school, set up in cooperation with employers and universities, will be 
opened by 2014. These colleges will teach engineering, business and other practical skills. 

Recent  moves  to  increase  employer  and  local  control  over  skills  provision  have  the 
potential to improve the responsiveness of the system to the needs of the labour market. 
The  Employer  Ownership  Pilot  seeks  to  raise  business  engagement  and  investment  in  skills 
provision by routing public money directly to employers rather than via providers. Businesses 
are invited to set out the public funding they need to support their own investment in skills, 
training and apprenticeship opportunities. For 2013-14, the government has increased the size 
of  the  Employer  Ownership  Pilot  from  GBP  250  million  (EUR  295  million)  to  GBP  340 
million  (EUR  400  million).  A  recent  report  from  an  independent  ad-hoc  commission,  the 

39 See UCAS (2012), How have applications for full-time undergraduate higher education in the UK changed in 
2012? 
40 Council Recommendation of 22 April 2013 on establishing a Youth Guarantee (2013/C 120/01) 
41  In  2011/2012,  advanced-level  apprenticeships  represented  36.1 %  of  the  total,  compared  with  33.7 %  in 
2010/2011, while higher-level apprenticeships were 0.7 % of the total, as against 0.5 % in 2010/2011 

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Richard  Review42,  called  on  the  government  to  improve  the  quality  of  apprenticeships  and 
make them more focused on the needs of employers. The government endorsed the Richard 
Review’s  recommendations,  which  appear  to  have  potential  to  strengthen  the  role  of 
employers  in  designing  an  effective  apprenticeships  system.  However,  the  qualifications 
system remains very complex, and this may have an adverse effect on business involvement 
in the apprenticeships programme. 

Raising  the  age  of  compulsory  participation  in  education  and  training  to  18  by  2015 
should  help  address  the  UK’s  high  early  school  leaving  rate,  but  this  alone  will  not 
necessarily endow pupils with the right skills for the labour market. The UK continues to 
have slightly higher levels of early school leavers than the EU average, 13.5 % vs. 12.8 % in 
2012, although the proportion has declined by 3.5 pp. since 2007. In England, the government 
is raising the age of compulsory participation in education or training, currently 16, to 17 in 
2013 and 18 in 2015. This may significantly reduce early school leaving, but it remains to be 
seen how far additional time in education and training alone will give young people the right 
skills  for  the  labour  market.  To  deal  with  the  basic  skills  issue,  the  government  plans  to 
introduce a new Traineeships programme in  England by September 2013.  This  will  provide 
16-24  year-olds  lacking  the  skills  and  experience  they  need  for  the  labour  market  with  a 
tailor-made  package  of  support  to  enable  them  to  take  up  apprenticeships  or  other  jobs. 
Traineeships  could  have  a  positive  impact  in  the  relatively  short  term,  but  will  require 
effective  implementation  and  monitoring.  In  Scotland,  through  the  'Opportunities  for  All' 
commitment,  the  Government  aims  at  offering  a  place  in  education  or  training  to  all  16-19 
year olds not already in learning, training or employment. 

The government is also reforming the education system, and this includes reviewing the 
national curriculum43. At school level, the focus is more on system reform than discrete 
measures or initiatives.  The  government  is  providing  schools  with  a  Pupil  Premium  worth 
GBP  1.25  billion  (EUR  1.47  billion)  from  2012–13  to  boost  the  attainment  of  pupils  from 
deprived  backgrounds.  A  survey  by  the  official  school  inspection  body  (Ofsted)  expressed 
some  concern  that  many  schools  were  not  using  the  extra  funding  to  target  disadvantaged 
children as envisaged44. The measures in the education system to improve the skills of young 
people have a long-term nature, so it is too early to assess their impact. 

3.4. 

Structural measures promoting growth and competitiveness 

There is significant scope for the UK to raise productivity relative to the best performing 
countries. Although UK labour and product markets are among the least regulated in the EU, 
and  its  business  environment  is  generally  favourable,  the  UK  economy  has  significant 
structural weaknesses. The UK’s capital stock and investment rate are low. As set out in Box 
1, the UK’s persistently weak net export position reflects a lack of external competitiveness. 
Recent  productivity  growth  has  been  very  weak,  and  there  is  evidence  of  a  lack  of 
restructuring, competition and innovation in the economy. The UK has a challenge to put the 
regulatory  and  financing  conditions  in  place  to  renew  and  upgrade  its  energy  and  transport 
infrastructure,  using  a  mix  of  public  and  private  funding  sources.  Government  attempts  to 
boost access to finance and investment are complicated by high levels of private debt, linked 
in large part to the after-effects of a house price boom that occurred in a context of restricted 
housing  supply.  In  2012,  the  Council  Recommendations  for  the  United  Kingdom  included 
CSRs concerning housing supply, and transport and energy infrastructure. 

42 Richard (November 2012), The Richard Review of Apprenticeships 
43 The Department for Education proposed more demanding programmes in English, mathematics and science   
44 See Ofsted (2012), The Pupil Premium 

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Spatial planning reform and housing supply 

The UK has made some progress on measures taken to address the CSR on housing, but 
housing completions remain at historic lows and there remains a challenge to deliver the 
housing supply the population needs. Residential investment remains low at 3.2 % of GDP. 
Overall construction output (not just residential) fell by 5.9 % in the year to 2013 Q1 and is 
nearly  20 %  lower  than  the  pre-recession  peak45.  Some  of  the  government’s  earliest 
commitments  led  to  further  reductions  in  housing  supply.  Government  funding  for  social 
housing  was  cut  sharply  in  the  2010  Spending  Review.  When  top-down  housing  supply 
targets in Regional Spatial Strategies were abolished, the number of new dwellings targeted 
for construction across the country fell by 272 72046. In contrast, the new National Planning 
Policy  Framework  (NPPF),  introduced  in  2012,  aims  to  increase  residential  construction 
through  simplifying  the  spatial  planning  system  and  creating  a  presumption  in  favour  of 
sustainable  development.  The  measures  announced  in  the  2011  Housing  Strategy  for 
England47  are  also  being  implemented.  These  include  freeing  up  public  sector  land  and 
various financial incentives such as the New Homes Bonus, Community Infrastructure Levy, 
Growing  Places  fund  and  a  Get  Britain  Building  investment  fund.  The  government  also 
recently  announced  the  liberalisation  of  planning  rules  to  allow  offices,  which  have  high 
vacancy rates in much of the country, to be converted for residential use. 

It is not yet clear to what extent the government’s reforms will increase housing supply 
in the medium  to long term. Many  of  the  major  housing  developers have made it clear to 
investors  that  they  are  currently  focused  more  on  expanding  margins  than  volumes48.  This 
could  limit  the  positive  impact  of  policies  designed  to  boost  housing  supply  in  the  short  to 
medium  term.  There  is  also  a  lack  of  effective  competition  in  the  residential  construction 
industry.  Much  of  the  impact  of  the  new  planning  system  will  depend  on  local 
implementation,  and  the  reforms  that  have  been  made  seem  to  amount  to  moderate 
liberalisation  overall.  There  continue  to  be  tight  restrictions  on  construction  around  most  of 
the UK’s major cities and economic growth poles.  

The capacity, efficiency and financial incentives in the planning system could also be a 
continuing  constraint  on  residential  development.  Whether  or  not  decisions  on  planning 
applications  are  timely  and  efficient  can  make  a  large  difference  to  developers’  risks  and 
returns  on  potential  residential  construction  projects.  This  in  turn  has  an  impact  on  the 
quantity and cost of new housing. Planning approvals had been at very low levels since mid-
2008,  although  there  were  signs  of  a  pick-up  in  late  201249.  Local  authorities  are  sharply 
cutting  spending  on  administering  the  planning  system  in  response  to  cuts  in  their  overall 
budgets,  and  the  government  has  decided  against  allowing  local  authorities  to  increase  user 
charges for planning- and housing-related services to reflect the full cost of the system. Some 
70 % of local authorities now have a plan under the new system but there is still strong local 
political  opposition  to  new  housing  in  areas  where  house  prices  are  high,  and  the  financial 
incentives  available  to  local  authorities  may  not  be  strong  enough  to  overcome  this.  The 
government has threatened to take decision-making powers away from local authorities that 
are  too  slow  to  make  planning  decisions  or  take  an  excessively  anti-development  approach, 
and this measure may be needed as a last resort. 

45 Office for National Statistics (2013), GDP Preliminary Estimate, Q1 2013 
46 Morton (2012), Planning for Less: the impact of abolishing regional planning 
47 HM Government (November 2011), Laying the Foundations: A housing strategy for England 
48 Deutsche Bank (2013), UK Building Sector – What to expect from the Q4 2012 results 
49 Home Builders Federation (2013). New Housing Pipeline, Q4 2012 Report 

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There is also a risk that government interventions that stimulate housing demand more 
than supply, in particular Help to Buy, could reflate a housing bubble and consequently 
household debt. The level of housing transactions and loans for new mortgages remains low, 
held  back  by  a  weak  domestic  economy,  impaired  credit  markets  and  a  continued  lack  of 
affordability.  Early  results  from  the  Funding  for  Lending  Scheme,  discussed  in  Section  3.2, 
suggest that to date it has largely led to an increase in lending against existing property50. In 
Budget  2013  the  government  announced  the  introduction  of  Help  to  Buy,  which  has  two 
elements, both available for houses costing up to GBP 600 000 (EUR 705 000). First, from 
April  2013,  the  government  will  provide  an  equity  loan  worth  up  to  20 %  of  the  value  of  a 
new-build  house,  repayable  once  the  home  is  sold.  Second,  from  January  2014,  the 
government  will  provide  a  mortgage  guarantee  to  lenders  who  offer  high  loan-to-value 
mortgages (80-95 %) on any house, new or existing. By facilitating loans for potential buyers 
who  could  not  otherwise  afford  to  buy  a  house,  Help  to  Buy  risks  leading  to  the  return  of 
imprudent and excessive mortgage lending and generating a rise in house prices due to state 
subsidy, which would further worsen the underlying problem of housing being unaffordable51. 
It could also lead to contingent liabilities for the Exchequer. However, the details of how the 
guarantees  will  operate  and  be  priced  have  not  yet  been  announced.  The  Scottish 
government's  National  Housing  Trust  initiative  also  provides  guarantees  to  stimulate  both 
public and private sector funding for the provision of rental accommodation.   
The  private  rented  sector  in  the  UK  is  dominated  by  short-term,  insecure  tenancies52. 
Tenancy agreements tend to be set for a relatively short fixed period, after which they revert 
to a rolling basis (running on a week-to-week or month-to-month basis). The notice period for 
terminating  a  tenancy  is  usually  one  to  six  months.  One  reason  for  the  flexibility  and 
dominance  of  short-term  tenancies  in  the  private  rental  market  is  that  in  recent  decades, 
private  renting  has  been  seen  as  a  temporary  solution.  Most  people  aim  to  buy  their  own 
house  at  some  point  in  the  future.  However,  a  combination  of  high  house  prices,  stretched 
household  finances  and  more  responsible  lending  criteria  are  likely  to  continue  to  prevent 
many middle-income households from becoming home owners. Private renting could be made 
a more attractive and viable long-term alternative to home ownership through the use of legal 
frameworks  that  make  longer  and  more  secure  rental  terms  more  appealing  to  both  tenants 
and landlords, and if the sector became more professional. The Welsh government will bring 
forward legislation in 2013 to develop more secure tenancy arrangements in the rental sector.   

Infrastructure 

The UK has made some progress on measures taken to address the CSR on improving 
transport  and  energy  infrastructure,  but  continues  to  have  substantial  infrastructure 
investment needs. The UK has shortcomings in its infrastructure53 and, while the government 
recognises the potential for infrastructure improvements to drive both short- and longer-term 
growth, the UK continues to have a significant challenge to secure adequate and cost-effective 
infrastructure investment. Around GBP 310 billion (EUR 365 billion) of investment is needed 
in energy, roads and the rail network over the duration of the current parliament and beyond54. 

50 Bank of England (2013), Trends in Lending, April 2013 
51 See oral evidence from the Office of Budget Responsibility to the House of Commons Treasury Committee 
hearing on Budget 2013, 26 March 2013 
52 Shelter (2012), A better deal: Towards more private renting 
53 According to the World Economic Forum, the UK currently ranks 24th on quality of its overall infrastructure, 
while  France  ranks  fifth  and  Germany  ninth.  World  Economic  Forum  (2012),  The  Global  Competitiveness 
Report 2012-13 
54 HM Treasury (2012), National Infrastructure Plan: update 2012 

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However, in 2012, total infrastructure spending (public and private) fell55. Significant cuts to 
publicly-funded  infrastructure  construction  and  maintenance  have  been  made  as  part  of  the 
2010 Spending Review. The government plans to partially reverse these cuts. It announced in 
Budget 2013 that it would increase capital spending plans by GBP 3 billion (EUR 3.5 billion) 
a year from 2015-16. The government also indicated that in Spending Review 2013, it would 
set  out  long-term  plans  up  to  2020-21  for  the  most  economically  valuable  areas  of  capital 
expenditure.  While the cuts made  to date have had a negative impact and are not due to be 
fully  reversed,  the  government  is  now  taking  some  positive  steps  on  public  infrastructure 
spending,  though  the  increases  will  not  come  in  immediately.  Giving  greater  certainty  and 
predictability on future capital spending plans could help to bring down the high unit costs in 
UK infrastructure, especially in the transport sector. 

Most infrastructure spending is privately funded, and the government is also seeking to 
stimulate  increased  private  investment.  In  the  2012-15  infrastructure  pipeline  65  %  of 
spending is private, 13 % public, and 22 % public/private56. The government has introduced a 
GBP 40 billion (EUR 47 billion) infrastructure guarantee fund to assist large privately-funded 
infrastructure projects that are currently struggling because of adverse credit conditions. The 
projects  can  come  from  a  range  of  sectors  including  transport,  energy,  utilities  and 
communications.  The  scheme  has  received  75  enquiries  from  project  sponsors  to  date. 
Projects  with  a  capital  value  of  around  GBP  10  billion  (EUR  11.8  billion)  have  so  far 
prequalified  as  potentially  eligible  for  a  guarantee.  The  government  has  also  stated  that  it 
wants to access pension funds and other private capital to fund infrastructure improvements, 
including new road developments and replacements for ageing electricity generating capacity. 
In  the  Autumn  Statement  2012,  a  successor  to  the  Private  Finance  Initiative  (PFI)  initiative 
was also announced. This will be called PFI 2. The UK needs to be careful not to repeat the 
mistakes of past PFI projects and to ensure that the most cost-effective funding model is used 
for each project. Audit evidence suggests the PFI model was a costly way of procuring public 
infrastructure,  largely  because  long-term  projects  were  funded  at  a  (higher)  private  rate  of 
return  than  the  cost  of  public  borrowing.  These  initiatives  may  be  beneficial  if  they  can 
provide  additional  investment  cost-effectively,  which  requires  careful  design,  but  few  funds 
have  been  committed  to  date  and  it  is  too  early  to  make  a  clear  assessment  of  their  likely 
impact. 

Transport 

Transport infrastructure is of particular importance for the goods-producing sector, an 
area  in  which  the  UK  trade  balance  is  in  a  persistent  and  significant  deficit.  Across 
different transport modes, the UK has a challenge to identify additional sources of funding, to 
bring down high unit costs, and to address practical regulatory barriers to timely investment. 
According to the ITF, investment in transport infrastructure building (all modes) is average at 
0.89 % of GDP. In Spending Review 2010, transport investment was relatively protected in a 
context of sharp cuts to overall capital spending. 

The UK’s roads are among the most congested in the EU, and the UK’s ratio of average 
road traffic speed to free-flow speed is also one of the lowest in the EU57. According to a 
recent McKinsey report58, road spending had fallen to 50 % of its 1975 levels by 2000, though 

55 Office for National Statistics (2013), Output in the Construction Industry, December and Q4 2012 
56 HM Treasury (2013), Infrastructure Pipeline Data 2012 
57 European Commission (2012), Key areas: comparing Member States’ performances, Network industries  —
transport 
58 McKinsey (2011), Keeping Britain moving  —The United Kingdom’s transport infrastructure needs 

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it has since increased again and is currently 75 % of 1975 levels. On average roads in England 
are only resurfaced once every 58 years, much less frequently than is ideal59. The Government 
has announced priorities for alleviating congestion and improving the national road network, 
but  overall  road  construction  and  maintenance  spending  is  being  squeezed.  There  is  a 
particular  risk  that  local  authorities,  whose  overall  budgets  are  being  reduced,  will  cut 
spending  on  highways  significantly.  Road  maintenance  and  small  projects  to  deal  with 
bottlenecks  are  important  and  should  not  be  neglected.  There  is  evidence  that  they  tend  to 
have relatively high economic payoffs compared to other spending, and they have relatively 
short lead times if the government can identify additional funding. McKinsey estimate that the 
UK  will  need  to  find  up  to  an  extra  GBP  2.7  billion  (EUR  3.2  billion)  annually  to  fund  its 
road network over the next 20 years if it is to avoid a rise in congestion. There is a case for 
reprioritising existing public spending towards roads. The UK could also consider options for 
generating additional revenue, for example, through user charging for lorries. 

Rapid growth in rail passenger traffic is leading to congestion on some routes and there 
is a need for increased capacity. UK rail passenger numbers have increased by 70 % since 
the 1990s (compared to increases of 20 % in Germany, 10 % in Italy and 8 % in France)60. Rail 
freight also moves a substantial proportion of goods  to and from the UK’s sea ports,  which 
could  benefit  from  better  transport  connections.  In  July  201261,  the  Government  announced 
that over the period 2014-2019, more than GBP 9.4 billion (EUR 11 billion) is to be invested 
in  railway  infrastructure,  including  improvements  to  stations,  routes  (electrification, 
reopening of routes), rolling stock and ticketing systems. This represents a decrease from the 
GBP 11.8 billion (EUR 13.9 billion) earmarked by Government for improvements from 2009-
2014.  Including  running  costs,  Network  Rail  plans  to  spend  GBP  37.5  billion  (EUR  44 
billion)  on  operation  and  expansion  of  railways  for  the  period  2014-2019.  Network  Rail 
intends  to  increase  capacity,  improve  connections,  especially  for  cities  in  the  North  of 
England, and reduce greenhouse gas emissions per passenger, but their plans are dependent on 
passenger  demand,  government  fare  policy  and  efficiency  savings.  There  have  been  some 
difficulties  with  the  process  of  reletting  rail  operating  franchises,  which  also  need  to  be 
resolved  to  give  the  industry  the  clarity  it  needs  to  plan  and  invest  effectively.  The 
government  also  announced  the  construction  of  a  new  high-speed  rail  line  between  London 
and Birmingham and on to Manchester and Leeds. Construction is due to start in 2017, with a 
view to services starting in 2026. There remains considerable scope for the UK rail industry to 
cut costs and improve efficiency62. The government has recognised this in setting an ambition 
for the rail industry to reduce running costs by GBP 3.5 billion (EUR 4.1 billion) by 201963. 
This could help mitigate the extent to which high fares rise yet further. 

The UK currently has no clear plan to address looming constraints in airport capacity. 
As  in  most  other  EU  countries,  aviation  has  been  hit  by  the  economic  downturn  and  traffic 
growth and passenger numbers have all but stalled. Aviation is taxed more in the UK than in 
other  EU  Member  States,  through  Air  Passenger  Duty,  and  UK  airline  passenger  services 
have some of the worst market performance indicators64. There is, however, a growing need 
for additional airport capacity in the South East of the UK. To date, the government does not 
have a policy to deliver the additional capacity needed for London to maintain its hub status 

59 Asphalt Industry Alliance (2012), Annual Local Authority Road Maintenance Survey 2012 
60 European Commission (2013), Commission Staff Working Document, Impact assessment SWD(2013) 10  
61 Department for Transport (2012), High Level Output Specification (HLOS) 2012: Railways Act 2005 statement 
62 McNulty (2011), Realising the potential of GB rail – Report of the rail value for money study 
63 Department for Transport (2012), Reforming our Railways: Putting the Customer First 
64 European Commission (December 2012), 8th Consumer Markets Scoreboard, DG SANCO 

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for  long-haul  connections.  In  September  2012,  the  government  established  an  Airports 
Commission65 to conduct an independent assessment of the future of aviation capacity in the 
South  East,  including  the  possibility  of  building  a  third  runway  at  Heathrow.  However,  the 
final report is not due until 2015 and there is scope for the government to make progress in 
the interim, given the pressing need for additional capacity. 

Energy, climate and resource efficiency 

The UK is making good progress towards meeting its Europe 2020 target for greenhouse 
gas emissions not covered by the EU-wide EU Emissions Trading Scheme (ETS). In 2011 
emissions were 14 % below 2005 levels. Projections based on existing measures suggest that 
the UK emissions from non-ETS sectors will be 19 % below 2005 levels by 2020, exceeding 
the 16 % cut by 2020 required under Europe 2020. The long-term legally binding framework 
established under the 2008 Climate Change Act, including statutory carbon budgets, continues 
to  drive  emissions  reductions  and  a  focus  on  green  growth.  In  October  2012,  a  Green 
Investment Bank was launched with GBP 3 billion (EUR 3.5 billion) to invest in the transition 
to a green economy. The UK housing stock is relatively old and the government estimate that 
38 % of GHG emissions in the UK come from energy inefficient buildings. The government’s 
main programme to improve energy efficiency is the Green Deal, launched in January 2013. It 
provides households and landlords with the option of paying back investment costs over time 
through energy bills, rather than paying costs upfront. 

The  UK  ranks  25th  out  of  27  EU  Member  States  regarding  the  share  of  renewable 
energy sources in final energy consumption. 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.  Currently,  performance  on  energy  from  renewable 
sources is significantly short of the target. In 2011 the share of renewable energy in gross final 
energy consumption was 3.8 %, below the first interim target set for 2011-2012 (4.1 %). The 
National  Renewable  Energy  Action  Plan  outlines  the  current  and  future  measures  to  be 
deployed to follow the trajectory  for developing  renewable energy sources laid down in the 
Directive and sets sectoral targets. Over the 2007-2013 programming period, around EUR 433 
million  or  4.2 %  of  the  ERDF  in  the  UK  has  been  devoted  to  renewable  energy  and  energy 
efficiency. The Commission’s position on the development of the Partnership Agreement and 
programmes  in  the  United  Kingdom  for  the  period  2014-2020  states  that  ESI  Funds  should 
support an increase in the use of all types of renewable energy. 

The  UK  has  an  increasingly  urgent  need  for  new  electricity  generating  capacity,  but 
there has been a lot of uncertainty over the prospects for energy investment, due mainly 
to regulatory risks. The Energy Bill, submitted to Parliament in 2012, includes a number of 
policies intended to set a clearer long-term framework for investments in low carbon energy 
generation and to stimulate green growth. In view of potential generation capacity shortages 
in Great Britain in the latter part of this decade, the Energy Bill introduces an explicit capacity 
mechanism  to  address  this  concern.  Electricity  market  reform  should  make  a  difference  in 
helping to stimulate the GBP 110 billion (EUR 130 billion) of investment needed to renew the 
UK’s electricity infrastructure66. The Energy Bill also proposes a new long-term feed-in tariff 
for  renewable  electricity  generation  to  replace  the  existing  renewables  obligation.  Other 
changes  to  support  for  renewables  proposed  in  2012  included  reduced  tariffs  for  some 
renewable generation, and the addition of a new domestic renewable heat incentive. Given the 

65 See https://www.gov.uk/government/organisations/airports-commission 
66 Ofgem (2012), Electricity capacity assessment (Ref: 126/12) 

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importance  of  an  effectively-functioning  internal  energy  market  for  delivering  new 
investment, it will be very important for the UK to ensure that detailed measures implemented 
under  the  Energy  Bill  to  attract  new  investment  are  fully  in  line  with  State  aid  and  internal 
market rules. 

UK  energy  networks  are  being  improved  to  ensure  the  security  of  supply  and  to  add 
flexibility  and  reliability  to  the  grid.  There  are  significant  developments  in  the  power 
transmission grid across the UK to better integrate generation from renewable sources, such 
as  both  on  and  offshore  wind  farms.  Further  strengthening  the  electricity  grid  and 
interconnections, especially to mainland Europe, would allow the UK and EU to benefit from 
the UK’s significant potential for wind power generation, especially offshore. 

Although the UK has taken reasonable first steps to improve resource efficiency, there is 
still room for improvement, especially as regards waste and water management. The UK 
still  landfills  almost  50 %  of  its  municipal  household  waste,  in  contrast  to  most  other  EU 
countries, although the government plans to increase the landfill tax. The UK already recycles 
or  composts  almost  40 %  of  waste,  so  reaching  the  50 %  recycling  target  by  2020  may  be 
possible. Full implementation of the existing waste legislation could reduce direct and indirect 
GHG emissions by an amount equal to 4 % of total 2004 emissions. The current level of water 
abstraction is unsustainable, and water scarcity will have impacts not only on the population, 
but also on industry and agriculture. 

Research and innovation 
Although the UK scores above the EU average on innovation indicators67, it has relative 
weaknesses  in  R&D  investment  by  firms,  the  creation  of  intellectual  assets,  SMEs 
introducing product or process innovations, and sales of new-to-market or new-to-firm 
innovations.  Business  expenditure  on  R&D  fell  from  1.17 %  of  GDP  in  2001  to  1.09 %  in 
201168.  Furthermore,  in  the  last  decade,  overall  expenditure  on  R&D  has  averaged  around 
1.8 %  of  GDP,  lower  than  the  EU  average  of  2.03 %.  The  UK  has  not  set  a  national  R&D 
intensity target in response to the European Council’s request regarding Europe 2020 headline 
targets. As part of the 2010 Spending Review, the budget for science was frozen in cash terms 
at just over GBP 4.6 billion (EUR 5.4 billion) for the next four years. This amounts to a cut of 
some 10 % in real terms over the period. The capital expenditure budget for science was not 
protected,  although  additional  commitments  to  research  capital  announced  since  Spending 
Review  2010  have  reduced  the  initially  planned  44 %  cuts  considerably69.  R&D  tax  credits 
continue to be the largest single source of government support for business R&D70. 

3.5.  Modernisation of public administration 

The  UK  generally  performs  well  in  surveys  on  the  quality  and  timeliness  of  public 
administration71. The government itself has set ambitious targets to reduce the administrative 
burden  on  companies,  and  to  use  e-government  tools  as  much  as  possible.  Regarding 
regulatory burdens, the one in, one out target has been replaced by the even more ambitious 
one in, two out, to help stem the flow of new regulation. Regarding e-government, the digital 

67 European Commission (2013), Innovation Union Scoreboard 2013 
68 Eurostat (2013). Provisional figure 
69  Campaign  for  Science  and  Engineering  (CaSE)  (2013),  Public  Funding  of  UK  Science  and  Engineering  — 
March 2013 update 
70 The UK authorities estimate that claims are made for some two-thirds of all business R&D expenditure and 
that each GBP 1 of foregone tax revenue from the R&D tax credit stimulates between GBP 0.47 and GBP 3.37 
of R&D investment (UK National Reform Programme 2013) 
71 European Commission (2012), Excellence in public administration for competitiveness in EU Member States 

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by  default  principle  is  being  implemented,  meaning  that  online  services  will  get  priority 
unless there is a good reason to take a different approach72. 

The  UK  does,  however,  have  scope  to  improve  public  procurement,  particularly  in 
facilitating the participation of SMEs. The UK authorities estimate that only 12 % of central 
government  procurement  is  currently  from  SMEs,  against  their  target  of  25 %.  The 
government is aware of the issue, but is finding it difficult to overcome strong resistance to 
the  centralisation  of  procurement  across  central  government,  and  to  reconcile  its  localism 
agenda  with  the  streamlining  and  coordination  needed  to  make  public  procurement  more 
accessible. 

The  UK  lacks  mechanisms  of  control  and  knowledge  over  state  aid  granted.  Other 
Member  States  have  introduced  relevant  procedures  such  as  transparency  mechanisms  and 
bodies in charge of checking eligibility of aid awards73. One of the UK’s main challenges for 
the  successful  implementation  of  the  European  Regional  Development  Fund  (ERDF)  2007-
2013 Operational Programmes is the scarcity of funding to match EU funds, especially after 
the  abolition  of  the  Regional  Development  Agencies.  However,  despite  these  challenging 
circumstances,  the  absorption  rate  of  ERDF  in  the  UK  is  still  acceptable.  Around  80 %  of 
resources had been contracted to operations by the end of 2012. 

72 Cabinet Office (2012), Government Digital Strategy  
73 For instance, Estonia recently introduced a public registry of all State aid awards, including de minimis aid, on 
the  homepage  of  the  Ministry  of  Finance  (http://www.fin.ee/riigiabi);  in  Hungary,  the  State  aid  Monitoring 
Office  (http://tvi.kormany.hu/home)  is  in  charge  of  checking  eligibility  under  the  General  Block  Exemption 
Regulation;  Slovenia’s  Ministry  of  Finance  has  put  in  place  a  system  of  regular  monitoring  and  evaluation  of 
State aid measures  
(http://www.mf.gov.si/en/areas_of_work/state_aid_monitoring/surveys_on_state_aid_in_slovenia/) 

EN 

31 

  EN 

 
                                                 
 
4.  OVERVIEW TABLE 

2012 commitments 

Summary assessment 

Country-specific recommendations (CSRs) 

CSR  1:  Fully  implement  the  budgetary  strategy  for  the 
financial  year  2012-13  and  beyond,  supported  by 
sufficiently  specified  measures,  to  ensure  a  timely 
correction  of  the  excessive  deficit  in  a  sustainable 
manner and the achievement of the structural adjustment 
effort  specified  in  the  Council  recommendations  under 
the  EDP  and  to  set  the  high  public  debt  ratio  on  a 
sustained  downward  path.  Subject  to  reinforcing  the 
budgetary  strategy  for  the  financial  year  2013-14  and 
beyond,  prioritise  growth-enhancing  expenditure 
to 
avoid  the  risk  that  a  further  weakening  of  the  medium-
term  outlook  for  growth  will  negatively  impact  on  the 
long- term sustainability of public finances. 

The  UK  has  made  limited  progress  on  measures 
taken to address the CSR. 

At  6.4 %,  structural  borrowing  in  FY  2012-13  was 
only 0.3 pp. lower than in 2011-12, despite the UK 
government  sticking  to  its  fiscal  consolidation 
strategy. The deficit is forecast at 6.8 % in 2013-14 
and 6.3 % in 2014. 

Some  modest  progress  has  been  made  on  making 
the structure of consolidation more growth-friendly 
by shifting spending towards capital budgets. 

a 

comprehensive  housing 

CSR  2:  Address  the  destabilising  impact  of  high  and 
volatile  house  prices  and  high  household  debt  by 
reform 
implementing 
programme  to  increase  housing  supply  and  alleviate 
problems  of  affordability  and 
the  need  for  state 
subsidisation  of  housing.  Pursue  further  reforms  to  the 
housing  market,  including  the  mortgage  and  rental 
markets,  financial  regulation  and  property  taxation  to 
prevent  excessive  volatility  and  distortions  in  the 
housing market. 

CSR 3: Continue to improve the employability of young 
people, in particular those not in education, employment 
or  training,  including  by  using  the  Youth  Contract. 
Ensure  that  apprenticeship  schemes  are  taken  up  by 
more young people, have a sufficient focus on advanced 
and  higher-level  skills,  and  involve  more  small  and 
medium-sized  businesses.  Take  measures  to  reduce  the 
high  proportion  of  young  people  aged  18-24  with  very 
poor basic skills. 

The UK has made some progress on measures taken 
to address the CSR. 

Government has reformed the planning system and 
put  in  place  a  number  of  regulatory  and  fiscal 
measures 
residential 
construction,  but  it  is  not  yet  clear  how  effective 
these will be in boosting the supply of housing. 

increasing 

aimed 

at 

Both  residential  construction  and  new  mortgage 
lending  remain  low,  affected  by  a  weak  economy 
and  policy  constraints.  There  is  also  a  risk  that 
recent  government 
that  stimulate 
housing  demand  more  than  supply,  in  particular 
Help  to  Buy,  could  reflate  a  housing  bubble  and 
consequently  household  debt.  This  could  also 
further decrease housing affordability. 

interventions 

Limited  changes  to  SLDT  have  been  made  but  no 
wider reforms to property taxation have been made. 

The UK has made some progress on measures taken 
to address the CSR. 

the 

If  implemented  effectively,  with  a  proper  focus  on 
apprenticeship 
increasing 
programmes,  including  their  level  and  duration,  a 
number of  measures  taken may  increase  the  labour 
market relevance of apprenticeships. 

quality 

of 

The  measures  in  the  education  system  to  improve 
the  skill  levels  and  employability  of  young  people 
have a long-term nature and therefore it is too early 
to assess their impact. 

CSR 4: Step up measures to facilitate the labour market 
integration  of  people  from  jobless  households.  Ensure 
that  planned  welfare  reforms  do  not  translate  into 
increased  child  poverty.  Fully  implement  measures 
aiming to facilitate access to childcare services. 

The UK has made some progress on measures taken 
to address the CSR. 

The  introduction  of  Universal  Credit  will  be  a 
focus  on  benefits 
its 
positive 

step,  with 

EN 

32 

  EN 

 
simplification  and 
incentives, 
although the employment impact is likely to depend 
in part on effective implementation. 

improving  work 

However  reforms  to  Council  Tax  benefit  appear 
likely  to  increase  poverty  and  make  the  benefits 
system  more  complex,  partially  offsetting 
the 
simplification benefits of Universal Credit. 

Early  evidence  on  the  impact  of  the  new  flagship 
is 
Work  Programme 
disappointing. 

the  unemployed 

for 

Relative  poverty,  including  child  poverty,  fell 
slightly  from  2010  to  2011,  due  in  part  to  falling 
real  median  income.  However,  poverty  is  likely  to 
increase  in  future  due  to  a  range  of  real  terms 
reductions to working age welfare payments that the 
government 
its  fiscal 
is  making  as  part  of 
consolidation strategy. 

Some  additions  to  early  years  provision  are  being 
made  but  childcare  remains  expensive  and  of 
variable quality. 

The UK has made some progress on measures taken 
to address the CSR. 

The  government  has  put  in  place  a  number  of 
schemes  aimed  at  increasing  lending  but  net  credit 
trends  remained  weak  throughout  2012.  Many 
firms,  notably  SMEs,  are  experiencing  difficulties 
in  obtaining  credit  to  finance  investment.  More 
the  different 
coordination  and  clarity  among 
programmes would be beneficial for SMEs. 

The FLS has contributed to ease bank funding costs 
and credit conditions, but there is a risk of it being 
primarily channelled to sectors that are less in need 
of funding. 

The  government  is  addressing  a  number  of  the 
recommendations  put  forth  in  the  Breedon  review, 
but  access  to  non-bank  lending  remains  largely 
restricted to bigger firms. 

There  remains  limited  competition  in  the  banking 
industry, but some actions to tackle barriers to entry 
have been announced. Lloyds bank and RBS are yet 
to divest of part of their assets to comply with state 
aid  rules  and  to  facilitate  the  creation  of  new 
challenger banks. 

The UK has made some progress on measures taken 
to address the CSR. 

Overall,  public  investment  has  fallen  and  remains 
relatively 
some 
prioritisation of higher value projects. 

there  has  been 

low,  but 

CSR  5:  Further  improve  the  availability  of  bank  and 
non-bank financing to the private sector, in particular to 
SMEs. Support competition within the banking sector, in 
particular  through  measures  to  reduce  barriers  to  entry, 
increase  transparency  and  facilitate  switching  between 
banks as recommended by the Independent Commission 
on  Banking  and  explore  ways  to  improve  access  to 
venture  and  risk  capital  and  other  forms  of  non-bank 
lending. 

CSR  6:  Pursue  a  long-term  strategy  for  improving  the 
capacity and quality of the UK’s network infrastructure, 
including measures to address pressures in transport and 
energy networks by promoting more efficient and robust 
planning and decision-making processes, and harnessing 
appropriate public or private financing arrangements. 

Quality  and  congestion  of  transport  infrastructure 
remains  a  structural  weakness  affecting  the  whole 
economy,  and  especially  goods  producing  and 

EN 

33 

  EN 

 
in  rail 

exporting  companies.  The  rail  investment  pipeline 
should help to accommodate the forecast continued 
increase 
traffic.  The  government  has 
announced  a  lot  of  initiatives  to  boost  private 
investment  in  the  road  network  but  most  remain 
aspirational  and  the  UK  needs  to  be  careful  not  to 
repeat  past  mistakes.  Limited  progress  has  been 
made  in  addressing  the  need  for  additional  hub 
airport capacity. 

There  has  been  a  lot  of  uncertainty  over  the 
prospects  for  energy  investment,  due  in  part  to 
regulatory 
show  an 
risks.  UK  assessments 
increasing  need  for  new  generating  capacity,  both 
renewable and non-renewable. 

The  energy  bill  aims  to  put  in  place  measures  to 
attract  the  GBP  110  billion  (EUR  130  billion) 
investment 
to  replace  current 
is  needed 
generating capacity and upgrade the grid by 2020. 

that 

The UK should ensure that the detailed measures to 
attract  new  investments  are  fully  in  line  with  State 
aid and internal market rules. 

73.6 % of the population aged 20-64 was employed 
in 2011 (unchanged from 73.6 % in 2010). 

Little progress has been made in contributing to this 
target in 2012, but the situation has not deteriorated. 
The UK employment rate is now marginally below 
the Europe 2020 target of 75 %. 

In  2012  private 
employment  grew 
sector 
sufficiently  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  to  increase  work  incentives  and 
parental  employment,  to  improve  access  to  high-
quality,  affordable  childcare,  and  to  raise  skill 
levels. 

Europe 2020 (national targets and progress) 

Employment rate target: No target set in NRP 

R&D target: No target set in NRP 

1.86 % (2009), 1.77 % (2010), 1.77 % (2011). 

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

(GHG)  emissions 

target: 

The  share  of  R&D  spending  in  UK  GDP  is  below 
the  EU  average  of  2.03 %.  It  has  averaged  around 
1.8 %  over  the  past  decade.  The  trend  since  2000 
shows  an  initial  fall,  a  mild  recovery  from  2005 
(peaking  in  2009),  and  a  recent  decline  then 
stabilisation. 

Change  in  non-ETS  greenhouse  gas  emissions 
between 2005 and 2011: -14 %. 

to 

the 

According 
latest  national  projections 
submitted  to  the  Commission  and  when  existing 
measures  are  taken  into  account,  the  target  is 
expected to be reached: -19 % in 2020 compared to 

EN 

34 

  EN 

 
2005 (with a margin of 3 pps). 

Renewable energy target: 15 % 
Share  of  renewable  energy  in  all  modes  of  transport: 
10 % 

Share  of  renewable  energy  in  gross  final  energy 
consumption  was  3.8 %  in  2011,  and  2.9 %  in 
transport74. 

interim 

trajectory 

Progress  to  date  was  not  sufficient  to  reach  the 
2011-12 
target  (4.1 %).  To 
achieve  the  2020  target,  the  UK  should  urgently 
finish developing and put in place a coherent, stable 
and 
support 
renewable 
framework. 

predictable 

energy 

Indicative  national  energy  efficiency  target  for  2020: 
final energy consumption in 2020 of 129.2 Mtoe. 
This  implies  reaching  a  2020  level  of  177.6  Mtoe 
primary  consumption  and  157.8  Mtoe  final  energy 
consumption. 

Early school leaving target: No target set in NRP 

Tertiary education target: No target set in NRP 

Risk  of  poverty  or  social  exclusion  target:  Existing 
numerical  targets  in  the  2010  Child  Poverty  Act  and 
Child Poverty Strategy 2011-14 

The United Kingdom has set an indicative national 
energy efficiency target in accordance with Articles 
3  and  24  of  the  Energy  Efficiency  Directive 
(2012/27/EU).  It  has  also  expressed  it,  as  required, 
in  terms  of  an  absolute  level  of  primary  and  final 
energy  consumption  in  2020  and  has  provided 
information on the basis on which data this has been 
calculated. 

Early school leaving rate: 14.9 % in 2010; 15.0 % in 
2011; 13.5 % in 2012. 

The early school leaving rate is falling but remains 
slightly above the EU average (12.9 % in 2012). The 
government  is  introducing  reforms  which  should 
have  a  significant  effect  in  reducing  early  school 
leaving.  The  age  of  compulsory  participation  in 
education or training is increasing from 16 to 17 in 
2013 and 18 in 2015.  

Tertiary  attainment  rate:  43.0 %  in  2010;  45.8 %  in 
2011; 47.1 % in 2012. 

The  UK  tertiary  attainment  rate  has  increased 
significantly  from  29 %  in  2000,  and  is  well  above 
the EU average (35.5 % in 2012). 

The percentage of the population at risk of poverty 
or  social  exclusion was 23.1 %  in  2010  and  22.7 % 
in 2011 (slightly below the EU averages of 23.6 % 
and 24.2 % respectively). 

The fall in the indicator from 2010 to 2011 is partly 
explained  by  a  reduction  in  the  poverty  threshold 
due  to  falling  real  median  income.  Three  other 
relevant  social  inclusion  indicators  rose  from  2010 
to  2011:  risk-of-poverty  or  exclusion  of  elderly: 
+0.4 pp.;  severe  material  deprivation:  +0.3 pp.;  in-
work at-risk-of-poverty rate: +1 pp.  

Although the latest figures show a reduction in the 
number of children living below the relative poverty 

74 Eurostat (April 2013). For 2011, only formally reported biofuels compliant with Art. 17 and 18 of Directive 
2009/28/EC are included) 

EN 

35 

  EN 

 
                                                 
threshold,  linked  to  the  drop  in  median  income, 
absolute poverty remained unchanged. Planned real 
terms  reductions  in  some  working  age  welfare 
benefits are likely to increase poverty rates. 

EN 

36 

  EN 

 
 
5.  ANNEX 

Table I. Macroeconomic indicators 

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 (-)

1995-
1999

2000-
2004

2005-
2009

2010

2011

2012

2013

2014

3.2
0.1
2.0
3.7
7.0
16.9
16.6

-2.3
48.2
n.a
38.5
40.7
3.4

3.3
0.9
1.2
3.7
5.0
16.8
15.0

-1.0
39.3
n.a
39.8
40.7
2.2

0.8
0.8
2.5
0.3
5.7
16.6
14.9

-5.1
50.0
n.a
41.0
46.1
2.1

1.8
-2.6
3.3
2.3
7.8
14.9
12.6

-10.2
79.4
n.a
40.3
50.5
3.0

1.0
-2.2
4.5
-0.6
8.0
14.1
13.7

-7.8
85.5
n.a
40.8
48.6
3.3

0.3
-2.5
2.8
1.4
7.9
14.2
10.8

-6.3
90.0
n.a
42.2
48.5
3.0

0.6
-2.6
2.8
0.6
8.0
14.4
11.8

-6.8
95.5
n.a
41.7
48.5
2.9

1.7
-1.8
2.5
1.3
7.9
14.9
12.9

-6.3
98.7
n.a
41.5
47.8
2.9

0.0

0.5

5.8

6.5

6.4

1.8

3.0

3.3

n.a
n.a
8.4
24.7

n.a
n.a
8.7
21.8

n.a
n.a
8.7
19.4

n.a
n.a
8.6
20.3

n.a
n.a
8.8
21.4

n.a
n.a
9.7
22.4

n.a
n.a
10.6
20.4

n.a
n.a
12.1
23.6

1.2
n.a
44.8
7.7
24.5
4.5

0.9
n.a
44.4
7.9
23.9
4.5

-2.6
n.a
45.3
7.2
21.9
2.1

1.5
n.a
45.5
10.5
22.4
5.1

-1.7
n.a
47.1
8.4
21.9
3.2

1.6
n.a
45.0
7.6
25.1
5.1

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 2005 market prices.
2 The indicator on domestic demand includes stocks.
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.

-2.1
n.a
-2.4
0.7
0.1
41.0
47.9
6.1
98.7
100.0
100.0

-0.8
n.a
-0.1
-0.4
0.1
44.3
44.8
5.3
86.6
96.5
111.0

-1.8
n.a
-2.6
2.0
0.2
n.a
n.a
n.a
87.4
93.9
95.1

-3.5
n.a
-2.3
-0.1
0.2
37.0
51.5
5.5
88.3
95.5
95.8

-2.5
n.a
-2.6
1.4
0.2
n.a
n.a
n.a
86.5
94.8
95.7

-1.1
n.a
-1.6
1.6
0.2
37.1
51.2
6.0
83.2
95.1
96.5

-1.7
n.a
-2.4
1.3
0.2
37.5
52.0
6.6
95.9
99.0
99.1

-2.3
n.a
-2.1
0.9
0.3
37.1
52.2
6.1
83.8
97.4
96.3

1.4
n.a
45.1
7.5
25.2
5.0

1.2
n.a
45.1
7.4
24.9
4.9

Source :
Commission services’ 2013 spring forecasts (COM); Convergence programme (CP).

EN 

37 

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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 (%)
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)

2012
COM CP
0.2
1.0
1.4
-0.3
2.0

0.3
1.2
1.5
-0.2
2.7

2013
COM CP
0.6
0.5
2.2
1.5
1.0

0.6
0.8
1.8
1.3
1.3

2014
COM CP
1.8
1.2
6.7
4.4
3.8

1.7
1.3
4.5
3.9
2.6

2015
CP
2.3
1.7
8.1
5.1
4.4

2016
CP
2.7
2.4
7.7
5.3
4.8

2017
CP
2.8
2.8
7.8
5.3
4.9

1.5
-0.1
-1.0
-2.5
1.2
7.9
-0.9
2.8
1.4
2.3
-3.5

1.4
-0.2
-0.8
-2.4
1.0
7.9
-1.1
2.8
1.3
1.4
-3.3

0.9
-0.3
0.0
-2.6
0.5
8.0
0.0
2.8
1.7
2.6
-2.5

0.7
-0.2
0.1
-2.6
1.0
7.9
-0.3
2.8
2.1
1.7
-2.3

1.4
0.0
0.4
-1.8
1.1
7.9
0.6
2.5
1.6
2.8
-1.8

1.6
0.0
0.1
-1.9
0.3
8.0
1.5
2.4
2.0
2.6
-1.9

2.2
0.0
0.1
-1.2
0.7
7.9
1.7
2.1
1.8
3.6
-1.6

2.5
0.0
0.1
-0.3
0.7
7.4
1.8
2.0
1.8
4.3
-1.4

2.7
0.0
0.1
0.3
0.7
6.9
2.0
2.0
1.7
4.1
n.a.

Note:
1In percent of potential GDP, with potential GDP growth recalculated by Commission services on the basis of the programme scenario 
using the commonly agreed methodology.

Source :

Commission services’ 2013 spring forecasts (COM); Convergence programme (CP).

EN 

38 

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Table III. Composition of the budgetary adjustment 

(% 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)

- Interest expenditure

General government balance (GGB)

Primary balance

One-off and other temporary measures

GGB excl. one-offs

Output gap

2

Cyclically-adjusted balance

2

3
Structural balance (SB)
Change in SB

Two year average change in SB 

Structural primary balance
Change in structural primary balance

3

Expenditure benchmark

Applicable reference rate

4

5

Deviation
Two-year average deviation (% GDP)

 (% GDP)

2012-
13

2013-14

2014-15

COM COM CP

1
COM

42.6

41.5

38.0

41.4

13.4

15.0

8.5

5.7

13.9

15.5

8.7

3.5

13.6

12.5

6.7

5.2

14.5

16.1

9.0

1.8

CP

37.8

13.6

12.6

6.5

5.1

2015-
16
CP

2016-
17
CP

2017-
18
CP

37.7

38.0

37.9

13.6

12.6

6.6

4.9

13.5

12.9

7.0

4.6

13.4

13.1

7.0

4.4

48.3

48.5

44.9

47.5

43.8

42.8

41.5

40.2

C h a n g e : 2 0 12 -
13  t o  2 0 17 - 18

CP

-4.3

0.1

-2.0

-1.5

-0.9

-8.3

45.3

45.5

41.7

44.4

40.6

39.4

37.9

36.4

-9.1

23.0

23.7

n.a.

24.0

n.a.

n.a.

n.a.

n.a.

15.6

16.1

n.a.

16.4

n.a.

n.a.

n.a.

n.a.

0.6

2.2

3.9

3.0

-5.6

-2.7

2.0

-7.6

-2.5

-4.4

-6.4

0.3

1.0

-3.4

0.09

-2.6

-2.3

0.6

2.3

2.8

3.0

-6.9

-4.0

0.0

-6.9

-2.4

-5.8

-5.8

0.6

0.5

-2.8

0.6

0.09

1.4

-0.6

0.6

1.9

3.4

3.2

-6.8

-3.7

0.0

-6.8

-2.6

-5.6

-5.6

0.8

0.6

-2.4

1.1

0.09

n.a.

n.a.

0.6

2.4

1.0

3.1

-6.1

-3.2

0.0

-6.1

-1.7

-5.3

-5.3

0.5

0.6

-2.2

0.6

0.04

-0.2

0.6

0.7

2.0

3.2

3.2

-6.0

-2.8

0.0

-6.0

-1.9

-5.1

-5.1

0.5

0.7

-1.9

0.5

0.04

n.a.

n.a.

0.7

1.9

3.0

3.4

-5.2

-1.8

0.0

-5.2

-1.2

-4.6

-4.6

0.4

0.5

-1.2

0.6

0.04

n.a.

n.a.

0.7

1.9

2.9

3.6

-3.5

0.1

0.0

-3.5

-0.3

-3.3

-3.3

1.3

0.9

0.3

1.5

0.04

n.a.

n.a.

0.7

1.8

2.7

3.8

-2.3

1.5

0.0

-2.3

0.3

-2.4

-2.4

0.9

1.1

1.4

1.1

n.a.

n.a.

n.a.

n.a.

n.a.

0.1

-0.3

-1.2

0.8

4.0

4.9

-1.8

5.9

2.7

2.7

4.5

-

-

5.4

-

-

-

-

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 programme scenario using the commonly agreed methodology.
3Structural (primary) balance = cyclically-adjusted (primary) balance excluding one-off and other temporary measures.

4 Reference medium-term rate of potential GDP growth. The (standard) reference rate applies from year t+1, if the country has reached its 
M TO in year t. A lower  rate applies as long as the country is adjusting towards its M TO, including in year t.The reference rates applicable 
to 2014 onwards have been updated in 2013. 
5 Deviation of the growth rate of public expenditure net of discretionary revenue measures and revenue increases mandated by law from the 
applicable reference rate. The expenditure aggregate used for the expenditure benchmark is obtained following the commonly agreed 
methodology. A positive sign implies that expenditure growth exceeds the applicable reference rate. 

Source :

Convergence programme (CP); Commission services’ 2013 spring forecasts (COM); Commission services’ calculations.

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39 

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Table IV. Debt dynamics 

(% of GDP)

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

5,6

Gap to the debt benchmark
Structural adjustment7
To be compared to:
Required adjustment8
Notes:

Average
2007-08 to 
2011-12

68.0

8.7

5.2

1.1

2.6

-0.2

-1.3

2.4

2012-
13

90.6

4.3

2.7

1.3

3.0

-0.2

-1.5

0.3

2013-14

2014-15

2015-

2016-

2017-

COM

CP

COM

CP

CP

CP

CP

95.6

5.0

94.9

4.3

98.7

3.0

98.6

3.7

100.8

100.8

2.2

0.0

99.4

-1.4

4.0

1.0

2.9

-0.8

-1.2

0.0

3.7

0.7

3.1

-0.5

-1.8

-0.2

3.2

-0.6

2.9

-1.7

-1.8

0.5

2.8

-0.2

3.2

-1.6

-1.8

1.2

1.8

-0.5

3.4

-2.2

-1.8

1.0

-0.1

-0.6

3.6

-2.6

-1.6

0.7

-1.5

-0.6

3.8

-2.7

-1.7

0.7

2013

2014

2015

2016

2017

2012

n.r.

n.r.

n.r.

COM / 
CP3
n.r

n.r.

n.r.

CP4

n.r.

n.r.

n.r.

COM / 
CP3
n.r

n.r.

n.r.

CP4

n.r.

n.r.

CP

n.r.

0.5

CP

n.r.

1.3

SP

n.r.

0.9

n.r.

1.0

1.3

1.3

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. 

3 Assessment of the consolidation path set in CP assuming growth follows the COM  forecasts.
4Assessment of the consolidation path set in the CP assuming growth follows the CP projections.
5Not relevant for M ember Sates that were subject to an EDP procedure in November 2011 and for a period of 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 – M ember State will 
comply with the debt reduction benchmark at the end of the transition period, assuming that COM  (SP) budgetary projections for the 
previous years are achieved.

Source :

Convergence programme (CP); Commission services’ spring 2013 forecasts (COM); Commission services’ calculations.

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Table V. Sustainability indicators 

S2

of which:

Initial budgetary position (IBP)

Long-term cost of ageing (CoA)

of which:

Pensions

Health care

Long-term care

Others

S1 (required adjustment)*

of which:

Initial budgetary position (IBP)

Debt requirement (DR)

Long-term cost of ageing (CoA)

S0 (risk for fiscal stress)**

Debt,  % of GDP (2012)

Age-related expenditure, % of GDP (2012)

UK

EU27

No-policy 
change 
scenario 

Programme 
(SCP) 
scenario

No-policy 
change 
scenario 

Programme 
(SCP) 
scenario

6.2

3.6

2.6

1.2

0.8

0.5

0.1

6.1

3.4

2.5

0.2

2.4

-0.4

2.8

1.5

0.8

0.5

0.1

2.4

-1.0

3.1

0.3

3.0

0.8

2.2

1.0

0.9

0.6

-0.4

2.2

0.0

1.9

0.3

1.3

-0.9

2.2

1.1

0.8

0.6

-0.3

0.5

-1.8

1.9

0.4

0.29

90.0

22.3

:

87.0

25.8

Note: 
The 'No-policy change' scenario depicts the sustainability gap under the assumption that the budgetary position evolves 
according to the Commissions' spring 2013 forecast until 2014. The 'Programme (SCP)' 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.              
** The critical threshold for the S0 indicator is 0.44. 

Source : 
Commission services; 2013 stability programme.                                                                                                                               

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Table VI. Taxation indicators 

Total tax revenues (incl. actual compulsory social contributions, % of GDP)

35.2

36.6

37.6

34.6

35.4

36.1

2002

2006

2008

2009

2010

2011

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 taxes 2
3
VAT efficiency
     Actual VAT revenues as % of theoretical revenues at standard rate

11.6

10.9

10.7

10.3

11.2

11.9

6.7

1.4

2.2

1.4

6.6

1.2

1.8

1.3

6.4

1.2

1.8

1.3

5.7

1.3

1.9

1.4

6.5

1.3

1.9

1.5

7.3

1.3

1.9

1.5

13.6

14.2

14.4

14.2

14.1

14.0

0.2

5.5

4.3

2.7

0.2

6.8

4.6

2.4

0.2

6.6

5.8

2.4

0.1

5.6

4.4

2.6

0.2

5.7

4.3

2.6

0.2

5.7

4.4

2.6

48.2

47.9

46.3

46.7

46.3

46.5

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 
(2013) 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 (2012), Tax reforms in EU M ember States, European Economy 6/2012 and Taxation Papers 34/2012 for a more detailed 
explanation.

Source: Commission

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Table VII. Financial market indicators 

Total assets of the banking sector (% of GDP)

482.3

569.4

536.7

557.0

503.5

2008

2009

2010

2011

2012

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)1)
              - capital adequacy ratio (%) 1)
              - return on equity (%) 1), 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)3)
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) Latest data (December 2011).
2) After extraordinary items and taxes.
3) Covered countries are CY, EL, ES, LV, HU, IE, PT and RO.
4) Latest data 2012Q3.

* M easured in basis points.
Source :

35.3

50.9

1.6
12.9

-10.3

-14.9

-27.5

117.1

…

13.7

…

13.0
111.7

0.5

48.0

34.1

45.8

3.5
14.8

2.6

3.2

24.1

110.0

…

15.4

39.8

…

4.0
15.9

3.9

4.6

18.0

107.1

…

13.6

44.1

…

4.0
15.7

2.2

-1.5

3.9

…

…

...
...

...

2.9

4.4

104.0

102.6

…

12.0

208.8

204.9

195.2

17.8
138.4

0.1

84.8

23.3
140.6

0.6

72.8

29.0
151.4

0.3

72.4

…

9.9

…

28.8
156.7

0.2

59.1

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) and ECB (all other indicators).

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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, 
15 years and more)
Part-time employment of women  (% of women employment, 15 
years and more)
Part-time employment of men  (% of men employment, 15 years 
and more)
Fixed term employment (% of employees with a fixed term 
contract, 15 years and more)
Transitions from temporary 
to permanent employment
Unemployment rate1 (% of labour force, 
age group 15-74)
Long-term unemployment rate2 (% of labour force)
Youth unemployment rate 
(% of youth labour force aged 15-24)
Youth NEET rate (% of population aged 15-24)

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)
Formal childcare (from 1 to 29 hours; % over the population less 
than 3 years)
Formal childcare (30 hours or over; % over the population less 
than 3 year)
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)

Real unit labour cost growth (annual % change)

2007

2008

2009

2010

2011

2012

75.2

75.2

73.9

73.6

73.6

74.2

0.7

68.4

82.2

57.4

25.2

42.2

10.8

5.9

:

5.3

1.3

14.3

11.9

16.6

38.5

34.0

4.0

2.9

0.1

2.8

2.9

2.1

-0.1

0.3

68.8

81.8

58.0

25.3

41.8

11.3

5.4

:

5.6

1.4

15.0

12.1

17.0

39.7

31.0

4.0

-1.7

-1.3

-0.4

-1.5

3.2

0.2

-1.7

68.2

79.6

57.5

26.1

42.5

11.8

5.7

:

7.6

1.9

19.1

13.3

15.7

41.5

31.0

4.0

-2.4

-0.4

-2.0

1.5

5.5

4.1

-0.7

67.9

79.3

57.1

26.9

43.3

12.6

6.1

1.6

7.8

2.5

19.6

13.7

14.9

43.0

31.0

4.0

1.6

-0.6

2.2

0.0

1.1

-1.6

0.5

67.9

79.4

56.7

26.8

43.1

12.7

6.2

1.7

8.0

2.7

21.1

14.3

15.0

45.8

30.0

5.0

0.4

0.8

-0.4

-0.5

1.5

-0.8

1.9

68.4

80.1

58.1

27.2

43.4

13.3

6.3

:

7.9

2.8

21.0

14.0

13.5

47.1

:

:

-0.7

-0.9

0.2

1.0

3.2

1.8

Notes:
1 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.

2 Long-term unemployed are unemployed persons for at least 12 months.

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

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44 

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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
At-risk-of-poverty or social exclusion1 
(% of total population)
At-risk-of-poverty or social exclusion of children 
(% of people aged 0-17)
At-risk-of-poverty or social exclusion of elderly 
(% of people aged 65+)
At-Risk-of-Poverty rate2 (% of total population)
Severe Material Deprivation3  (% of total population)
Share of people living in low work intensity households 4 (% of 
people aged 0-59)
In-work at-risk-of poverty rate (% of persons employed)
Impact of social transfers (excluding pensions) on reducing 
poverty
Poverty thresholds, expressed in national currency at constant 
prices5
Gross disposable income (households)
Relative median poverty risk gap (60% of median equivalised 
income, age: total)

Notes:

2006

2007

2008

2009

2010

7.99

2.41

11.30

1.51

0.63

1.44

25.45

3.92

7.61

2.50

10.47

1.59

0.51

1.15

24.05

3.57

7.84

2.73

10.91

1.68

0.59

1.22

25.15

3.68

8.79

2.92

11.93

1.93

0.83

1.46

28.09

4.20

8.57

2.78

11.49

1.87

0.73

1.51

27.15

4.23

2007

2008

2009

2010

2011

22.6

27.6

27.9

18.6

4.2

10.3

8.0

37.4

23.2

29.6

28.5

18.7

4.5

10.4

8.5

35.3

22.0

27.4

23.1

17.3

3.3

12.6

6.7

43.1

23.1

29.7

22.3

17.1

4.8

13.1

6.8

44.8

22.7

26.9

22.7

16.2

5.1

11.5

7.9

46.9

8682

8834

8196

8129

7973

872401

904588

933599

972492

1002261

22.4

21.0

20.6

21.4

21.1

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 (SM D) and/or living in household with zero or very low work intensity (LWI).
2 At-risk-of poverty rate (AROP): 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 (excluding 
dependent children) work less than 20% of their total work-time potential during the previous 12 months.

5 For EE, CY, M T, SI, SK, thresholds in nominal values in Euros; HICP -  index 100 in 2006 (2007 survey refers to 2006 incomes)

Sources: 
For expenditure for social protection benefits ESSPROS; for social inclusion EU-SILC.

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45 

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Table IX. Product markets 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, steam and 
air conditioning supply (annual growth in %)
Labour productivity1 in the construction sector 
(annual growth in %)
Total number of patent2 applications per million of 
labour force

Policy indicators

Enforcing contracts 3 (days)
Time to start a business 3 (days)
R&D expenditure (% of GDP)
Tertiary educational attainment 
(% of 30-34 years old population)
Total public expenditure on education 
(% of GDP)

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 Industries 5
(Index; 0=not regulated; 6=most regulated)

2003-
2007

2.1

6.0

2008

2009

2010

2011

2012

-1.5

-2.3

3.1

-5.4

1.3

6.4

0.6

3.6

-0.5

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

-0.5

-2.7

-10.8

13.1

7.6

n.a.

185.6

166.1

160.4

152.8

n.a.

n.a.

2003-
2007
404

13

1.7

2008

2009

2010

2011

2012

404

13

1.8

399

13

1.9

399

13

1.8

399

13

1.8

399

13

n.a.

34.9

39.7

41.5

43.0

45.8

46.8

5.32

5.37

5.67

n.a.

n.a.

n.a.

2007

2008

2009

2010

2011

2012

n.a.

n.a.

0.8

2.0

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

0.9

n.a.

n.a.

n.a.

n.a.

n.a.

Notes:
1 Labour productivity is defined as gross value added (in constant prices) divided by the number of persons employed.
2 Total number of patent applications to the European Patent Office (EPO) per million of labour force
3 The methodologies, including the assumptions, for this indicator are presented in detail on the website 
http://www.doingbusiness.org/methodology. 
4 The methodologies of 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 Energy, Transport and Communications Regulation (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). 

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Table X. 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**
Gas 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
Security of energy supply
Energy import dependency
Diversification of oil import sources 
Diversification of energy mix
Share renewable energy in energy mix

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

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

%
HHI
HHI
%

2002-
2006

0.13
0.37
0.42
n.a.
0.1%
n.a.
n.a.
18.5%
7.3%

0.12
n.a.
n.a.
n.a.
n.a.
n.a.
30.6%
n.a.
n.a.
n.a.

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

2007

2008

2009

2010

2011

0.11
0.33
0.38
n.a.
-0.4%
8
4.9
17.2%
6.9%

0.11
n.a.
0.11
0.03
0.00%
0.01%
42.9%
39.8%
0.47
1.08

20.5%
0.22
0.30
2.1%

0.11
0.32
0.36
0.17
-0.7%
7
14.9
16.3%
6.3%

0.12
n.a.
0.10
0.03
0.00%
0.02%
46.7%
42.1%
0.46
1.04

26.2%
0.22
0.31
2.5%

0.11
0.31
0.34
n.a.
-0.4%
8
4.8
17.9%
7.5%

0.11
n.a.
0.11
0.03
0.01%
0.02%
49.8%
40.2%
0.45
1.00

26.2%
0.22
0.30
3.0%

0.11
0.31
n.a.
0.14
-0.5%
9
-6.1
18.2%
7.3%

0.11
n.a.
0.10
0.02
0.00%
0.02%
50.4%
40.0%
n.a.
n.a.

28.1%
0.23
0.31
3.2%

0.10
n.a.
n.a.
n.a.
-1.0%
9
5.4
n.a.
n.a.

n.a.

n.a.
0.10
0.03
0.00%
0.02%
n.a.
40.0%
n.a.
n.a.

36.0%
n.a.
0.29
3.9%

Country-specific notes: 
The year 2012 is not included in the table due to lack of data.
General explanation of the table items:
Source: Eurostat unless indicated otherwise; ECFIN elaborations indicated 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 M aterial 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 2005 EUR) 
Share of energy-intensive industries in the economy: share of gross value added of the energy-intensive industries in GDP
Electricity and gas prices medium industrial users: consumption band 500  - 2000M Wh and 10000 - 100000 GJ;  figures excl. VAT.
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 M ember States to EEA (excl LULUCF)
Transport energy intensity: final energy consumption of transport activity (kgoe) divided by transp industry gross value added (2005 EUR)
Transport carbon intensity:  greenhouse gas emissions in transport activity divided by gross value added of the transport sector
Energy import dependency: net energy imports divided by gross inland energy consumption incl. energy consumption 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 renewable energy in energy mix: %-share in  gross inland energy consumption, expressed in tonne oil equivalents

*Provisional data (15 April 213). Commission Services and EEA.

** For 2007 average of S1 & S2 for DE, LU, NL, FI, SE & UK. Other countries only have S2.

*** For 2007 average of S1 & S2 for IT, NL, FI, SE & UK. Other countries only have S2.

EN 

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  EN