Macroeconomic imbalances : United Kingdom 2014.
Date: 2014-05-08
Institutions: Directorate-General for Economic and Financial Affairs
Subjects: United Kingdom, economic forecasting, economic indicator, export, industrial restructuring, macroeconomics, public finance

European Commission 

Directorate-General for Economic and Financial Affairs 

Macroeconomic Imbalances  

United Kingdom 2014  

EUROPEAN ECONOMY                                                                                   Occasional Papers 188 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ACKNOWLEDGEMENTS 

This  report  was  prepared  in  the  Directorate  General  for  Economic  and  Financial  Affairs  under  the 
direction of Servaas Deroose, deputy director-general, Matthias Mors and Anne Bucher, directors. 

The main contributors were Matthias Mors, Heinz Jansen, Christian Weise, Antonino Barbera Mazzola, 
Olivia Mollen and Peter Symons. Other contributors were Paulus Arnoldus, Martijn Brons, Jorge Duran 
Laguna, Aron Kiss, Vitor Martins, Daniel Monteiro, Peter Pontuch and Hylke Vandenbussche. Statistical 
assistance was provided by Johann Korner, Ulrike Stierle-von Schutz and Laura Fernández Vilaseca. 

Comments on the report would be gratefully received and should be sent, by mail or e-mail to: 

Heinz Jansen 
European Commission 
DG ECFIN, Unit G2  
B-1049 Brussels 
e-mail: heinz.jansen@ec.europa.eu 

The cut-off date for this report was 25 February 2014. 

ii 

 
 
 
Results  of  in-depth  reviews  under  Regulation  (EU)  No  1176/2011  on  the  prevention  and  correction  of 
macroeconomic imbalances 

The United Kingdom continues to experience macroeconomic imbalances, which require monitoring and policy 
action. In particular, developments in the areas of household debt, linked to the high levels of mortgage debt and 
structural characteristics of the housing market, as well as unfavourable developments in export market shares, 
continue to warrant attention.  

More  specifically,  while  recent  growth  in  economic  activity  is  welcome,  it  is  driven  mostly  by  household 
consumption and is accompanied by a rising current account deficit. Business investment and net exports are yet 
to  pick  up  from  their  current  low  levels.  Containing  high  indebtedness,  in  particular  of  the  household  sector, 
while minimising the impact on investment and growth, would help limit medium-term risks and vulnerability to 
rises  in  the  cost  of  borrowing.  Credit  growth  for  mortgage  loans  has  been  modest  but  rising  from  high  pre-
existing levels of household indebtedness. The risks in the housing sector relate to a continuing structural under-
supply of housing; the relatively  slow response of  supply to increases in demand results in high  house prices, 
particularly in London and the Southeast, and in household mortgage indebtedness. While the declining export 
market  share  is  unlikely  to  pose  short-term  risks,  together  with  the  current  account  deficit,  it  still  points  to 
structural challenges. These are related to skills  gaps and a low level of infrastructure endowment.  As regards 
public finances, the UK seems to continue missing its headline deficit targets and its structural adjustment targets 
by wide margins. 

Excerpt of country-specific findings on The United Kingdom, COM(2014) 150 final, 5.3.2014 

3 

 
 
 
Executive Summary and Conclusions 

1. 

Introduction 

2.  Macroeconomic Developments 

3. 

Imbalances and Risks 

3.1.  Export Share and Competitiveness 

3.1.1.  The current account deficit 

3.1.2.  Export shares challenge 

3.1.3.  The impact of the depreciation 

3.1.4.  Policy responses: Infrastructure, skills and SME finance 

3.1.5.  Conclusions 

3.2.  Private Sector Indebtedness 

3.2.1.  Introduction 

3.2.2.  Trends and developments 

3.2.3.  Credit supply 

3.2.4.  Cost of credit 

3.2.5.  Near-term outlook for credit supply and demand 

3.2.6.  Risks 

3.2.7.  Government policy – developments and impact 

3.2.8.  Conclusion 

3.3. 

The Housing Sector and Household Mortgage Indebtedness 

3.3.1.  Introduction 

3.3.2.  Trends and Developments 

3.3.3.  Risks 

3.3.4.  Government policy - responses and challenges 

3.3.5.  Conclusion 

4. 

Policy Challenges 

References 

LIST OF TABLES 

2.1.  Key economic, financial and social indicators - United Kingdom 

3.1.  Elasticity of supply 

9 

11 

13 

17 

17 

17 

18 

21 

23 

29 

30 

30 

30 

32 

34 

35 

35 

38 

40 

40 

40 

41 

46 

51 

54 

57 

60 

16 

50 

5 

 
 
 
 
LIST OF GRAPHS 

2.1.  External and domestic demand - growth contribution 

2.2.  Youth unemployment rate (% of youth labour force aged 15-24) 

2.3.  Debt Decomposition, all sectors, consolidated 

2.4.  Decomposition of credit flows, consolidated 

3.1.  Decomposition of external position (current and capital accounts) 

3.2.  Export shares 

3.3. 

Investment and gross savings 

3.4.  UK's world market share for services 

3.5.  Goods export: geographical and sectoral composition 

3.6.  Dynamism and competitiveness of goods export 

3.7.  Export destinations, goods 

3.8.  Exchange rate developments 

3.9.  Deflator of exports 

3.10.  Decomposition of REER 

3.11.  Nominal effective exchange rate (NEER) 

3.12.  Unit labour costs and its components 

3.13a. UK firm-level Return on Assets, industry medians 

3.13b. France, Italy and Spain firm-level Return on Assets, industry medians 

3.14.  Transport gross investment spending (exluding maintenance) 

3.15a. Beveridge curve - pre- and post-crisis 

3.15b. Beveridge curve - by duration of unemployment, after 2008 

3.16.  Lending to UK private non-financial corporations 

3.17.  Corporate credit costs by firm size 

3.18.  Lending to UK private non-financial corporations 

3.19.  Households' and PNFCs' indebtedness 

3.20.  PNFCs' debt as percentage of gross operating surplus 

3.21.  Measures of PNFCs' leverage 

3.22.  Household debt as a percentage of gross disposable income 

3.23.  Composition of household deleveraging 

3.24.  Gross operating surplus and household gross disposable income 

3.25.  Household saving ratio 

3.26.  Credit growth by sector 

3.27.  Economic sentiment and consumer confidence 

3.28.  PNFCs' cost of borrowing 

3.29.  Stock of UK loans by sector a) 

3.30.  PNFCs' profitability ratios 

3.31.  PNFCs' financial assets 

3.32.  Liabilities and Loans/Deposits Ratio, Financial Corporations 

3.33.  Homeownership rate 

3.34.  Property transactions 

6 

13 

13 

14 

15 

17 

18 

18 

19 

19 

21 

21 

21 

21 

22 

22 

22 

23 

23 

24 

26 

26 

28 

28 

28 

30 

31 

31 

31 

31 

32 

32 

32 

34 

35 

37 

37 

37 

38 

41 

41 

 
 
3.35.  Number of loans approval for house purchase and for remortgaging, seasonally adjusted 

3.36.  Measures of near-term demand 

3.37.  Quoted mortgage rates 

3.38.  2-Year fixed mortgage Rate and 2-Year Swap Rates 

3.39.  Net balance of consumers that believe that now is a good time in which to make a major 

purchase 

3.40.  Private sector housing starts and completions 

3.41.  House Price Index 

3.42a. Selling price achieved as a share of the asking price 

3.42b. House price expectations 12-months ahead 

3.43.  House prices to disposable income 

3.44.  Price to rent 

3.45.  Mortgage interest payments as a percentage of household disposable income 

3.46.  Regional house price developments 

3.47.  Regional house prices (change in levels) 

3.48.  Housing affordability by region 

3.49.  Mortgage approvals and house price growth 

3.50.  House prices and mortgage debt 

3.51.  Market expectations of future yields 

3.52.  Mortgage arrears and repossession rates 

3.53.  Proportion of mortgage applications approved (% balance) 

3.54.  Housing tenure and housing cost overburden rates 

LIST OF BOXES 

3.1. 

The Financial and Insurance services sector 

3.2.  PNFCs - supply and demand for credit. 

3.3. 

Sources of funds for PNFCs 

41 

41 

42 

42 

42 

43 

44 

44 

44 

44 

44 

45 

45 

45 

45 

46 

46 

47 

48 

48 

54 

20 

33 

36 

7 

 
 
 
 
 
 
 
EXECUTIVE SUMMARY AND CONCLUSIONS 

In  April  2013,  the  Commission  concluded  that  the  United  Kingdom  was  experiencing  macroeconomic 
imbalances,  relating  to  household  debt,  the  housing  market  and,  to  a  lesser  extent,  external 
competitiveness.  In  the  Alert  Mechanism  Report  (AMR),  published  on  13 November  2013,  the 
Commission  found  it  useful,  also  taking  into  account  the  identification  of  an  imbalance  in  April,  to 
examine  further  the  persistence  of  imbalances  or  their  unwinding.  To  this  end,  this  In-Depth  Review 
(IDR) provides an economic analysis of the UK economy in line with the scope of the surveillance under 
the Macroeconomic Imbalance Procedure (MIP). The main observations and findings from this analysis 
are: 

•  Growth picked up markedly in 2013 at 1.8% compared with 0.3% in 2012 and is projected to 
increase  further  to  2.5%  in  2014.  Growth  in  the  UK  outstripped  that  in  the  euro  area  (-0.4%  in 
2013),  the  largest  export  market  for  the  UK.  However,  growth  has  been  driven  predominantly  by 
household  demand  and  has  been  accompanied  by  a  rise  in  the  current  account  deficit.  In  2013, 
domestic demand contributed 1.6 pps. to growth, driven mainly by an upswing in private consumption 
while net exports contributed slightly to growth by 0.1 pp. A more broadly based recovery is desirable 
in which both business investment and net exports contribute positively to growth. 

•  The export market share continues to decline although it has stabilised recently and the pace of 
decline  has  fallen.  Reflecting  the  impact  of  the  international  economic  crisis,  financial  services 
exports have fallen. Following the strong depreciation of sterling in 2008-2009, exporters responded 
by  raising  margins  instead  of  increasing  market  share  so  the  impact  of  the  depreciation  on  export 
growth  has  been  relatively  subdued.  The  risks  associated  with  the  declining  export  share  are  less 
marked in the short term but are higher in the medium term - the current account deficit may gradually 
increase  over  the  medium  term  should  the  export  market  share  continue  to  deteriorate.  Structural 
challenges  to  raising  exports  include  a  low  level  of  infrastructure  endowment,  skills  gaps,  in 
particular,  in  technical  areas  and  constrained  access  to  finance  for  Small  and  Medium-sized 
Enterprises (SMEs). Policy initiatives are being developed to address these issues. 

•  Fiscal  consolidation  is  underway  which  aims  to  stabilise  and  reverse  the  high  general 
government  debt  ratio  which  averaged  around  40%  of  GDP  in  the  decade before  the  international 
economic  crisis  but  rose  swiftly  to  reach  almost  90%  of  GDP  in  2012-13.  The  budget  deficit  was 
below  3%  of  GDP  in  2007-08  but  increased  rapidly  to  peak  at  11.4%  in  2009-10.  Reflecting  the 
impact of a substantial and necessary fiscal consolidation, the budget deficit fell to 5.2% in 2012-13. 
The  fiscal  consolidation  is  expected  to  continue  and,  as  a  result,  the  deficit  is  projected  to  decrease 
further  with  the  pace  of  increase  in  general  government  indebtedness  falling.  The  UK  is  currently 
subject to an Excessive Deficit Procedure.  

•  Although  the  pace  of  private  sector  deleveraging  has  slowed  recently,  private  sector 
indebtedness  has  fallen  significantly  from  its  peak,  in  particular,  for  private  non-financial 
corporations (PNFCs). PNFCs' balance sheets are strong and the PNFC sector is a net lender to the 
rest of the economy suggesting that the sector is resilient despite the slowing in deleveraging; the risks 
posed by high PNFCs' debt are less marked than at the time of the 2013 IDR.  

•  Household  sector  indebtedness,  despite  having  declined  from  its  peak,  remains  high  and 
continues  to  pose  risks.  Households'  debt  predominantly  comprises  mortgages  secured  against 
houses. Demand for houses is increasing, reflecting increased confidence, the low cost of borrowing 
and easing credit constraints. The increase in supply of new properties has, however, been muted. As a 
result,  house  prices  are  rising  and  household  mortgage  indebtedness  is  expected  to  increase.  In  the 
short  term,  the  increase  in  housing  supply  is  likely  to  remain  below  that  of  household  formation 
although the government is implementing reforms to boost the supply of land and the stock of housing 
in the short and medium terms. The housing market is marked by divergent developments in London 
and the rest of the UK. In the year to November 2013, house prices increased by 5.4% largely driven 

9 

 
by  rises in London where prices increased by 11.6% whereas, excluding London and the south east, 
house prices increased modestly by 3.1%. 

•  Credit constraints are easing for households and credit supply is rising. However, credit supply 
continues to fall for PNFCs – it fell by 3.4% in the year to December 2013 – while, for households, 
secured lending increased in the same period by 0.9%. There is a need to ensure adequate access to 
finance for PNFCs, particularly SMEs, that need it to invest and expand. Policies are in place to help 
address the issue. 

This IDR analyses these imbalances and associated risks and challenges. It considers a number of ways in 
which government policy can address the challenges,  minimise the risks associated  with any imbalance 
and prevent it from worsening.  

•  To  improve  external  competitiveness,  improvements  in  infrastructure,  skills,  credit  access  for 
SMEs  and  export  promotion  could  be  considered.  Firstly,  transport  bottlenecks  and  capacity 
shortages  could  be  addressed  by  investing  in  infrastructure.  The  UK  government's  National 
Infrastructure  Plan  2013  sets  out  ambitious  plans  to  boost  the  quality  and  quantity  of  national 
infrastructure  and  envisages  investment  of  GBP  375  billion,  a  significant  portion  (around  three-
quarters)  of  which  is  private  sector  funding;  effective  implementation  and  harnessing  private  sector 
funding is  key. Secondly, businesses require a labour force  with specific intermediate and advanced 
technical skills in order to expand. Gaps in this area could be reduced by focussing on STEM (science, 
technology, engineering and mathematics) skills and apprenticeships and cooperating with businesses 
in  order  to  identify  the  professional  and  technical  skills  required  by  the  tradable  sector.  The 
government published an implementation plan on apprenticeships and has initiatives in place to raise 
vocational skills.  Thirdly, whilst credit constraints have diminished, particular challenges surrounding 
access  to  credit  remain  for  SMEs.  The  establishment  of  the  Business  Bank  is  a  positive  step  and 
should  help  SMEs  obtain  alternative  sources  of  finance  while  the  refocussing  of  the  Funding  for 
Lending Scheme to PNFCs only should help all PNFCs including SMEs. Fourthly, exports could be 
stimulated by providing export credit  where constraints exist. Finally,  facilitating the recruitment of 
foreign experts could improve external mobility and ability to engage in international trade. 

•  To  minimise  the  risks  associated  with  rising  house  prices  and  high  household  indebtedness, 
there is a need to address the short and medium term  imbalance between supply and demand 
for  property.  A  number  of  useful  policy  initiatives  are  being  implemented  but  there  is  scope  for 
further action. In relation to demand, at a time in which credit constraints are easing in the mortgage 
market, the need for the Help to Buy 2 policy may diminish. Close monitoring of credit availability 
and associated macroeconomic developments is required given the risks associated with Help to Buy 2 
and the policy could be scaled back – and/or more closely targeted – should credit supply growth rise 
further  and  credit  constraints  continue  to  ease.  In  relation  to  macro-prudential  regulation  of  credit 
conditions in the housing sector, there is a case for a more detailed public assessment by the Financial 
Policy Committee of the Bank of England of the merits of the various instruments available to it and 
the  situations  in  which  they  would  be  deployed  to  increase  markets'  knowledge  of  its  approach  to 
regulation.  In  relation  to  supply,  there  is  scope  to  consider  the  development  of  appropriate  and 
targeted  incentives  for  local  authorities  to  release  land  with  planning  permission  attached  for 
development in the context of local solutions to inadequate supply. Local solutions may also include 
the taxation of vacant property. In relation to taxation, revaluation of the property roll would reduce 
distortions in the taxation system in favour of owner-occupied housing. 

10 

 
 
1. 

INTRODUCTION 

On 13 November 2013, the European Commission presented its third Alert Mechanism  Report (AMR), 
prepared  in  accordance  with  Article  3  of  Regulation  (EU)  No.  1176/2011  on  the  prevention  and 
correction  of  macroeconomic  imbalances.  The  AMR  serves  as  an  initial  screening  device  helping  to 
identify Member  States that  warrant  further in depth analysis to determine  whether  imbalances exist or 
risk  emerging.  According  to  Article  5  of  Regulation  No.  1176/2011,  these  country-specific  “in-depth 
reviews”  (IDR)  should  examine  the  nature,  origin  and  severity  of  macroeconomic  developments  in  the 
Member State concerned, which constitute, or could lead to, imbalances. On the basis of this analysis, the 
Commission will establish whether it considers that an imbalance exists in the sense of the legislation and 
what type of follow-up in terms it will recommend to the Council. 

This is the third IDR for the United Kingdom. The previous IDR was published on 10 April 2013 on the 
basis of which the Commission concluded that the UK was experiencing macroeconomic imbalances, in 
particular  as  regards  developments  related  to  household  debt,  the  housing  market  and,  to  some  extent, 
external competitiveness. Overall, in the AMR, the Commission found it useful, also taking into account 
the  identification  of  an  imbalance  in  May,  to  examine  further  the  persistence  of  imbalances  or  their 
unwinding.  To  this  end,  this  IDR  provides  an  economic  analysis  of  the  UK  economy  in  line  with  the 
scope of the surveillance under the Macroeconomic Imbalance Procedure (MIP). 

Section  2  provides  an  overview  of  general  macroeconomic  developments,  section  3  considers  the  main 
imbalances and risks, including on export share, private indebtedness and the housing sector and section 4 
discusses policy considerations. 

11 

 
2.  MACROECONOMIC DEVELOPMENTS 

Growth and inflation 

Unemployment and poverty 

demand, 

particularly 

The  recovery  since  the  international  economic 
crisis had been slow and protracted until 2013. 
However, 2013 finally saw a decisive shift towards 
a  more  sustained  recovery  in  which  growth 
reached  1.8%.  The  main  source  of  growth  was 
private 
domestic 
consumption. Net exports detracted from growth in 
2012  but  made  a  small  positive  contribution  in 
2013.  Despite the pick up in growth in 2013, the 
economy remains 1.4% below  the pre-crisis peak. 
Growth is projected to rise further in 2014 to 2.5%, 
stabilise  somewhat  thereafter  and  broaden  as 
growth gross fixed capital formation increases and  
the  contribution  to  growth  from  net  exports 
becomes positive but remains small (Graph 2.1). 

Graph 2.1: External and domestic demand -
growth contribution

s
p
p
,

%

6

4

2

0

-2

-4

-6

-8

99 00 01 02 03 04 05 06 07 08 09 10 11 12 13*14*15*

Inventories investment
Consumption
Real GDP growth

Investment (GFCF)
Net exports

* estimated

Source: Commission Services

Inflation  has  been  on  a  downward  trajectory 
since September 2011  when  it peaked at a 5.2%. 
Following  some  stickiness  in  the  twelve  months 
from  October  2012  in  which  inflation  averaged 
2.7%,  the  rate  has  fallen  more  quickly  in  recent 
months  to  1.9%  in  January  2014.  The  recent 
decline  can  be  attributed  to  a  fall  in  oil  prices, 
delayed rises in utility charge increases and lower-
in  education  costs. 
than-expected 
Inflation is expected to remain around the Bank of 
England’s 2% target. 

increases 

The  unemployment rate peaked at 8.4% in the 
final quarter of 2011 and has fallen consistently 
since  then.  In  the  final  quarter  of  2013,  the 
unemployment  rate  was  7.2%.   The  fall  in  the 
unemployment rate has occurred as strong rises in 
private  sector  employment  have  outweighed 
reductions  in  public  sector  employment.  Between 
the  third  quarter  of  2009  and  the  same  quarter  in 
2013,  public  sector  employment  has  fallen  by 
some  10.6%  (1).  However,  the  improvements  in 
employment  have  been  accompanied  by  stagnant/ 
declining levels of productivity. 

The  regions  with  the  highest  unemployment 
rates  in  England  are  the  North  East  and  West 
Midlands  and  the  rate  increased  in  those  regions 
in  2013.  The  lowest  rates  are  in  the  East  of 
England, and are falling, thereby contributing to an 
inter-regional division ( 2). 

Graph 2.2: Youth unemployment rate (% of 
youth labour force aged 15-24)

%

25

20

15

10

5

0

01

03

05

07

09

11

13

Youth unemployment rate (% of youth labour force aged 15-24)

Unemployment rate (% of labour force, age group 15-74)

Source: Commission Services

Youth  unemployment  has  increased  over  the 
past ten years and reached 21% in 2012 (Graph 
2.2)  (3).  Furthermore,  almost  one-third  of  youth 
have  been  unemployed  for  more  than  one  year. 
Long-term  unemployment  has  increased  over  the 
past decade and reached 2.7% in 2012 (4). Poverty 
indicators  provide  a  mixed  picture  as  the  severe 

(1)  However, it should be noted that part of the decline is due 
to  the  reclassification  of  further  education  and  sixth  form 
colleges in England from the public to the private sector in 
2012; this accounts for 3.2 pp. of the decline. 
(2)  ONS Labour market statistics, December 2013. 
(3)  Eurostat data. 
(4)  Idem. 

13 

 
 
 
 
                                                           
2. Macroeconomic Developments 

investments. In 2013, the current account balance 
reached a deficit of 3.8% of GDP. 

The fiscal position 

Fiscal  consolidation  has  been  underway  since 
the  June  2010  Budget.  This  has  resulted  in  a 
6.2 pp. fall in the budget deficit to 5.2% of GDP in 
2012-13.  The  consolidation  has  been  assisted  by 
for 
certain  one-off 
approximately 
decline. 
Furthermore, the ongoing  transfers  from the Bank 
of  England’s  Asset  Purchase  Facility  also 
contributed  to  the  decline  ( 7).  Gross  government 
debt  continues  to  increase  and  reached  88.1%  of 
GDP in 2012-13. 

account 
the 

items  which 

one-third 

of 

Private sector debt  

Private  sector  debt  peaked  at  195%  of  GDP  in 
2009 and has been declining since then although 
it remains high (Graph 2.3). Household debt and 
corporate  debt  both  remain  high  despite  having 
declined  since  2009  and  the  pace  of  decline  has 
fallen.  The  household  savings  ratio  was  high  in 
2012 but fell somewhat in 2013.   

Graph 2.3: Debt Decomposition, all sectors, 
consolidated

P
D
G

f
o
%

400

300

200

100

0

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

Non financial corporations

Financial corporations

MIP Threshold

Household

Government

Source: Commission Services

During  2013,  activity  in  the  housing  market 
increased  with  prices  rising  from  an  already 
elevated level. The strongest rises were in London 
and the South East. 

(7)  As  a  result  of  quantitative  easing,  the  coupon  payments 
linked  to  assets  held  by  the  Bank  of  England  Asset 
Purchase Facility Fund Limited (BEAPFF), a subsidiary of 
the  Bank  of  England,  are  being  transferred  to  the  general 
government accounts. 

material  deprivation  rate  rose  from  2008  to  2012 
(the  date  of  the  last  available  data) (5);  however, 
the  at-risk  of  poverty  or  social  exclusion  rate  has 
declined  since  2005  and  is  now  below  the  pre-
crisis level. 

Potential growth 

reflects 

In 2014, potential growth is projected at 1%(6), 
around  one-half  of  the  level  just  prior  to  the 
crisis.  Low  potential  growth 
low 
productivity  growth  and  the  combination  of  a 
resilient labour market and growth in employment 
that  outstripped  that  in  GDP.  Low  productivity  is 
likely  to  reflect  a  combination  of  factors  such  as 
the lower price of labour relative to capital leading 
to a rise in demand for labour, albeit possibly less 
productive  labour,  a  rise  in  employment  in  less 
productive sectors of the economy and forbearance 
and cheap credit allowing some firms to remain in 
the market from which they would otherwise have 
exited. 

In  2012,  the  Greater  South  East  (London,  the 
regions) 
South  East  and  East  of  England 
contributed  45.4%  of  total  Gross  Value  Added 
(GVA). This was an increase from 44.3% in 2007 
and  43.1%  in  2001.  London  alone  accounted  for 
22.4% of GVA in 2012 and grew by 2.0% over the 
year; higher than the UK average of 1.6%. 

The external side  

Although  the  deterioration  in  export  market 
share  reversed 
in  2013,  net  exports  only 
contributed  0.1pp  to  growth.  The  trade  balance 
for services  has been improving recently although 
the  goods  balance  has  been  deteriorating.  Exports 
are  reorienting  towards  non  EU  markets  but  the 
EU  still  accounts  for  the  largest  export  share  by 
destination.  In  2012,  the  single  largest  destination 
for  exports  was  the  US  (13.7%  of  total  exports), 
followed  by  Germany  (10.6%)  whereas  China 
accounted for 3.5% of total exports. Growth in net 
exports is projected to remain subdued in 2014 in 
part  reflecting  relatively  subdued  growth  in  the 
euro area. 

Along with weak export growth, there has been 
a  sharp  deterioration  in  earnings  on  overseas 

(5)  Macroeconomic Imbalance Procedure Scoreboard 
(6)  Commission services Winter 2014 Forecast. 

14 

 
                                                           
 
 
 
 
                                                           
The financial sector and credit 

to 

Credit  conditions  have  been  improving  for 
households  although  the  supply  of  credit 
remains  muted  for  corporates  (Graph  2.4). 
According 
the  Bank  of  England’s  Credit 
Conditions  Survey(8),  the  overall  availability  of 
credit for both small and large corporates increased 
significantly in the final quarter of 2013. This was 
the  fifth consecutive quarter  of increases. Secured 
credit  to  households  also  rose  including  for 
borrowers  with  high  loan-to-value  ratios.  This 
trend  may  have been affected by the  Help to Buy 
scheme.  However,  despite  positive  signs  from 
surveys,  overall  credit  growth  remains  low  and 
continues to decline for corporates.  

A  number  of  government  policies  have  been 
designed  to  improve  the  flow  of  credit  in  the 
economy,  in  particular,  the  Funding  for  Lending 
scheme  (FLS)  and  quantitative  easing  (QE).  The 
FLS  was  introduced  in  July  2012  and  was 
extended  by  one  year  in  April  2013;  however,  in 
November  2013,  the  terms  of  the  lending  were 
changed,  effective  from  1  January  2014,  by 
excluding  lending  to  households  and  focussing 
solely  on  corporate  lending.  As  part  of  QE, 
between  March  2009  and  July  2012,  the  Bank  of 
England  purchased  GBP  375  billion  worth  of 
government  bonds  but  has  not  returned  to  the 
market since then. 

Graph 2.4: Decomposition of credit flows, 
consolidated

35

30

25

20

15

10

5

0

-5

-10

P
D
G

f

o
%

96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

Government
Household
MIP Threshold

Source: Commission Services

Financial corporations
Non financial corporations

The government is establishing a Business Bank 
which should be operational by the second half of 

(8)  Bank of England (2014). 

2. Macroeconomic Developments 

2014.  The  Bank  aims  to  assist  SMEs  to  obtain 
alternative sources of funds.  

three-quarters  of 

Throughout  2013,  the  eight  major  banks  and 
building societies continued to eradicate capital 
shortfalls  based  on  the  Prudential  Regulation 
Authority's  (PRA)  recommendations  of  March 
the 
2013.  By  September, 
shortfalls had been addressed in the banks in which 
issues  had  been  identified.  This  represented  a 
1.5 pp.  improvement  in  their  capital  ratios.  Banks 
that  were  not  identified  as  having  a  shortfall  also 
took  actions  which  raised  their  capital  ratios  by 
0.5 pp. in aggregate. The Bank of England and the 
PRA  are  also  developing  a  regular  stress-testing 
framework  to  assess  the  resilience  of  the  banking 
to  housing-related  portfolios,  among 
system 
others, with the first tests to be carried out in 2014. 
Furthermore, 
stronger  mortgage  underwriting 
standards will be implemented in the context of the 
Mortgage Market Review from April 2014. 

15 

 
 
 
 
                                                           
2. Macroeconomic Developments 

Table 2.1:
Key economic, financial and social indicators - United Kingdom

Real GDP (yoy)
Private consumption (yoy)
Public consumption (yoy)
Gross fixed capital formation (yoy)
Exports of goods and services (yoy)
Imports of goods and services (yoy) 
Output gap

Contribution to GDP growth:
Domestic demand (yoy)
Inventories (yoy)
Net exports (yoy)

Current account balance BoP (% of GDP)
Trade balance (% of GDP), BoP
Terms of trade of goods and services (yoy)
Net international investment position (% of GDP)
Net external debt (% of GDP)
Gross external debt (% of GDP)
Export performance vs. advanced countries (5 years % change)
Export market share, goods and services (%)

Savings rate of households (Net saving as percentage of net disposable income)
Private credit flow (consolidated, % of GDP)
Private sector debt, consolidated (% of GDP)

Deflated house price index (yoy)

Residential investment (% of GDP)

Total Financial Sector Liabilities, non-consolidated (yoy)
Tier 1 ratio (1)
Overall solvency ratio (2)
Gross total doubtful and non-performing loans (% of total debt instruments and total 
loans and advances) (2)

Employment, persons (yoy)
Unemployment rate
Long-term unemployment rate (% of active population)
Youth unemployment rate (% of active population in the same age group)
Activity rate (15-64 years)
Young people not in employment, education or training (% of total population)
People at-risk poverty or social exclusion (% total population)
At-risk poverty rate (% of total population)
Severe material deprivation rate (% of total population)
Persons living in households with very low work intensity (% of total population)

GDP deflator (yoy)
Harmonised index of consumer prices (yoy)
Nominal compensation per employee (yoy)
Labour Productivity (real, person employed, yoy)
Unit labour costs (whole economy, yoy)
Real unit labour costs (yoy)
REER (ULC, yoy)
REER (HICP, yoy)

2007
3.4
2.7
0.7
7.5
-2.0
-1.5
2.6

3.2
0.3
-0.1

-2.4
-3.2
0.0
-22.6
43.3
392.1
-10.0
4.2

-3.7
15.3
180.8

8.0

4.4

16.7
.
.

2008
-0.8
-1.0
2.1
-6.9
1.1
-1.7
0.5

-1.3
-0.2
0.8

-1.3
-3.3
-0.9
-6.9
37.3
436.4
-14.9
3.8

-2.7
9.5
189.8

2009
-5.2
-3.6
0.7
-16.7
-8.7
-10.7
-5.1

-4.5
-1.5
0.8

-1.4
-2.2
-0.6
-20.8
45.7
410.0
-14.2
3.8

2.3
-7.3
195.6

-4.1

-9.6

3.8

3.0

48.0
.
.

-17.6
.
.

2010
1.7
1.0
0.5
2.8
6.7
7.9
-4.0

0.8
1.3
-0.5

-3.3
-2.8
-0.3
-23.5
45.6
407.8
-16.4
3.5

2.9
-0.6
183.3

3.2

3.4

8.2
.
.

2011
1.1
-0.4
0.0
-2.4
4.5
0.3
-3.3

-0.6
0.5
1.2

-1.3
-1.9
-1.6
-16.8
44.1
419.6
-18.6
3.5

2.2
-1.3
179.8

2012
0.3
1.5
1.6
0.7
1.1
3.1
-3.4

1.4
-0.2
-0.7

-3.7
-2.4
0.0
-9.8
31.5
385.3
-10.4
3.4

2.8
2.6
178.6

-4.7

-0.9

3.4

8.9
.
.

3.3

-4.3
.
.

Forecast
2014
2.5
2.4
0.5
6.5
2.9
2.6
-0.9

2013
1.8
2.3
0.9
-1.5
0.8
0.4
-2.4

1.6
0.3
0.1

.
.
1.1
.
.
.
.
.

.
.
.

.

.

.
.
.

2.6
-0.1
0.0

.
.
0.8
.
.
.
.
.

.
.
.

.

.

.
.
.

.

.

.

.

.

.

.

.

.

0.7
5.3
1.3
14.3
75.5
11.9
22.6
18.6
4.2
10.3

2.3
2.3
4.8
2.7
2.0
-0.3
1.6
1.5

0.7
5.6
1.4
15.0
75.8
12.1
23.2
18.7
4.5
10.4

3.2
3.6
1.7
-1.5
3.2
0.0
-13.2
-12.8

-1.6
7.6
1.9
19.1
75.7
13.3
22.0
17.3
3.3
12.6

2.2
2.2
2.4
-3.6
6.2
3.9
-8.6
-9.5

0.2
7.8
2.5
19.6
75.5
13.7
23.2
17.1
4.8
13.1

3.1
3.3
3.1
1.5
1.7
-1.4
2.7
0.9

0.5
8.0
2.7
21.1
75.7
14.3
22.7
16.2
5.1
11.5

2.3
4.5
2.0
0.6
1.4
-0.9
-0.6
0.5

1.2
7.9
2.7
21.0
76.3
14.0
24.1
16.2
7.8
13.0

1.7
2.8
1.9
-0.9
2.9
1.2
5.5
4.3

-6.1
-6.5
88.6

1.3
7.5
.
.
.
.
.
.
.
.

1.9
2.6
1.9
.
1.0
-0.6
.
.

-6.3
-5.3
91.4

1.3
6.8
.
.
.
.
.
.
.
.

1.9
2.0
2.1
.
0.9
-1.0
.
.

-5.2
-4.8
93.4

2015
2.4
2.2
0.4
7.1
3.7
3.3
0.2

2.5
-0.1
0.1

.
.
1.0
.
.
.
.
.

.
.
.

.

.

.
.
.

1.0
6.5
.
.
.
.
.
.
.
.

2.1
2.0
2.8
.
1.4
-0.7
.
.

-4.2
-4.3
94.5

General government balance (% of GDP)
Structural budget balance (% of GDP)
General government gross debt (% of GDP)
(1) domestic banking groups and stand-alone banks.
(2) domestic banking groups and stand alone banks, foreign (EU and non-EU) controlled subsidiaries and foreign (EU and non-EU) controlled branches.
Source: Eurostat, ECB, AMECO

-11.4
-9.0
67.1

-10.1
-8.4
78.4

-5.0
-5.1
51.9

-2.8
-4.4
43.7

-7.7
-6.4
84.3

16 

 
 
 
 
 
 
 
            
 
 
 
3. 

IMBALANCES AND RISKS 

3.1. 

EXPORT SHARE AND COMPETITIVENESS 

medium  term  -  contribute  to  a  narrowing  of  the 
deficit (9).  

The 2013 IDR described the external dimension 
of  the  UK  economy  as  "less  as  a  source  of 
macroeconomic  instability,  and  more  a  field  of 
often  underexploited  growth  possibilities".  The 
reasons  for  the  deterioration  in  the  export  share 
were  analysed  in  the  2012  and  2013  IDRs.  This 
IDR  sets  out  an  update  of  developments  in  the 
current  account  balance  and  export  share  and 
in 
examines 
addressing  potential  bottlenecks  to  export  growth 
including  in  relation  to  infrastructure,  access  to 
finance and skills.  

the  role  of  government  policy 

10

5

0

-5

-10

P
D
G

f
o
%

Graph 3.1: Decomposition of external position (current 
and capital accounts)

96

98

00

02

04

06

08

10

12

Capital account (KA)
Income balance
  Trade balance - goods
Current account balance (CA)

Current transfers
  Trade balance - services
Trade balance
Net lending/borrowing (CA+KA)

3.1.1.  The current account deficit 

Source: Commission Services

The  UK  has  registered  persistent  current 
account deficits since the late 1990s and stood at 
3.8% of GDP in 2013. For more than 15 years, the 
current account balance showed a consistent trend 
-  a  negative  and  increasing  goods  balance  goods 
and,  while  slightly  smaller,  a  positive  and 
increasing services balance (Graph 3.1). However, 
both  have  flattened  recently.  The  trade  deficit 
increased  steadily  over  most  of  the  past  15  years 
although it too has stabilised in the last few years. 
In  2013,  the  trade  deficit  in  goods  is  projected  to 
have reached almost 7% of GDP while the surplus 
in services stood at almost 5% of GDP.  

in 

the  current  account 
The  deterioration 
balance  following  the  international  economic 
crisis  was  dominated  by  movements  in  the 
income  balance.  Historically,  the  income  balance 
has  been  in  surplus  but  has  recently  moved  into 
deficit  and  contributed  to  the  rise  in  the  current 
account  deficit.  The  deterioration  appears  to  be 
mostly  driven  by  differential  returns  between 
the  UK. 
inward  and  outward 
Notably, the UK has been growing at a faster pace 
than  the  EU  -  its  most  important  trading  partner 
and  investment  destination  (the  EU  absorbs  about 
the  UK's  exports  and  accounts  for 
half  of 
approximately 40% of its inward investment). As a 
consequence,  profits  earned  by  UK  companies  on 
investments  abroad  may  have  developed  less 
favourably  than  those  of  inward  investment.  A 
recovery  in  net  investment  income  in  2014  is 
projected,  which  should  –  if  sustained  over  the 

investment  of 

The  pattern  of  recent  economic  growth  in  the 
UK  compared  with  its  major  trading  partners 
might  explain  part  of  the  deterioration  in  the 
trade balance. Since the end of 2009, growth has 
been driven by growth in domestic demand rather 
than  net  exports  (as  discussed  in  Chapter  2). 
Recently, growth in the UK has outstripped that in 
the euro area – for example, the UK grew by 1.8% 
in  2013  compared  with  -0.4%  for  the  euro  area  – 
which  may  have  affected  relative  import  and 
export  growth  to  the  detriment  of  the  trade 
balance.  As  domestic  demand  picks  up  further, 
imports  are  likely  to  increase  further  which  is 
likely  to  result  in  a  further  deterioration  in  the 
trade balance should growth in imports continue to 
outstrip  growth  in  exports.    Nevertheless,  relative 
losses  in  export  market  share  stabilised  in  2012 
and 2013 (Graph 3.2). 

(9)  European Commission (2013d). 

17 

 
 
 
 
 
                                                           
3. Imbalances and Risks 

30

20

10

0

-10

-20

-30

-40

)

%

(

y
-
o
-
y
e
g
n
a
h
c

f
o
e
t
a
R

Graph 3.2: Export shares

consistent  with  an 
investment. 

increase 

in  savings  and 

Graph 3.3: Investment and gross savings

P
D
G

f
o
%

20

18

16

14

12

10

8

97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13

Denominator: World Export growth (neg. sign)
Numerator: Export growth
EMS growth rate

Source: Commission Services

00 01 02 03 04 05 06 07 08 09 10 11 12 13

The deterioration in the current account deficit 
may  be  associated  with  movements  in  gross 
savings  and  investment  (Graph  3.3).  Since  the 
international  economic  crisis,  domestic  demand 
has  been  sustained  by  a  substantial  decline  in  the 
national  savings  rate.  Gross  national  savings  have 
fallen sharply from 16% of GDP in 2008 to 10% of 
GDP in 2013 and have been accompanied by a fall 
in  investment  from  over  17%  of  GDP  before  the 
crisis  to  below  14%  of  GDP.  Neither  the  fall  in 
investment  nor  the  deterioration  in  the  current 
account  is  consistent  with  balanced  medium-term 
growth.  

The  prospect  of  a  more  balanced  pattern  of 
growth depends on a shift in the composition of 
growth towards exports and investment. Despite 
rising  recently,  the  current  account  deficit  is 
associated with a modestly negative net investment 
position of -9% of GDP in 2012 and zero in 2013. 
Furthermore,  these  developments  need  to  be  seen 
in  the  context  of  a  floating  exchange  rate,  which 
facilitates external adjustment.  

However, if the current pattern of growth is to 
become  more  balanced,  growth  in  investment 
and  net  exports  need  to  rise  to  complement 
growth 
in  household  consumption  so  that 
balanced growth is accompanied by a fall in the 
current  account  deficit  and  an  increase  in  the 
net savings rate in the order of a significant 7% 
of  GDP.  To  achieve  this  feat  in  a  growing 
economy,  improved  external  performance  plays  a 
crucial  a  role.  Rebalancing  away  from  domestic 
towards  net  exports  would  be  also 
demand 

Gross fixed capital formation

Gross saving

Source: Commission Services

The  medium-term  prospects  for  net  exports 
need  to  be  analysed  in  the  context  of  several 
potential  adverse  developments  which  include: 
the  loss  in  export  market  share,  especially  for 
services  exports,  the  long-term  decline  in  goods 
exports, the muted response of exports in the wake 
of  the  substantial  depreciation  of  sterling  and  the 
fall  in  financial  services  exports  since  the  start  of 
the international economic crisis. 

3.1.2.  Export shares challenge  

In  the  five  years  to  2012,  the  UK 
lost 
approximately  20%  of  its  export  market  share 
in  goods  and  services  although  the  pace  of 
decline  slackened  in  2012.  There  is  not  a  single 
obvious  driver  of  the  decline  in  export  shares. 
Rather,  it  is  determined  by  a  number  of  factors 
financial 
including  weakness 
services,  itself  reflecting  broader  weakness  in  the 
financial  sector,  and  the  mix  of  destinations  and 
product  markets  for  export.  Other  factors  may 
include  impaired  access  to  finance  for  exporters 
and long-standing issues relating to the quality and 
quantity of infrastructure and skills. 

in  exports  of 

Despite the relative strength in exports of services 
(contributing 4.5pp of GDP to the current account 
balance in 2012), the UK's world market share for 
services  decreased  from  7.9%  in  2000-2001  to 
6.6%  in  2010-2011.  A  breakdown  by  industry 
shows an across-the-board decline in  most sectors 
over  the  past  ten  years  (Graph  3.4),  including,  in 
particular, a decrease in the world market share of 

18 

 
 
 
 
 
  
 
 
 
3. Imbalances and Risks 

the financial and insurance services industries (see 
Box 3.1). 

Graph 3.4: UK's world market share for 
services

represented  in  the  bottom-left  quadrant  of  the 
graph,  which  means  that  -  except  for  Switzerland 
and China – they are either losing dynamism or the 
UK is losing share in those countries compared to 
other export competitors.  

Financial
services
Insurance
services

Other Services

Transportation

Travel

Total Services

0

10

20

30

2000-2001

2011-2012

Source: Commission Services

Graph 3.5: Goods export: geographical and 
sectoral composition

Initial geographical specialisation

Initial product specialisation

Market share gains in
geographical destinations

Market share gains in product
markets

2

0

-2

-4

-6

-8

-10

-12

-14

-16

)

%

(
n
a
e
m
e
g
a
r
e
v
a
c
i
t
e
m
h
t
i
r
a

l

a
u
n
n
A

2006-2008

2008-2010

2010-2012

Source: COMTRADE data (HS 1992 Commodity Classification), 
Commission Services

The  persistence  of  a  deficit  in  the  goods  trade 
balance  reflects  deep-rooted  characteristics  of 
the  economy.  The  trade  balance  is  marked  by  a 
structural  shift  toward  services  and  increased 
competition  from  emerging  markets  for  goods 
exports. The  weakness in certain  goods exports is 
also  linked  to  intense  competition  in  export 
destinations.  A  decomposition  of  the  nominal 
growth  of  goods  exports  by  geographical 
specialisation  and  product  specialisation  (Graph 
3.5)  shows  that,  between  2006  and  2008,  the 
decline  of  market  share  was  driven  mainly  by  the 
loss  of  market  share  within  existing  destinations 
and 
the 
'dynamism' (10)  of  such  destinations  and  markets 
(11).  

product  markets 

rather 

than 

More recently – between 2010 and 2012 - the UK 
gained  market  share  in  its  export  destinations, 
which, however, are losing 'dynamism'. Graph 3.6 
shows  the  relationship,  in  the  top-10  destinations 
for  UK  goods  exports,  between  the  growth  in 
imports  of  these  countries  (market  dynamism  on 
the  vertical  axis)  and  the  extent  to  which  exports 
are growing in these countries (competitiveness on 
the horizontal axis) ( 12). The graph shows that the 
UK's  top  export  destinations  are  disproportionally 

(10)  A destination country is 'dynamic' if its total imports grow 

faster than world total imports. 

(11)  In terms of relative growth rates of imports. 
(12)  The size of the bubble indicates the weight of a destination 

on total exports of the UK. 

19 

 
 
                                                           
 
 
 
 
 
 
 
3. Imbalances and Risks 

Box 3.1: The Financial and Insurance services sector

The  UK  financial  and  insurance  services  sector  has  experienced  adverse  developments  in  the  last  5 
years. Its gross value added (GVA) reached a peak of 10.7% of GDP in 2009, but fell to 7.9% of GDP in 
2012 – a lower share than in 2005. It remains, however, well above the Euro Area 12 average (graph 1a). 
The shrinkage of the sector, which contributed substantially to growth in the previous decade, could have 
important repercussions for the UK economy. While in 2000-08 financial services (excluding life insurance) 
contributed on average 23% of total corporation tax receipts, this fell to approximately 13% in 2012-2013 
(1). The proportion of UK workforce which is accounted by the sector declined from 4.6% in March 2009 to 
4.2%  in  March  2013,  accelerating  the  downward  trend  since  1995.  Rising  GVA  and  falling  employment 
were among the main contributing factors to increased productivity in the UK in the decade until 2009. The 
financial sector contributes to the surplus in services trade of the UK. The degree to  which the sector can 
recover and increase its contribution to the trade balance has a significant impact on the economic prospects 
of the country. 

There are signs that the export performance of the sector will improve with global economic recovery. 
This  is  most  visible  in  the  divergent  developments  in  London (2),  which  accounted  for  52%  of  financial 
sector  GVA  in  2011,  and  the  rest  of  the  UK.  Graph  1b  shows  that  income  of  financial  and  insurance 
activities taking place in London stayed flat in 2009-2011, while it fell strongly in the rest of the UK. Since 
London-based financial firms have a higher propensity to export than in the rest of the country, most likely 
focused  on  retail  banking,  this  bodes  well  for  the  prospects  of  financial  services  exports.  It  is  indicative, 
however, of the depth of the issues facing the retail banking industry outside the capital and consistent with 
the reported difficulties of SMEs to access finance. However, there are indications of a gradual recovery in 
the sector. Net receipts (3) from the banking sector which had decreased substantially to less than GBP 18 
billion  in  2008-10  from  GBP  23  billion  of  2007-08  have  started  to  climb  again  to  above  GBP  20  billion 
since  2010-11;  this  is  a  strong  rise  taking  into  account  that  this  includes  the  GBP  1.6  billion  from  the 
introduction of the Bank Levy - an annual tax on certain equity and liabilities of banks, building societies, 
banking and building society groups. The financial sector remains therefore in a position that would allow it 
to contribute to export growth significantly as the global economy recovers. 

(1)  HM Revenue and Customs 
(2)  NUTS 2 statistical region Greater London 
(3)  PAYE, Bank Payroll Tax, Corporation Tax and Bank Levy 

20 

 
 
 
 
 
 
 
 
                                                           
 
 
 
term, 

the  medium 

Over 
geographical 
specialisation  might  diversify  continuing  a 
rebalancing  away  from  the  EU  to  emerging 
markets (Graph 3.7). While the EU is still the main 
export  destination  for  goods,  accounting  for  half 
the  trade  in  value,  the  share  of  BRICs  in  total 
exports  has  grown  from  4.9%  in  2006  to  9.6%  in 
2012.  

Graph 3.6: Dynamism and competitiveness of goods 
export

4

Switzerland

)
p
p
(

i

m
s
m
a
n
y
D

t
e
k
r
a
M

China

Netherlands

Germany

France

2

0
USA
-2

Belgium

-4

Ireland
-6

-8

Italy

Spain

-10

-12

-10

0

10

20

30

40

Competitiveness (pp)

Source: COMTRADE data (HS 1992 Commodity Classification), 
Commission Services

Graph 3.7: Export destinations, goods

%

50

40

30

20

10

0

02 03 04 05 06 07 08 09 10 11 12

Germany
Rest EU
Rest World

Netherlands
BRICS

Source: Office for National Statistics

3.1.3.  The impact of the depreciation  

Sterling  fell  significantly  vis  à  vis  the  euro 
between  2007  and  2009.  It  is  now  at  a  mean  of 
approximately  1.2  euro  from  a  4-year  pre-crisis 
average  of  almost  1.5  euro  (Graph  3.8).  The 
depreciation could be expected to improve external 
competitiveness  and  the  current  account  balance, 
the  impact  on  the  latter  by  boosting  exports  – 
which  become  cheaper  for  foreign  purchasers  – 

3. Imbalances and Risks 

and  deterring  imports  –  which  become  more 
expensive  for  domestic  purchasers  -  however, 
there  may  be  circumstances 
in  which  a 
depreciation is less effective than expected (13). 

Graph 3.8: Exchange rate developments

P
B
G
R
U
E

/

1.6

1.5

1.4

1.3

1.2

1.1

1

04 05 06 07 08 09 10 11 12 13

Source: Commission Services

Export  growth  may  have  responded  by  less 
than  expected  to  the  fall  in  the  exchange  rate 
because, following the depreciation, prices  may 
foreign 
have  risen  relative 
competitors, 
the  competitive 
advantage that  may normally be expected. It is 
noteworthy that the export price deflator has risen 
by more than that of the Euro 15 (Graph 3.9).   

thus  eroding 

those  of 

to 

Graph 3.9: Deflator of exports

135

130

125

120

115

110

105

100

95

90

0
0
1
=
5
0
0
2
x
e
d
n

i

05

06

07

08

09

10

11

12

13

Source: Commission Services

EU 15

UK

The  strong  nominal  depreciation  in  2008  is 
matched  by  a  marked  fall  in  the  real  effective 

(13)  For example, Bahmani et al (2013) show that a devaluation 
may  be  less  effective  than  might be  supposed in  its  effect 
on  a  country's  competitive  position.  Although  for  some 
sectors  there  may  be  an  improvement  in  net  exports,  for 
many others there is  not, and it is not clear a priori which 
sectors will react positively. 

21 

 
 
 
 
 
 
 
 
                                                           
3. Imbalances and Risks 

terms  by  7%  compared  with  that  in  the  EU  15  of 
14%. 

It  is  likely  to  be  the  case  that  exporters  have 
responded  to  the  depreciation  by  increasing 
margins  rather  than  significantly  expanding 
output  (Graph  3.9).  In  addition,  nominal  unit 
labour  costs  have  risen  consistently  since  2008 
(Graph  3.12)  as  growth  in  nominal  compensation 
has continued, albeit at a subdued rate, but labour 
productivity has fallen. 

Graph 3.12: Unit labour costs and its components

0
0
1
=
8
0
0
2

115

110

105

100

95

90

85

08

09

10

11

12

13

Nominal wage

Productivity

ULC

Source: Commission Services

the 

improved 

A  sectoral  assessment  suggests  that,  between 
2009  and  2011,  firms  in  the  tradable  sectors, 
specifically  in  the  manufacturing  sector,  may 
have benefited from the depreciation of sterling 
(Graphs  3.13a  and  b)  (14).  Higher  margins  may 
have 
relative  profitability  of 
tradables  compared  to  non  tradables  which  might 
provide incentives to firms in the tradable sector to 
allocate more resources in the production process. 
In  the  pre-crisis  period,  profitability  in  the  non 
tradables (in particular construction and real estate) 
did not rise above that of other sectors, as it did in 
certain  other  large  EU  Member  States  (Graph 
3.13a). 

(14)  Chapter II.2 in the Product Market Review 2013 European 
Commission  (2013g)  explores 
the  capital  allocation 
process between tradable and non-tradable sectors in terms 
of incentives and constraints using firm-level data. 

of 

competitiveness).  The 

exchange  rate  (REER)  (Graph  3.10)  (a  standard 
measure 
close 
relationship  between  the  REER  and  the  nominal 
effective  exchange  rate  (Graph  3.11)  reflects  the 
relatively  small  impact  of  relative  inflation  to 
changes  in  competitiveness  since  the  depreciation 
in 2008.  

10

Graph 3.10: Decomposition of REER

)

%

(

y
-
o
-
y
e
g
n
a
h
c

f
o
e
t
a
R

5

0

-5

-10

-15

99

01

03

05

07

09

11

13

NEER IC-42

relative HICP (-)

REER (HICP) IC-42

REER (ULC) IC-37

Source: Commission Services

Graph 3.11: Nominal effective exchange rate 
(NEER)

0
0
1
=
5
0
0
2

,
x
e
d
n

i

110

105

100

95

90

85

80

75

70

65

60

05

06

07

08

09

10

11

12

13

Source: Commission Services

Since  2008,  the  sizeable  depreciation  has  not 
had  a  significant  relative  impact  on  export 
growth  or  the  contribution  to  growth  from  net 
exports.  Although  goods  exports  grew  between 
the trough in 2009 and 2013 by 21% - broadly in 
line  with  that  in  the  EU  15  of  24%  -  services' 
exports remain relatively subdued, growing in real 

22 

 
 
 
 
 
 
 
 
 
 
                                                           
3. Imbalances and Risks 

Graph 3.13a: UK firm-level Return on Assets, industry 
medians

03

04

05

06

07

08

09

10

11

Graph 3.13b: France, Italy and Spain firm-level Return 
on Assets, industry medians

%

7

6

5

4

3

2

1

0

%

7

6

5

4

3

2

1

0

03

04

05

06

07

Construction and real estate

Manufacturing

Source: ORBIS

08
09
Other services

10

11

Trade and transport

However, 
increased  profitability  has  not 
resulted  in  a  significant  increase  in  exports  as 
discussed  above.  It  may  also  be  the  case  that 
demand  from  major  trading  partners  for  exports 
fell  during  the  international  economic  crisis  – 
although  that  impact  should  unwind  as  the  crisis 
recedes. In addition, the price elasticity of demand 
for high  value exports is likely to be low because 
demand may depend on non price as well as price 
characteristics.  In  addition,  resource  allocation 
towards the export sector could also be affected by 
uncertainty  as  to  whether  the  fall  in  the  exchange 
rate  is  temporary  or  permanent  –  although  this 
effect should have receded by now (15).  

Government policy can play a role in improving 
the  environment  in  which  exporters  operate, 
facilitating  rebalancing  over  the  medium  term. 
As  noted  above,  productivity  has  declined  since 

(15)  Firm-level  data  also  shows  that  investment  rates  in 
tradables are, at best, reaching their pre-crisis levels. 

2009.  Government  policy  may  help  address 
the 
bottlenecks 
following 
raise 
productivity and competitiveness. 

to  exports  as  discussed 
subsection  by  helping 

to 

in 

3.1.4.  Policy responses: Infrastructure, skills and 

SME finance  

Previous  IDRs  identified  structural  constraints 
in  infrastructure,  skills  and  access  to  finance 
that  might  affect  export  performance 
- 
especially for SMEs. There are policies in place to 
the 
address 
government has an ambitious objective to "double 
the UK’s exports to GBP 1 trillion by 2020 and a 
program  to attract  more inward investment  in  UK 
infrastructure  projects" (16).  However,  there  are 
challenges relating to detail and delivery.  

bottlenecks.  Moreover, 

these 

Infrastructure  

Investment  in  infrastructure  is  below  the  EU 
average (17). Investment in transport infrastructure 
are  particularly  relevant  (Graph  3.14)  -  in  the  last 
decade,  the  UK  has  invested  less  in  transport 
infrastructure  as  share  of  GDP  than  the  EU27 
average  and  countries  -  such  as  France  and 
Belgium  –  which,  like  the  UK,  have  a  mature 
transport network. Moreover, the investment share 
in GDP has fallen over time, similar to the trend in 
Germany,  but 
fall  has  become  more 
pronounced since 2009. In an advanced economy, 
adequate  investment  in  infrastructure  –  while  not 
sufficient  in  itself  –  may  be  a  pre-condition  to 
enhancing  export  performance;  recent  research 
indicates  a  positive  association  between  domestic 
transport  infrastructure  improvements  and  small 
and  medium-sized  firms'  probability  of  exporting 
(18). 

the 

(16)  UK government (2013a). 
(17)  European Commission (2013c). 
(18)  Albarran et al. (2013). 

23 

 
 
 
                                                           
                                                           
3. Imbalances and Risks 

to  be 

funded  publicly  while 

The  government  has  announced  an  ambitious 
infrastructure  program  and  has  published  a 
'pipeline'  of  infrastructure  investment  worth 
GBP  375  billion  between  2015  and  2020 (21). 
GBP  100  billion  of  infrastructure  investment  is 
expected 
the 
remaining GBP 275 is expected to be raised from 
private  funds  –  for  instance  a  group  of  large 
insurance companies has agreed to invest GBP 25 
billion in the 5 years from 2014 (22). The National 
Audit Office ( 23) has, however, expressed concerns 
about  how  the  private  financing  might  impact  on 
consumers , who will eventually be charged higher 
tariffs,  especially  those  on  low  incomes.  Most  of 
the  value  of  the  pipeline  is  in  the  energy  and 
transport  sectors,  worth  over  GBP  340  billion  of 
combined investment.  

There  are  inherent  risks  in  the  private  sector 
element  of  the  financing  –  which  accounts  for 
around three-quarters of the total financing; in 
particular,  the  degree  and  timelines  in  which 
the  private  financing  will  materialise.  While 
anecdotal  evidence  suggests  that  investment  in 
infrastructure  could  be  considered  attractive  by 
institutional  investors,  and  that  business  networks 
may  welcome  even 
investment  plans, 
greater  detail  and  clarity  is  required  on  the 
financing  and 
the  private 
composition  of 
reassurance  that  the  required  amount  of  that 
finance will materialise.  

larger 

those 

Potential  investors  in  infrastructure  include 
international  investors  (e.g.  sovereign  wealth 
funds)  and  domestic  investors  (pension  funds). 
The Pensions Institute has forecast that the defined 
contribution  pension  schemes’  auto-enrolment 
market  will  increase  to  GBP  1680  billion (24)  of 
assets  under  management  by  2030.  The  extent  to 
which 
in 
assets  will  be 
infrastructure  is  linked  to  the  concentration  of 
pension funds, as in an overly fragmented market, 
individual  funds  might  lack  scale  for  such  large 
investments.  A  solution  may  be  provided  by 
platforms that pool the resources of  more pension 
funds  for  infrastructure  investment  –  such  as  one 
recently announced by the National Association of 
Pension  Funds (25).  Nevertheless,  there  remains  a 

invested 

(21)  HM Treasury (2013b). 
(22)  UK government (2013b). 
(23)  National Audit Office (2013). 
(24)  Pensions Institute (2013). 
(25)  National Association of Pension Funds (2013). 

Graph 3.14: Transport gross investment spending 
(exluding maintenance)

P
D
G

f
o
%

1.2

1.0

0.8

0.6

0.4

0.2

0.0

00 01 02 03 04 05 06 07 08 09 10 11

EU27

BE

FR

DE

UK

Source: Commission Services

There are also concerns about the quality of the 
infrastructure. A survey by the World Economic 
Forum  shows  a  relatively  low  assessment  of  the 
quality  of  infrastructure  in  the  UK,  as  well  as  a 
relatively  low  assessment  of  the  quality  of  roads. 
Perceptions  from  abroad  about  the  quality  of 
infrastructure  are,  however,  mixed.  For  example, 
according to a survey of  foreign-based companies 
(19),  81%  of  respondents  acknowledged  transport 
and  logistic  infrastructure  as  a  good  reason  to 
invest  in  the  UK  and  89%  of  respondents  praised 
technology  and  telecommunications  infrastructure 
– which is consistent with the fact that the UK has 
an  above  EU  average  percentage  of  broadband 
lines with speed above 10 MBps (20).  

London's  economic  success  risks  exacerbating 
the  regional  divide  within  the  UK.  A  large  rail 
project,  High  Speed  2,  initially  planned  to  run 
between  London  and  Birmingham,  has 
the 
potential  to  change  regional  dynamics  but  its 
potential  impact  is  ambiguous:  on  the  one  hand  it 
will make London easier to reach and thus increase 
the attractiveness of siting business in London but, 
on  the  other  hand,  it  will  allow  easier  access  to 
Birmingham  and  other  regional  centres  from 
London.  A  further  option  to  enhance  growth 
outside  London  could  be  to  enhance  connectivity 
between  cities  in  northern  England  (Manchester, 
Newcastle,  Liverpool),  as  well  as  between 
different parts of the UK. 

(19)  Ernst & Young (2013). 
(20)  Besides  infrastructure,  the  UK  holds  Foreign  Direct 
Investment's  leadership  in  Europe  –  measured  by  number 
of  new  projects  -  and  further  market  research  finds  that 
foreign  investors’  perceptions  of  the  UK’s  labour  skills, 
employment  costs,  transport  infrastructure  and  corporate 
taxation are of world-class and have all improved recently. 

24 

 
 
 
 
                                                           
                                                           
need  for  greater  detail  on 
investment  plans 
in  relation 
composition and timing of funds  

the 
to 

infrastructure 
the  source, 

Further  risks  to  delivery  of  the  infrastructure 
programme  include  alleged  uncertainty  in  the 
regulatory  environment  –  for  example  -  the 
Confederation  of  British  Industry’s  infrastructure 
survey (26) 
the  biggest 
identified  planning  as 
constraint (96%) for infrastructure investment. The 
fact that the delivery of the projects is spread over 
a number of years is a further element of risk. 

Skills and job matching 

The  2012  and  2013  IDRs  identified  a  gap  in 
skills,  in  particular,  there  are  an  insufficient 
number  of  workers  with  intermediate  vocational 
training.  While  the  skills  base  is  strong  overall, 
there  is  room  for  improvement  in  basic  and 
intermediate skills. It is noteworthy that, compared 
to the EU average, the UK has a larger number of 
early leavers from education and training.  

is 

the  global 

International  comparisons (27)  also  show  a 
relative  underperformance  in  attainment  in 
basic  skills  and  foreign  languages.  Although 
English 
language  of  business, 
knowledge  of  foreign  languages  by  UK  citizens 
could 
in 
international 
international 
mobility;  to  eventually  facilitate  this,  it  is  a 
positive  development  that  language  classes  in 
schools  will  be  made  compulsory (28)  for  pupils 
from the age of 7 in England.  

to  participate 

their  ability 

and  boost 

increase 

trade 

On  the  positive  side,  employers  are  generally 
satisfied with skills availability (29). The UK has 
a  high  share  of  adults  between  30  and  34  of  age 
with  tertiary  educational  attainment (30)  and  a 
relatively  high  employment  rate  of  graduates. 
Higher education provides additional reasons to be 
optimistic: 
internationally 
renowned  and  could  be  a  driver  of  regional 
rebalancing.  In  fact,  the  creation  of  clusters  of 
specialisations  of 
firms  which  exploit 
universities outside London could create attractive 

universities 

the 

are 

(26)  Confederation of British Industry (2013). 
(27)  OECD (2013a), OECD (2013b), McKinsey (2013). 
(28)  Schools  can  fulfil  the  requirement  by  offering  either 

ancient or modern languages. 

(29)  McKinsey (2013). 
(30)  European Commission (2013b). 

3. Imbalances and Risks 

in  different  cities  and  counteract 

jobs 
centripetal force that brings graduates to London.  

the 

The  demand  for  skilled  labour  is  likely  to 
increase  as  soon  the  economy  recovers.  This 
would be a positive development for the economy, 
as, according to OECD, the UK (31) has been more 
effective  in  providing  opportunities  to  their  more 
highly skilled adults than many other countries. 

 Nevertheless,  the  problem  of  the  vertical  skills 
mismatch in the UK might have worsened after 
2008.  While  graduates  usually  do  well  in  the 
labour market, according to the Office for National 
Statistics,  the  percentage  of  graduates  working  in 
non graduate roles has risen, particularly since the 
the 
2008-2009  recession.  This  suggests 
increasing  supply  of  graduates  and  the  possible 
decrease in demand for them has had an effect on 
the  type  of  job  they  undertake  ( 32).  Since  new 
graduates  could  not  be  absorbed  into  the  labour 
market to the same extent as previously, some may 
have  to  'down-skill'.  To  address  the  situation, 
promotion of STEM subjects (science, technology, 
engineering  and  mathematics)  in  higher  education 
may assist.  

that 

Job  matching efficiency has recently worsened, 
in particular, for long-term unemployed. This is 
suggested  by  the  Beveridge  curve,  which  depicts 
the  relationship  between  unemployment  and  job 
vacancies. The curve is usually downward-sloping: 
economic  upswings  are  characterised  by  low 
unemployment and many vacancies and vice versa 
in  downturns.  Shifts  of  the  curve  are  departures 
from  the  usual  downward-sloping  trajectory  and 
may  indicate  structural  changes  in  the  labour 
market. An outward shift of the Beveridge curve is 
an  indication  of  a  deterioration  of  job  market 
matching.  

The Beveridge curve showed little movement in 
the  years  before  2008  (Graph  3.15a)  (33)  which 
can be explained by the fact that the economy then 
operated 
low 
unemployment  and  a  relatively  high  vacancy  rate 
(the  number  of  vacant  posts  as  a  percentage  of 
total  posts,  vacant  or  occupied).  As 
the 
international  economic  crisis  unfolded,  vacancies 

utilisation, 

factor 

high 

at 

(31)  The survey covered England and Northern Ireland. 
(32)  Office for National Statistics, 2013. 
(33)  The analysis is based on European Commission (2013e). 

25 

 
                                                           
                                                           
3. Imbalances and Risks 

fell and unemployment increased to levels where it 
remained  until  the  last  quarter  of  2012,  the  last 
observation available.  

Graph 3.15a:Beveridge curve - pre- and post-crisis

after the first wave of dismissals during the crisis), 
and did not increase further after 2010. It appears 
large  part  of  unemployment  remains 
that  a 
rising,  part 
cyclical,  and  a  smaller,  albeit 
potentially  structural  (Graph  3.15b).  Short-term 
unemployment  could  be  expected  to  decrease  as 
the  economy  moves  along 
short-term 
Beveridge curve. 

the 

The government intends to address the shortage 
of intermediate skills. The government published 
"The  Future  of  Apprenticeships 
in  England: 
Implementation  Plan"  in  October  2013 (35).  This 
was a response to the 2012 Richard Review (36), an 
independent  report  on  improving  the  quality  of 
apprenticeships.  Apprenticeships  are  to  be  based 
on  standards  designed  by  employers  in  order  to 
better  meet  the  needs  of  the  economy.  These 
standards,  which  will 
the  current 
frameworks, aim to simplify the system. In relation 
to  quality  assurance,  the  government  will  set  a 
small  number  of  criteria:  apprenticeships  will  be 
required  to  last  at  least  12  months;  off-the-job 
training  will  continue  to  be  a  requirement  of  all 
and  maths 
apprenticeships 
requirements  will  be  stepped  up  gradually. 
Implementation will be completed by 2017-18.  

English 

replace 

and 

Compared  to  that  in  2011-12,  the  number  of 
apprenticeship  starts  at  advanced  level  and 
higher  level  has  increased,  while  apprenticeship 
starts at intermediate level decreased. This may be 
a  first  sign  of  a  rebalancing  of  apprenticeships 
towards  higher  skill  levels.  Ongoing  reforms  of 
vocational qualifications are also part of the effort 
to  increase  vocational  skills  among  young  people 
and adults.  

Policy  initiatives  to  raise  vocational  skills  are 
likely  to  be  beneficial  if  maintained,  or  even 
stepped  up.  Indeed,  skills  forecast  expect  an 
increased demand for medium qualifications in the 
UK.  CEDEFOP,  the  European  Centre  for  the 
Development  of  Vocational  Training,  estimated 
projections 
by 
qualification  up  to  2020.  Compared  with  2010,  it 
expects  an  17.8%  increase  in  jobs  requiring 
medium  qualifications  in  the  UK,  much  higher 
than  an  EU  average  increase  of  4.6%;  a  20.6% 
increase  in  jobs  requiring  high  qualifications, 

employment 

trends 

about 

(35)  HM Government (2013). 
(36)  Richard (2012). 

Source: European Commission (2013)

Graph 3.15b:Beveridge curve - by duration of 
unemployment, after 2008

Source: European Commission (2013)

A  large  majority  of  unemployment  is  short-
term  (shorter  than  12  months  in  duration). 
Graph  3.15b  depicts  the  post-crisis  Beveridge 
curve in the UK by duration of unemployment ( 34). 
It  shows  that  the  short-  and  long-term  Beveridge 
curves  have  a  different  pattern.  The  Beveridge 
curve  corresponding  to  short-term  unemployment 
is  characterised  by  the  usual  downward-sloping 
the  Beveridge  curve 
pattern.  By  contrast, 
corresponding 
unemployment 
exhibits  an  outward  shift  of  about  1  percentage 
point  in  2009-2010,  presumably  about  12  months 

long-term 

to 

(34)  The Beveridge curves corresponding to short and long term 
unemployment  exhibit  the  same  movement  along  the  Y-
axis,  as  the  vacancies  are  not  specific  to  the  duration  of 
unemployment. 

26 

 
 
                                                           
                                                           
broadly  in  line  with  an  EU  average  increase  of 
19.1%; and a 42.9% decrease in jobs requiring low 
qualifications,  which  is  more  pronounced  than  an 
EU average decrease of 20.2%. 

The  effectiveness  of  policy  responses  to  skills 
shortages  can  be  improved.  According  to  the 
Social  Mobility  and  Child  Poverty  Commission, 
the  Youth  Contract  has  not  worked  "effectively 
enough"  (37).  There  is  anecdotal  evidence  that 
business 
of 
apprenticeships,  provided  that  they  are  of  high 
quality  and  targeted  at  certifying  relevant  work 
experience and skills.  

associations 

supportive 

are 

Work is underway to increase the attractiveness 
of vocational education as an alternative career 
path, as currently there might be 'stigma' attached 
to 
it,  perhaps  because  of  better  perceptions 
attached  to  academic  education.  The  key  to  the 
success of these policies is productive cooperation 
with  employers  in  the  design  and  development  of 
occupational  standards and skills profiles to  make 
vocational  qualifications  more  attuned  to  labour 
market needs ( 38). As young people are "not much 
better  equipped  with  literacy  and  numeracy  skills 
than those who are retiring" (39), there is also scope 
for thinking strategically about the role of lifelong 
learning. 

Fine-tuning  of  immigration  policies  has  the 
potential to broaden the skills base of the UK. It 
would  make  it  easier  to  recruit  experts  from  new 
export destinations and UK employers would have 
access to a larger pool of talent (40). 

Access to finance for SMEs 

International  comparisons  suggest  that  UK 
SMEs have a lower export propensity than  EU 
peers (41). According to a recent survey (42), only a 
minority  of  SMEs  (14%)  were  internationally 
active.  Of  all  survey  respondents,  8%  reported 

(37)  Social Mobility and Child Poverty Commission (2013). 
(38)  See UK Commission for Employment and Skills (2013). 
(39)  OECD  (2013b)  shows  that  England  is  the  only  country 
where  adults  aged  55-65  perform  better  than  16-24  year 
olds in both literacy and numeracy. 

(40)  In addition, migration could be good for the economy as a 
whole. Dustmann and Frattini (2013) show that immigrants 
to the UK have made a positive fiscal contribution between 
1995 and 2012. 

(41)  See European Commission (2010).  
(42)  BDRC (2013).  

3. Imbalances and Risks 

having  exported  while  11%  reported  having 
imported in the third quarter of 2013.  

A constraint on the decision of SMEs to export 
may  be  an  inability  to  easily  obtain  access  to 
external  finance.  SMEs  can  potentially  benefit 
from  the  significant  depreciation  of  sterling  that 
took  place  since  2008.  However,  difficulties 
accessing 
finance,  particularly  credit,  and/or 
accessing  it  on  competitive  terms,  may  constrain 
SMEs'  ability 
to  expand  and  access  export 
markets (43).  It  may  also  affect  their  ability  to 
constraining 
compete 
productivity (44). 

internationally 

by 

The  ability  of  SMEs  to  raise  external  finance 
appears  to  have  been  impaired  during  the 
global  financial  crisis  and  subsequent  UK 
recession.  As  discussed  in  Box  3.3,  PNFCs  as  a 
whole  were  excessively  reliant  on  credit  as  a 
source of finance in the lead-up to the international 
economic crisis and recession in the UK and have 
been  adversely  affected  by  the  continuing  decline 
in  bank  credit,  not  least  because  they  have  been 
unable  to  obtain  external  finance  by  alternative 
means. The reliance on external credit to expand is 
likely to be a particular issue for SMEs which can 
lack  the  size  or  sophistication  to  issue  fixed-
interest  debt  and  equity  or  seek  other  means  of 
external  finance  and  are  mostly  reliant  on  bank 
credit to raise funds.  

Neither  credit  available  to  SMEs  nor  their 
perceptions of their ability to access credit have 
improved  significantly  since  the  2013  IDR.  Net 
lending  to  PNFCs,  and  to  SMEs  in  particular, 
continued  to  decline  in  2013  (Graph  3.16).  In 
addition,  surveys  of  SMEs  continue  to  show  that 
access  to  finance  on  suitable  terms  remains  a 
concern.  According  to  BDRC  Continental's  SME 
Finance  Monitor,  more  than  a  third  of  SMEs 
applying  for  a  loan  did  not  manage  to  obtain  the 
desired  facility  either  because  they  were  turned 
down  or  because  of  other  issues  with  the  'offer' 

(43)  European Commission (2013a) finds that access to finance 
is  reported  as  the  third  most  pressing  problem  for  UK 
businesses (15.4%, equal to the EU average). 

(44)  See  European  Commission  (2013f)  for  evidence  on  how 
difficulties  accessing  finance  decreased  the  probability  of 
manufacturing  firms  becoming  exporters  in  2008  by 
negatively affecting their productivity. 

27 

 
                                                           
                                                           
3. Imbalances and Risks 

may  remain  a  deterrent  to  SMEs  requiring  cost-
effective finance in order to expand. 

Graph 3.17: Corporate credit costs by firm size

60

50

40

30

20

10

0

-10

-20

-30

-40

s
t
s
o
c
d
e
s
a
e
r
c
e
D

s
t
s
o
c
d
e
s
a
e
r
c
n
I

4
Q
9
0

3
Q
0
1

2
Q
1
1

1
Q
2
1

4
Q
2
1

3
Q
3
1

2
Q
0
1

1
Q
1
1

4
Q
1
1

3
Q
2
1

2
Q
3
1

1
Q
0
1

4
Q
0
1

3
Q
1
1

2
Q
2
1

1
Q
3
1

Small

Medium

Large

Fees and commissions on loans

Spreads on loans

Source: Bank of England's Credit Conditions Survey and Bank 
of England calculations 

%

7

6

5

4

3

2

1

0

Graph 3.18: Lending to UK private non-financial 
corporations

Medium SMEs

Smaller SMEs

All SMEs

Bank Rate

8
0
v
o
N

9
0
y
a
M

9
0
v
o
N

0
1
y
a
M

0
1
v
o
N

1
1
y
a
M

1
1
v
o
N

2
1
y
a
M

2
1
v
o
N

3
1
y
a
M

Source: Department for Business Innovation and Skills
Note: Interest rates are indicative medium rates on new SME 
variable-rate facilities.

The  government  has  responded  to  concerns 
surrounding  SME  access  to  finance  with  a 
number of measures. These include inter alia, the 
Funding  for  Lending  Scheme  designed  to  boost 
credit availability and reduce the cost of borrowing 
for firms, including SMEs; the proposed Business 
Bank,  to  provide  alternative  sources  of  finance  to 
SMEs.  (These  measures  are  discussed  in  the 
following  section.)  While  a  number  of  access  to 
finance policies have been in place for a significant 
period of time, they nevertheless have yet to exert 
a marked impact on SMEs' credit conditions.  

ten  SMEs  applying  for 

(45).  Additionally,  17%  of  applicants  managed  to 
obtain funding only after going through issues with 
the offer. Another recent survey carried out by the 
Federation  of  Small  Businesses  in  the  fourth 
quarter of 2013 showed that approximately four in 
10 
loan  had  been 
unsuccessful  ( 46).  These  comparatively  high  loan 
rejection rates have been a persistent characteristic 
of  the  post-crisis  period  in  the  UK  (47).  A  recent 
report  to  the  UK  government (48)  estimated  a 
funding  gap  for  SMEs  of  GBP  8.2-12.6  billion  in 
2012.  The  size  of  the  gap  was  split  reasonably 
equally  between  'loan  rejections'  and  'discouraged 
demand'  (that  is,  SMEs  that  did  not  consider  it 
worthwhile to apply for a bank loan to begin with). 
Finally,  bank 
is  relatively 
concentrated  which  may  render  them  particularly 
dependent  on  the  relationship  established  with 
their own bank (see Section 3.1.12). 

to  SMEs 

lending 

Graph 3.16: Lending to UK private non-financial 
corporations

e
g
n
a
h
c
%
y
-
o
-
y

30

25

20

15

10

5

0

-5

-10

-15

05
04
Private NFCs

06

07

08
All SMEs

09

10

11

13
Small Businesses

12

Source: Trends in Lending April 2012 (Bank of England, British 
Bankers' Association and Department for Business Innovation and 
Skills) for data up until February 2012; Bank of England for data from 
April 2012 onward.
Note: the private NFC and SME series are subject to a break in March 2012 due 
to a new data collection by the BoE; the small businesses series was terminated 

Not only does credit supply remain constrained, 
the  cost  of  credit  is  comparatively  high  for 
SMEs.  Survey  evidence  suggests  that  borrowing 
cost  developments  since  2009  have  been  more 
unfavourable for smaller companies than for larger 
ones (Graph 3.17). Although the cost of borrowing 
declined  when  the  Bank  of  England  cut  its 
reference rate to 0.5% in 2008, margins have risen, 
particularly  for  smaller  SMEs  (Graph  3.18).  The 
relatively high margins may be partly explained by 
the risk characteristics of  SMEs but,  nevertheless, 

(45)  BDRC  Continental  (2013).  Survey  results  refer  to  loan 
applications made between the second quarter of 2012 and 
the third quarter of 2013.  

(46)  Federation of Small Businesses (2013).  
(47)  See Monteiro (2013) for a review of survey evidence. 
(48)  Business  Bank  Advisory  Group  to  the  Department  of 

Business Innovation and Skills (2013)  

28 

 
 
 
 
                                                           
 
 
 
 
 
 
 
 
 
 
 
 
 
 
3.1.5.  Conclusions 

The  UK's  export  share 
in  world  exports 
continues  to  decline  but  the  pace  is  less  rapid 
than in previous years. This continues the pattern 
of gradual but persistent decline of the past decade. 
There  is  no  apparent  single  reason  to  explain  the 
decline;  rather,  it  is  likely  to  be  the  outcome  of  a 
number of smaller factors and wider issues relating 
to  the  structure  of  exports  and  its  export  markets. 
Such trends need to be interpreted in the context of 
the  rising  share  of  emerging  markets  in  world 
trade.  

could 

policies 

support 

Government 
a 
rebalancing  towards  net  exports.  For  example, 
the effective delivery of the announced 'pipeline' of 
infrastructure  investment  has  potential  to  remove 
bottlenecks  and  boost  export  performance.  In 
addition,  the  focus  on  apprenticeships  is  likely  to 
raise  skills  provided  that  the  quality  of  the 
apprenticeships is high. The authorities could also 
continue to monitor the impact of credit access and 
export  finance  policies  and  extend 
if 
necessary.  

them 

Overall, the declining export share is unlikely to 
pose short-term risks to the economy. However, 
in the absence of a major change in the structure of 
exports or export markets, or government policy to 
support  rebalancing,  the  export  share  is  likely  to 
continue  to  slowly  deteriorate  over  the  medium 
term. In turn, the main risk associated with a slow 
deterioration  of  the  export  share  is,  other  factors 
held constant, an associated deterioration, over the 
medium  term,  of  the  current  account  deficit  and 
the net international investment position. 

3. Imbalances and Risks 

29 

 
3. Imbalances and Risks 

Graph 3.19: Households' and PNFCs' 
indebtedness

250

200

150

P
D
G

f

o
%

100

50

0

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

Households

Non financial corporations

Private sector EA17

Private sector

Source: Commission Services

Private  sector  indebtedness  is,  broadly,  split 
equally between indebtedness of households and 
PNFCs  (Graph  3.19)  and  the  pace  at  which  both 
sectors reduced holdings of debt fell in 2012: 

3.2. 

PRIVATE SECTOR INDEBTEDNESS  

3.2.1.  Introduction 

trends  and  developments 

levels  of  private  sector 

High private sector indebtedness was identified 
as  a  macroeconomic  imbalance  in  the  IDRs  in 
2012 and 2013 and has been identified again as 
a  potential  imbalance  in  2014.  This  section 
analyses:  recent 
in 
private  sector  indebtedness,  risks  associated  with 
indebtedness, 
high 
Non-Financial 
particularly 
Corporations  (PNFCs), 
to  maintain 
adequate  access  to  finance,  especially  for  SMEs 
while  orderly  deleveraging  continues,  the  impact 
of  government  policy  in  facilitating  sufficient 
access  to  credit  and  sets  out  conclusions  on  the 
state  of  any  imbalance  and  the  risks  associated 
with it. 

the  need 

Private 

for 

sector 

in  the  housing  market  and 
Developments 
household 
indebtedness  have  been 
particularly marked over the past year and have 
potential  implications  for  the  existence  of,  and 
risks  surrounding,  any  macroeconomic  imbalance 
and are analysed separately in Section 3.3.  

• 

• 

3.2.2.  Trends and developments 

for  PNFCs',  debt  as  a  %  of  GDP  has  fallen 
since  its  peak  in  2009  but  the  pace  of  decline 
lessened  in  2012  as  PNFCs'  debt  began  to 
stabilise at a relatively high level; and 

for  households,  debt  as  a  %  of  GDP  has  also 
fallen  since  its  peak  in  2009  and  the  pace  of 
decline lessened in 2012 as debt also began to 
potentially stabilise at a relatively high level. 

Size of deleveraging 

to  179%  of  GDP 

After  having  increased  steadily  during  the 
previous  decade,  private  sector  indebtedness 
has peaked at 195% of GDP (49) in 2009 (Graph 
3.19).  Since  then,  private  sector  indebtedness  has 
fallen 
in  2012  reflecting 
deleveraging by households and PNFCs as the size 
of the economy  grew in nominal terms. However, 
the  pace  of  reduction  in  indebtedness  declined  in 
2012 – as minimal economic growth was matched 
by a small fall in debt holdings. 

Despite  recent  falls,  the  current  level  of  private 
sector indebtedness remains historically high. 

of 

Alternative  measures 
indebtedness 
corroborate  the  slowdown  in  deleveraging  by 
the corporate sector: PNFCs' debt as a % of gross 
operating surplus has fallen from the peak of 2009, 
although  the  pace  of  decline  slowed  in  2012 
(Graph 3.20) and corporate debt as a % of financial 
assets and corporate debt as a % of total assets (or 
gross  wealth)  have  also  fallen  but  the  decline  has 
slowed more recently (Graph 3.21). 

(49)  All data is quoted on a consolidated basis unless otherwise 

indicated. 

30 

 
                                                           
 
 
 
3. Imbalances and Risks 

700

650

600

%

550

500

450

400

Graph 3.20: PNFCs' debt as percentage of 
gross operating surplus

180

160

140

120

100

80

60

40

20

0

s
t
e
s
s
a

d
n
a
P
D
G

f
o
%

Graph 3.22: Household debt as a percentage of gross 
disposable income

180

I

D
G
%

160

140

120

100

80

60

40

20

0

04

05

06

07

08

09

10

11

12

PNFCs' debt as percentage of ross operating surplus

96

98

00

02

04

06

08

10

12

Debt / GDP, Households
Debt / fin. assets, Households
Debt / gross disposable income, Households (right axis)

Source: Commission Services, Office for National Statistics

Source: Commission Services

Graph 3.21: Measures of PNFCs' leverage

s
t

e
s
s
a

l

a

t

o

t

d
n
a
P
D
G

,
y
t
i

u
q
e
o

t

t

b
e
d

f

o
s
o

i
t

a
R

)

%

(

120

100

80

60

40

20

0

96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13*

Debt / GDP
Debt / assets

Debt / equity
Debt / assets, consolidated

Source: Commission Services

The  pace  of  deleveraging  by  the  household 
sector has also slowed. Trends in household debt 
as  a  percentage  of  financial  assets  and  household 
debt  as  a  percentage  of  total  assets  (or  gross 
wealth)  indicate  that  household  deleveraging  has 
slowed  recently  and  that  it  has  plateaued  at  a 
relatively high level (Graph 3.22). 

Composition of deleveraging 

The composition of deleveraging since 2008 has 
differed between households and PNFCs (Graph 
it  has  been  achieved, 
3.23).  For  PNFCs 
predominantly,  by  reductions  in  gross  borrowing 
and,  to  a  lesser  extent,  write  offs  on  loans.  By 
contrast,  for  households,  the  greatest  contribution 
to  deleveraging  has  been  a  rise  in  nominal 
disposable  income  –  a  relatively  minor  role  has 
been  played  by  write  offs  and,  in  absolute  terms, 
the level of borrowing has actually increased.  

Graph 3.23: Composition of household 
deleveraging

10

0

-10

-20

-30

-40

-50

UK household sector

UK corporate sector

Borrowing
Write-offs on loans
Change in debt to income

Source: Bank of England

Broadly,  there  are  five  possible  drivers  of 
deleveraging (50): 
increased  economic  growth, 
increased  saving,  increases  in  inflation,  'financial 
repression'  and  debt  restructuring.  The  preferred 
option  to  facilitate  deleveraging  is  an  increase  in 
GDP growth. However, this has not, to date, been 

(50)  See European Commission (2013h). 

31 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                           
3. Imbalances and Risks 

3.2.3.  Credit supply 

The  stalling  in  the  pace  of  deleveraging  has 
been accompanied by divergent trends in credit 
supply. The experience of households and PNFCs 
noticeably differs: increases in credit supply to the 
household  sector  increased  in  late  2012  –  and,  in 
particular,  growth  in  unsecured  credit  has  been 
relatively  brisk  -  and  grew  further  in  2013  but 
credit  supply  to  PNFCs  continued  to  decline 
throughout  this  period  (although  the  pace  of 
decline  slackened).  For  PNFCs,  credit  supply  has 
fallen  more  heavily  for  SMEs  than  for  PNFCs 
overall (Graph 3.26).  

Graph 3.26: Credit  growth by sector

%

r
a
e
y

n
o
r
a
e
Y

25

20

15

10

5

0

-5

-10

Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Jan 13

To individuals

Individuals, secured

To SMEs

To PNFC's

Individuals unsecured

To SMEs, new series

Source: Office for Budget Responsability

credit  may 

The reasons for the significant rise in growth of 
household  unsecured 
reflect 
increases  of  purchases  of  large  items  such  as 
cars.  More  broadly,  growth 
in  demand  for 
unsecured credit may reflect the boost in economic 
sentiment  and  confidence  associated  with  the 
return 
to  growth.  For  example,  consumer 
confidence  as  measured  by  the  GfK  Survey  has 
picked  up  steadily  throughout  2012  and  2013  (52) 
(Graph  3.27),  amidst  rise  in  expected  income 
growth and a loosening of credit conditions so that 
unsecured  credit  is  more  easily  available  than  in 
the previous three years. 

(52)  GfK UK Consumer Confidence Measures December 2013.  

the  predominant  route  by  which  PNFCs  have 
deleveraged (51)  –  rather,  deleveraging  has  been 
achieved largely through a reduction in borrowing 
-  and,  therefore,  may  have  impacted  adversely 
upon future economic growth by more than would 
have been the case if it had been achieved through, 
in  gross  operating 
for  example,  an 
increase 
the  subdued 
surplus. 
performance  of  business  investment  vis  a  vis 
household consumption (Graph 3.25). 

It  may  also  explain 

During  deleveraging,  households'  consumption 
rose less than disposable income. As a result the 
household saving ratio rose (Graph 3.24). In 2012 
and  2013  the  gap  between  the  two  narrowed 
somewhat  as  the  saving  ratio  stabilised  (Graph 
3.25).  For  PNFCs,  the  pattern  has  been  different: 
gross  operating  surplus  has  risen  only  slightly 
while business investment has fallen sharply. 

Graph 3.24: Gross operating surplus and 
household gross disposable income

110

100

0
0
1
=
1
Q
8
0

90

80

70

60

08

09

10

11

12

13

Households gross disposable income
Gross operating surplus (PNFCs)
Household consumption
Business investment

Source: Office for National Statistics

Graph 3.25: Household saving ratio

e
m
o
c
n

i

l

e
b
a
s
o
p
s
d
%

i

8

7

6

5

4

3

2

1

0

00 01 02 03 04 05 06 07 08 09 10 11 12

Source: Commission Services

(51)  See Cuerpo et al (2013). 

32 

 
 
 
 
 
                                                           
 
 
 
 
                                                           
3. Imbalances and Risks 

Box 3.2: PNFCs - supply and demand for credit.

The reduction in the availability of credit can be examined from the supply and demand sides (1).  

Graph 1a: Perceived riskiness of future 
investment opportunities

75

50

25

0

-25

-50

-75

%

-100

07

08

09

10

11

12

13

Is this a good time to be taking greater risk onto your balance
sheets?

How would you rate the general level of external financial and
economic uncertainty facing your business?

Do you think UK corporate balance sheets are over leveraged?

Source: Deloitte CFO Survey 

Graph 1b: Attractiveness of different sources 
of corporate funding

80

%

60

40

20

0

-20

-40

-60

-80

e
v
i
t
c
a
r
t
t

A

e
v
i
t
c
a
r
t
c
c
a
n
U

07

08

09

10

11

12

13

Bond issuance

Bank borrowing

Equity issuance

Source: Deloitte CFO Survey

Demand side factors 

Larger  PNFCs (2)  may  have  reduced  their  demand  for  credit.  For  example,  the  perceived  riskiness  of 
investment opportunities may have increased thus deterring demand although while there is some evidence, 
overall  it  is  mixed  (Graph  1a).  In  addition,  the  attractiveness  of  raising  finance  by  equity  and  bonds  may 
have risen increased relative to that of bank loans although again the evidence is mixed – while bonds may 
have been increasingly perceived as a preferred source of funding, that is less likely to have been the case 
for equity (Graph 1b). Moreover, given the depth of the downturn in growth in 2008-12 and its uncertain 
aftermath, it is reasonable to expect that PNFCs' expectations for future growth fell.  

It is a consistent theme of PNFCs' responses to surveys on demand for credit that they are unable to 
obtain  the  amount  of  credit  that  they  ideally  desire  and  at  an  acceptable  price.  The  outcome  is 
particularly  marked  for  SMEs.  While  there  may  be  a  reduction  in  demand  for  credit  there  remains, 
nevertheless, clear survey evidence of unmet demand for credit.  

Supply side factors 

Risk perceptions of PNFCs 

Risk perceptions may be related to asymmetric information between the finance provider and PNFC – eg in 
relation to its creditworthiness and future performance. A rise in risk aversion may result in a credit provider 
being reluctant to provide funds without any track record and/or collateral to mitigate the risk of default.  

An increase in negative risk perceptions towards PNFCs may have adversely affected the supply of credit; 
write off rates on lending to PNFCs have increased somewhat since 2009 (Graph 2a). However,  write-off 
rates have fallen sharply since 2011 (although they remain high). In addition corporate insolvency rates have 
declined  since  the  recent  peak  in  2009  and  also  remain  low.  This  suggests  that  the  influence  of  risk 
perceptions on supply may begin to wane. 

(1)  The analysis in this box is taken from Monteiro, D. (2013). 
(2)  The source for Graphs 1a and b is the Deloitte's survey of Chief Finance Officers of the top 350 companies listed on 

the FTSE.  As such, it does not cover the borrowing pattern of SMEs. 

(Continued on the next page) 

33 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                           
 
 
 
3. Imbalances and Risks 

Box (continued) 

Graph 2a: Write off rates for lending to PNFCs 

Graph 2b: Changes in core Tier One capital 
ratios and risk-weighted assets

1.8

1.5

1.2

0.9

0.6

0.3

0.0

91

93

95

97

99

01

03

05

07

09

11

13

Creditors' voluntary liquidations

Compulsory liquidations

Receivership appointments

Administration appointments

Company voluntary arrangements

Sources:  The Insolvency Service and Bank of England

Restoration of capital by the banking sector 

14

12

10

%

8

6

4

2

0

France Germany

Italy

Spain

United
Kingdom

United
States

2008

2009

2010

2011

2012

Source: SNL Financial, published accounts and Bank of 
England calculations

The  banking sector reduces the size of its risk-weighted assets and increase  holdings of high quality 
capital  to  meet  strengthened  regulatory  requirements  –  which  may  have  adversely  affected  credit 
supply. The banking sector has substantially increased its core Tier One capital ratio and reduced its risk-
weighted assets. The capitalisation of the UK banking system now compares favourably with that of other 
major countries (Graph 2b). 

According  to  the  Financial  Policy  Committee  of  the  Bank  of  England (3),  the  banking  system  is 
soundly capitalised and risks had been significantly reduced. While banks needed to raise more capital to 
meet  regulatory  requirements,  such  amounts  were  small  compared  to  those  raised  in  the  past  few  years. 
Overall, the increased health of the banking system should support its ability to supply funds.  

(3)  Financial Policy Committee of the Bank of England (FPC). See Bank of England (2013e). 

Graph 3.27: Economic sentiment and 
consumer confidence

20

0

-20

-40

-60

-80

-100

00 01 02 03 04 05 06 07 08 09 10 11 12 13

Consumer Confidence Indicator

General economic situation over last 12
months

Source: GfK and Commission Services

The reasons for the divergence in credit growth 
between  SMEs  and  PNFCs  as  a  whole  may 

relate  to  certain  characteristics  of  SMEs.  This 
issue  is  considered  in  more  detail  in  Section  3.1. 
However, credit supply for all PNFCs continues to 
decline.  Factors  that  may  have  influenced  the 
demand and supply of/for credit over 2009-13 are 
discussed further in Box 3.2. 

3.2.4.  Cost of credit 

The  cost  of  credit  for  PNFCs  remained  low  in 
2013. Having fallen steeply in late 2008 and 2009 - 
coinciding  with  the  reduction  in  the  bank  rate  to 
0.5 pps. - the cost of credit for PNFCs remained at 
historic  low  levels  throughout  2013  as  shown  in 
Graphs 3.17 and 3.28. 

34 

 
 
 
 
 
                                                           
 
 
 
 
i

s
t
n
o
p
e
g
a
t
n
e
c
r
e
p

10

8

6

4

2

0

04

Graph 3.28: PNFCs' cost of borrowing

05

06

09
interest rate, other loans, new advances to PNFCs

08

13

10

07

12

11

interest rate, other loans, new advances on a
floating rate to PNFCs
interest rate, overdrafts

Source: Bank of England

3.2.5.  Near-term  outlook  for  credit  supply and 

demand 

Recent  survey  results  present  a  mildly  positive 
picture for corporate credit supply and demand 
(53): 

•  corporate 

credit 

availability 

increased 
significantly in  Q4 2013 for small PNFCs and 
large  PNFCs,  although  it  was  muted  for 
medium-sized 
further 
PNFCs, 
improvement is expected in Q1 2014; and 

and 

a 

•  demand  for  corporate  credit  picked  up  further 
in  Q4  2013  for  medium  and  large  PNFCs 
although it was subdued for small PNFCs, and 
a further improvement is expected in Q1 2014 
for small and large PNFCs. 

3.2.6.  Risks  

Inadequate access to funds  

Adequate access to funds is important if PNFCs 
are  to  take  full  advantage  of  the  projected 
increase in growth in 2014 (54) to expand and/or 
increase  investment  ( 55).  Moreover,  sufficient 
access  to  credit  during  a  period  of  deleveraging 
can  help  ensure  that  such  deleveraging  is  smooth 

(53)  Bank  of  England  (2014),  Credit  Conditions  Survey,  2013 

Q4. 

(54)  See European Commission (2013a)  
(55)  There is also a link between adequate access to funds and 
productivity.    Evidence  suggests  that,  in  the  euro  area, 
decreases in firm level productivity can be linked to credit 
supply conditions  See European Commission 2013(d). 

3. Imbalances and Risks 

and orderly ( 56). The potentially adverse impact of 
deleveraging  on  growth  and  stability  can  be 
mitigated if credit supply remains healthy.  

Since  the  advent  of  the  international  economic 
crisis,  the  supply  of  funds  available  to  –  and 
raised  by  -  PNFCs  has  fallen  sharply.  Prior  to 
the  international  economic  crisis  PNFCs  were 
disproportionately  reliant  on  credit  to  raise  funds 
(Box  3.3).  Since  the  crisis,  PNFCs  have  been 
unable to seek alternative sources of funds in large 
quantities – and to the extent that they have raised 
funds,  it  has  been  largely  via  equity  issuance 
although larger PNFCs have raised funds via bond 
issuance. As has been discussed in previous IDRs, 
PNFCs',  and  particularly  SMEs',  access  to  credit 
was  adversely  affected  by  the  weakness  in  the 
banking  sector  as,  in  response  to  the  international 
economic  and  financial  crisis  and  UK  recession, 
banks  reduced  the  size  of  their  balance  sheets, 
lowered lending to PNFCs and reduced risk as they 
addressed  capital  shortfalls  and  strengthened 
capitalisation ratios. 

According  to  the  'Breedon  Report'  (2012)  (57), 
between 2012 and 2016 the projected 'financing 
gap'  for  PNFCs  could  range  from  GBP  84-191 
billion  depending  on  GDP  growth  and  its 
relationship  to  credit  supply.  A  continuing 
through  credit  or 
funds, 
inability 
raise 
alternative  means, 
for  PNFCs  – 
is  a  risk 
particularly  SMEs  (SMEs'  access  to  finance  is 
considered in more detail in section 3.1).  

to 

(56)  See Cuerpo, C. et al (2013) which states 'credit conditions 
are  an 
important  qualifying  factor  for  deleveraging 
processes and their assessment provides useful information 
to  better  understand  deleveraging  pressures…..in  short, 
credit  supply  constraints….have  a  direct  impact  on  non-
financial sector deleveraging'. 

(57)  Breedon (2012).  

35 

 
 
 
 
                                                           
                                                           
3. Imbalances and Risks 

Box 3.3: Sources of funds for PNFCs

Broadly,  the  main  sources  of  funds  for  PNFCs  are:  bank  credit,  bond  issuance  and  equity.   Prior  to 
2009, PNFCs were heavily dependent on bank credit as the major source of funds prior to the international 
economic crisis and UK recession (Graph 1a). Since then, fund-raising has been limited and below the levels 
of  the  preceding  decade.  PNFCs  have  reduced  credit  holdings  and  relied  on  bond,  equity  issuance  and 
retained earnings to raise funds. 

60000

40000

20000

0

-20000

-40000

P
B
G
m

,
e
g
a
r
e
v
a
g
n
v
o
m

i

r
e
t
r
a
u
q
-
4

Graph 1a: Sources of funds

Graph 1b: Private bond market capitalisation in 
G7 countries 

140

1
Q
4
0

1
Q
5
0

1
Q
6
0

1
Q
7
0

1
Q
8
0

1
Q
9
0

1
Q
0
1

1
Q
1
1

1
Q
2
1

1
Q
3
1

Other accounts receivable/payable, Credit
(resources/liabilities)
Unquoted shares and other equity, Credit
(resources/liabilities)
Quoted shares, Credit (resources/liabilities)

Loans, Credit (resources/liabilities)

P
D
G

f
o
%

120

100

80

60

40

20

0

93

95

97

99

01

03

05

07

09

11

Canada
Germany
Japan
United States

France
Italy
United Kingdom

Source: ECB

Securities other than shares, excluding financial
derivatives, Credit (resources/liabilities)

Source: World Bank's financial structure dataset 2013

While the UK is generally regarded as having deep and liquid financial markets (1) the experience of 
the period since 2008 suggests that PNFCs' ability to raise funds is impaired. Credit supply has fallen 
and  continues  to  falls;  far  from  raising  funds  through  the  acquisition  of  credit,  in  aggregate,  PNFCs  have 
reduced  their  reliance  on  credit  as  a  source  of  funds.  Private  bond  markets  in  the  UK  have  remained 
relatively underdeveloped; this has been a long-standing feature of the funds market – so smaller PNFCs had 
relatively little ability to switch from credit to bond issuance as a means to raise finance once credit market 
conditions changed (Graph 1b). Although recourse to public equity is possible, PNFCs may not always wish 
to  list  –  it  may  not  always  be  possible,  or  appropriate,  particularly  for  smaller  PNFCs  which  may  be 
unwilling to lose control and management  freedom  associated  with equity  finance. Moreover, the costs of 
securing equity finance may be excessive and lack of knowledge of how to obtain it may be a deterrent.  

(1)  See  World  Economic  Forum  Global  Competitiveness  Report  2013-14.  The  Global  Competitiveness  Report  ranks 
countries on a number of measures including measures of access to financial services which include (the UK's rank is 
in parentheses among EU 28): availability of financial services (1), affordability of financial services (3), financing 
through local equity market (1), ease of access to loans (15) and venture capital availability (4). 

High  indebtedness  of  PNFCs  in  the  property-
related sector 

firms'  business 

The  composition  of  corporate  deleveraging 
varies significantly by type of firm according to 
is  predominantly 
whether 
property  related.  As  noted  above,  corporate 
sector  indebtedness  has  fallen  by  17  percentage 
points  since  its  peak  in  2009.  However,  while 
loans to non-property firms have fallen by around 
30% (GBP 57 billion) since 2008, that for core real 
estate (CRE) firms has fallen by around 7% (GBP 
29  billion)  while  that  for  property-related  sectors 

has fallen by 15% (GBP 14 billion) (Graph 3.29). 
The indebtedness of these firms remains relatively 
high while commercial property prices remain well 
below  their  previous  peak  in  2007  –  by  around 
40%  in  total  and  almost  50%  for  secondary 
property (58). 

(58)  See Bank of England (2013a).  

36 

 
                                                           
 
 
 
 
 
 
 
                                                           
 
 
 
3. Imbalances and Risks 

that  has  continued  in  2013  as  growth  in  gross 
operating  surplus  has  outstripped  that  in  gross 
value  added.  In  addition,  a  feature  of  the  PNFC 
sector  that  it  is  a  net  lender.  This  trend  has 
continued in 2012 and 2013. 

Graph 3.30: PNFCs' profitability ratios

d
e
d
d
a

e
u
a
v

l

f
o
%

50

45

40

35

30

25

20

15

10

5

0

d
e
d
d
a

e
u
a
v

l

f
o
%

25

20

15

10

5

0

Gross entrepreneurial income
Gross operating surplus
Retained earnings (right axis)
Retained earnings, EA17 (right axis)

96

98

00

02

04

06

08

10

12

Source: Commission Services

PNFCs'  holdings  of  financial  assets,  including 
cash,  have  risen  sharply  in  the  last  ten  years 
(Graph  3.31).  Moreover,  PNFCs'  loans  to  deposit 
ratio has fallen sharply recently (Graph 3.32). The 
rise  in  PNFCs'  financial  assets,  including  (near-) 
cash  holdings  provides  a  counterweight  to  high 
levels of gross debt and lessens the risks associated 
with it. 

Graph 3.31: PNFCs' financial assets

P
D
G

f
o
%

600

550

500

450

400

350

300

250

200

00 01 02 03 04 05 06 07 08 09 10 11 12 13

Source: Office for National Statistics

Graph 3.29: Stock of UK loans by sector a)

P
B
G
s
d
n
a
s
u
o
h
T

350

300

250

200

150

100

50

0

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13

CRE companies

Non Property Related c)

Other Property related lending b)

Source: Bank of England

(a)  Data show values of outstanding total lending by UK MFIs 
excluding the effects of securitisations and loan transfers, and 
excluding securities. Data are for lending in all currencies stated 
in sterling terms.  Data are not seasonally adjusted. From 2011 
Q1, data are on the SIC 2007 basis. Changes in the SIC codes 
have led to some components moving between industries.
(b)  CRE includes the buying, selling and renting of real estate, 
and the development of buildings.
(b)  Other property related lending includes construction, hotels 
and restaurants, and health and social work. 
(c)  Non property related lending includes agriculture hunting 
and forestry, fishing, mining and quarrying, manufacturing, 
electricity, gas and water supply, wholesale and retail trade, 
transport, storage and communications, profesional services and 
and support activities, public administation and defence, 
education, and community service activities. 

Inadequate  deleveraging by previously  highly 
indebted PNFCs 

Aggregate  trends  may  mask  other  differences 
between  PNFCs.  The  Bank  of  England  ( 59) 
discusses the extent of deleveraging by the type of 
firm  distributed  by  pre-existing 
levels  of 
indebtedness.  It  finds  that  the  leverage  of  firms 
that were already highly indebted has continued to 
rise  since  2008,  in  marked  contrast  to  the  least 
indebted firms.  

Prudent PNFCs' balance sheets 

The  risks  associated  with  high  PNFCs' 
indebtedness  may  be  ameliorated  by  a 
consideration  of  PNFCs'  balance  sheets  and 
profitability. Despite the weakness in the level of 
gross operating  surplus, profitability ratios remain 
relative 
high 
profitability held up from 2009 to 2012 – a pattern 

(Graph  3.30).  Measures  of 

(59)  See Bank of England (2013a). 

37 

 
 
 
                                                           
 
 
 
 
 
 
 
 
 
 
3. Imbalances and Risks 

Graph 3.32: Liabilities and Loans/Deposits Ratio, 
Financial Corporations

)

%

(

y
-
o
-
y
e
g
n
a
h
c

f
o
e
t
a
R

60

50

40

30

20

10

0

-10

-20

-30

s
t
i
s
o
p
e
d

d
n
a
y
c
n
e
r
r
u
c

f
o
%

68

66

64

62

60

58

56

54

52

97

99

01

03

05

07

09

11

13*

Liabilities growth, Financial Corporations
Loans / deposits, Financial Corporations (right axis)

Source: Commission Services

Rising household unsecured lending 

Although  the  rise  in  unsecured  lending  to 
households  is  worth  noting,  it  is  unlikely  to 
constitute  a  major  risk.  Most 
importantly, 
unsecured lending accounts for a small proportion 
of households' debt (less than 5%) so is unlikely to 
be  of  sufficient  relative  size  to  constitute  a 
macroeconomic 
risk.  The  vast  majority  of 
household  debt  is  secured.  Growth  in  household 
disposable income should continue in 2014-15 and 
cushion  the  risks  associated  with  high  absolute 
levels  of  household  debt.  Moreover,  'write  off' 
rates for unsecured lending have decreased sharply 
since  early  2010  and  have  now  returned  to  the 
rates preceding the international economic crisis.  

3.2.7.  Government policy – developments and 

impact  

The Government has instituted policies to improve 
PNFCs' access to finance, in particular: 

• 

• 

the Funding for Lending Scheme (FLS); and 

the Business Bank. 

The Funding for Lending Scheme 

The  Funding  for  Lending  Scheme  (FLS)  was 
introduced  in  August  2012  by  the  Bank  of 
England.  The  aim  of  the  FLS  is  to  provide 
incentives – by providing funding at below market 
rates - to banks (and building societies) to expand 
lending  to  PNFCs  (and  households)  by  reducing 
their  funding  costs  which,  ultimately,  should 
translate  to  lower  effective  rates  of  lending  and 
increased  availability  of  credit.  As  at  Q3  2013, 

total  loans  outstanding  under  the  FLS  were  GBP 
23 billion. 

The  evidence  to  date  on  the  impact  of  the  FLS 
on bank lending to PNFCs has been  mixed. On 
the  one  hand,  it  is  difficult  to  disentangle  the 
impact  of  the  FLS  itself  and  international  factors 
that  reduced  wholesale  bank  funding  costs  inside 
and  beyond  the  UK  since  the  middle  of  2012.  In 
addition, the borrowing margin for PNFCs remains 
low.  Crucially,  however,  since  the  advent  of  the 
FLS, lending remains muted and continues to fall. 

Conceptually and practically, the FLS is a well-
designed  policy;  overall,  however,  it  is  yet  to 
significantly  affect 
supply  of  credit 
the 
outstanding to PNFCs. It may be that further time 
is required for the FLS to have a significant impact 
or it may be that, in the absence of the FLS, credit 
availability would have been even lower – that is, 
other  factors  are  weighing  down  on  lending.  The 
recent withdrawal of the FLS for loans for housing 
(60) may lessen the likelihood of any 'crowding out' 
of  loans  provided  under  the  FLS  for  SMEs  by 
loans for households.  

The Business Bank 

is 
The  aim  of  the  Business  Bank,  which 
expected to be operational by the second half of 
2014, is to deploy capital to address gaps in the 
provision  of  finance  for  SMEs.  The  Bank  has 
been  provided  with  GBP  1.25  billion  (61)  of  new 
capital. In addition, a number of existing schemes 
to  support  access  to  finance  -  of  a  total  value  of 
GBP 2.4 billion – of both a debt and equity nature 
- will be rolled into the Bank.  

The  capital  provided  to  the  new  bank  is 
relatively small – however, it is expected that the 
funds  will  be  leveraged  up  with  the  addition  of 
private sector funds. 

The government intends that the Bank will not 
directly  lend  or  invest  in  businesses;  rather,  it 

(60)  See Bank of England (2013d). The changes took effect on 

1 January 2014. 

(61)  Department for Business Innovation and Skills (2013) The 
capital  will  be  used  to:  invest in  late  stage  venture  capital 
funds which in turn invest in high growth potential SMEs, 
launch a scheme to support the provision of lease and asset 
finance,  and  provide  wholesale  guarantees  for  loans  to 
SMEs. 

38 

 
 
 
 
 
 
 
 
 
 
                                                           
will  work  in  conjunction  with  the  private  sector 
providers  to  support  and  increase  the  capacity  of 
existing  channels  of  finance.  Such  providers  may 
include challenger banks (see above). 

The  establishment  of  the  Business  Bank  is  a 
positive  first  step  forward.  Conceptually  and 
practically,  it  enables  SMEs  to  obtain  funds  that 
they  may  not  be  able  to  do  so  via  bank  credit. 
However, design and implementation  will  need to 
proceed  carefully  given  the  complexities  of  the 
issue  so  that  the  Bank  gains  the  confidence  of 
SMEs  and  potential  niche  providers  of  funds  to 
SMEs.  It  remains  to  be  seen,  however,  how 
quickly the Bank can provide finance to SMEs on 
a  scale  that  helps  to  meet  the  gap  caused  by  the 
lack of other funding sources and that the leverage 
provided  by  the  private  sector  will  materialise  to 
the extent envisaged. Moreover, it is important that 
the  Bank  operates  alongside  the  market,  and 
provides  funds  in  a  way  that  is  not  currently 
provided  by  the  market,  rather  than  replace  the 
market (62). 

Competition in the banking sector 

PNFCs' access to finance may be affected by the 
degree of competition in the banking sector. The 
banking sector is characterised by a small number 
of large national banks and relatively few regional 
banks  or  regional  building  societies  with  a 
presence  limited  to  a  narrow  geographical  area. 
the  degree  of  concentration  has 
Moreover, 
increased since the international economic crisis – 
between 2007 and 2013, for the six largest banks: 
the  share  of  total  assets  among  all  monetary 
financial  institutions  increased  from  46%  to  55%, 
for loans to PNFCs it increased from 64% to 70% 
(63).  

SMEs are heavily dependent on their own bank 
to  raise  funds.  For  example,  over  half  of  SMEs 
that  sought  finance  first  approached  their  main 
bank. Moreover, 71% of SMEs contacted only one 
(64).  Anecdotal 
provider 
finance 
businesses, 
that 
evidence 
particularly  SMEs,  are  deterred  from  expansion 
and investment if an application is rejected by their 

in  seeking 
suggests 

some 

(62)  The  activities  of  the  Business  Bank  will  need  to  be 

compliant with the EU's State Aid Regime. 

(63)  Bank of England, unpublished data. 
(64)  See Breedon Report (2012). 

3. Imbalances and Risks 

existing  bank  as  they  are  unable  or  unwilling  to 
seek additional sources of finance, including from 
other banks. 

The  dominance  of  the  banking  sector,  and  the 
behaviour of SMEs in relation to it, may reflect 
information  issues  in  the  market.  Incumbent 
banks  have  an  advantage  in  relation  to  retaining 
SME  business  particularly  if  SMEs  have  been  a 
customer  of  the  bank  for  a  long  period  of  time  – 
allowing the bank to make a full assessment of risk 
and  hence  the  collateral  and  pricing  terms  of  any 
loan.  More  generally,  incumbent  banks  have  an 
advantage 
their  provision  of  current 
account facilities  which provide them  with details 
on individual borrowers. 

through 

An  increase  in  the  number  of  banks  would 
provide  alternative  options  for  SMEs  to  seek 
finance  in  the  event  that  an  initial  application  for 
finance  was  rejected  by  their  existing  main  bank 
and wider benefits could be expected to flow from 
the  increase  in  competition  that  such  banks  could 
provide.  

small  and  new 

A  number  of 
so-called 
'challenger  banks'  have  commenced  operation 
in  the  UK  in  recent  years  (65).  It  is  unclear 
whether  challenger  banks  will  be  able  to  gain 
significant  market  share  and,  where  relevant, 
expand  activities  to  the  SME  sector  (66).  There  is 
potential  for  challenger  banks  to  work  with  the 
Business  Bank,  once  it  is  established,  to  provide 
access  to  finance  for  SMEs.  More  broadly,  the 
is 
government  has  recognised  the  issue  and 

(65)  Year  established  as  a  stand-alone  bank  in  the  UK  in 
parentheses:  Metro  Bank  (2010),  Aldermore  (2009), 
Handelsbanken (2012) and Virgin Money (2012) although 
Metro  Bank  and  Virgin  Money  have,  to  date,  offered 
predominantly retail banking services. Virgin Money is not 
technically a new entrant to the market as it has increased 
market share by taking responsibility for much of Northern 
Rock's previous business. 

(66)  As argued by the UK Independent Commission on Banking 
(2011),  for  a  new  bank  to inject  competitive  pressure  into 
the  market,  it  should  have  sufficient  scale  and  financial 
backbone  to  act  as  a  challenger  bank.  In  the  past,  only 
banks with a sufficiently high share have been able to grow 
and  act  as challengers  to  the  incumbents.  The  Commision 
on  Banking  also  recommended  the  creation  of  a  new 
challenger bank through the divestiture of assets belonging 
to Lloyds Bank.  The creation of an independent new bank, 
TSB, is underway. 

39 

 
                                                           
                                                           
3. Imbalances and Risks 

3.3. 

THE  HOUSING  SECTOR  AND  HOUSEHOLD 
MORTGAGE INDEBTEDNESS 

3.3.1.  Introduction 

in 

The  2013  IDR  concluded  that  high  levels  of 
the 
household  debt  and  developments 
housing sector posed a challenge to the economy 
noting  that  'the  macroeconomic  imbalances  that 
the  UK  is  experiencing  pose  a  more  immediate 
threat  to  growth  than  to  stability  but,  if  not 
addressed,  they  could  store  up  future  risks  to 
macroeconomic  stability  and 
the  financial 
sector'. 

to 

considering  action  to  improve  competition  in  the 
banking sector (67). 

3.2.8.  Conclusion 

Private  sector 
indebtedness  remains  high; 
however,  the  challenge  posed  by  high  private 
sector  (excluding  household  secured  lending) 
indebtedness is less  marked than at the time of 
the  2013  IDR.  In  particular,  PNFCs  remain  net 
lenders  with  strong  balance  sheets  that  should 
provide 
vulnerabilities. 
However,  credit  supply  remains  muted  despite 
recent  signs  from  surveys  that  demand  for,  and 
supply of, credit may rise.  

cushion 

against 

a 

The  main  challenge  is  constrained  access  to 
funds,  impeding  PNFCs'  ability  to  expand  and 
invest. Excessive reliance on the banking sector for 
funds  could  constrain  access  to  finance.  A  further 
risk  relates  to  distributional  issues,  especially 
remaining  high  indebtedness  in  the  property  and 
property-related sectors.  

The  government's  policy  response  is  welcome: 
the  Business  Bank  should,  once  operational,  help 
SMEs  obtain  alternative  sources  of  funds  and  the 
recent refocussing of the FLS towards PNFCs only 
is appropriate.  

There  are  particular  risks  and  challenges 
associated  with  high  household  mortgage 
indebtedness  -  flowing from risks and challenges 
associated  with  the  housing  market  -  given  the 
high  proportion  of  outstanding  mortgage  debt  in 
total  household  debt.  This  issue  is  considered  in 
Section 3.3.  

(67)  For example, the government is consulting on proposals to 
require banks to share information on their SME customers 
with  other  lenders  through  credit  reference  agencies.  The 
Office  for  Fair  Trading  is collecting  evidence  on  the  anti-
competitive  practice  of  banks  potentially  requiring  SMEs 
to open or maintain a business current account in order to 
qualify for a loan. 

The  housing  sector  is  unusually  important  in 
the UK economy. Households' residential building 
assets  account  for  some  400%  of  households' 
disposable  income  –  a  marked  increase  from  the 
230%  of  post-tax  income  in  1997  (the  previous 
trough)  and  approximately  equal  to  the  share  of 
financial  assets  in  disposable  income.  Household 
debt  has  also  increased  over  the  medium  term, 
from  90%  in  1997  to  140% of  disposable  income 
in 2011. 

Although  residential  investment  accounts  for 
only  around  3%  of  total  output,  the  housing 
sector  potentially  impacts  on  economic  growth 
and stability in a way that is disproportionate to 
its  share 
investment 
in  output.  Residential 
decreased by around 40% from its peak in 2007 to 
its  trough  in  2009  –  greater  than  the  fall  in  total 
output  of  around  6%  from  its  peak  in  2007  to  its 
trough in 2009. 

House  price  movements  can  outstrip  those  in 
retail prices. For example, house prices increased 
by  around  150%  between  January  2000  and  their 
peak in late 2007 compared to an increase of 15% 
in the Consumer Prices Index (CPI) over the same 
period.  Since  their  trough  in  early  2009,  house 
prices have risen by around 20% while the CPI has 
risen by around 16%. 

The  rate  of  homeownership  is  above  that  of 
other large EU Member States – such as France 
and Germany – but below that of others – such as 
Spain and Italy (Graph 3.33). 

40 

 
                                                           
 
100

90

)
n
o

80

i
t

l

a
u
p
o
p

70

l

a

t

o

t

60

f

o
%

(

50

40

30

3. Imbalances and Risks 

Graph 3.33: Homeownership rate

Graph 3.35: Number of loans approval for house 
purchase and for remortgaging, seasonally 
adjusted

s
d
n
a
s
u
o
h
T

100

90

80

70

60

50

40

30

20

10

0

00 01 02 03 04 05 06 07 08 09 10 11 12 13

Approvals for house purchase

Approvals for remortgaging

Source: British Bankers' Association

E
D

K
D

L
N

T
A

I

RF
F

E
S

K
U

L
P

U
L

Y
C

T
P

Z
C

E
B

T
M

L
E

E

I

I

TS

I

S
E

K
S

G
B

V
L

E
E

T
L

U
H

O
R

Source: Eurosystem Household Finance and Consumption Survey  

3.3.2.  Trends and Developments 

Activity 

Over  the  past  year,  activity  in  the  housing 
sector has increased further but remains below 
the  peaks  of  2007  and  early  2008.  Property 
transactions  have  increased  steadily  throughout 
2012  and  2013  to  reach  300,000  in  Q3  2013  – 
more than double the trough in early 2009 (Graph 
3.34).  

Moreover,  short-term  forward  indicators  of 
near-term  activity,  such  as  the  high  sales-stock 
ratio  and  the  net  balance  of  new  buyer  enquiries 
and  newly  agreed  sales,  suggest  that  rising  levels 
of  activity  will  continue  ( 68)  (Graph  3.36).  The 
positive  near-term  outlook 
is  supported  by 
indicators  for  demand  for  credit  for  house 
purchases. 

Graph 3.36: Measures of near-term demand

Graph 3.34: Property transactions

e
c
n
a
a
B

l

t

e
N

80

60

40

20

0

-20

-40

-60

-80

40.0

35.0

30.0

25.0

20.0

%

15.0

10.0

5.0

0.0

05

06

07

08

09

10

11

12

13

Source: RICS Housing Market Survey Data

08

09

10

11

12

13

New Buyer Enquiries (lhs)

Agreed Sales (lhs)

Sales to stock ratio (rhs)

s
d
n
a
s
u
o
h
T

500

450

400

350

300

250

200

150

100

50

0

Source: HM Revenues and Customs

The  number  of  mortgage  approvals  has  also 
picked up and continues to increase at a steady 
pace  and  is  at  its  highest  level  since  late  2009. 
Mortgage  approvals  for  house  purchase  and  re-
mortgaging  have  both  picked  up  although  the 
increase  in  activity  is  greater  for  mortgages  for 
house purchase (Graph 3.35).  

Rising  levels  of  activity  reflect  rising  demand 
for  housing.  A  number  of  factors  may  have 
contributed to buoyant demand. 

First, quoted interest rates on fixed and floating 
rate  mortgages  have 
fall 
throughout  2012  and  2013  across  a  range  of 
mortgage products (Graph 3.37). Broadly, the fall 
in  quoted  mortgage  rates  may  reflect  a  fall  in 

continued 

to 

(68)  Royal  Institute of Chartered Surveyors (RICS) Residential 

Market Survey December 2013. 

41 

 
 
 
 
 
 
 
 
 
                                                           
3. Imbalances and Risks 

50

40

30

20

10

0

-10

-20

-30

Graph 3.39: Net balance of consumers that believe 
that now is a good time in which to make a major 
purchase

0

-5

-10

-15

-20

-25

-30

-35

-40

-45

banks' funding costs over this period, for example, 
the  two  year  swap  rate  has  also  fallen  (Graph 
3.38). 

Graph 3.37: Quoted mortgage rates

12

10

8

6

4

2

0

03

04

05

06

07

08

09

10

11

12

13

Source: GfK and Commission Services

05Q1 06Q1 07Q1 08Q1 09Q1 10Q1 11Q1 12Q1 13Q1

Major purchases over next 12 months (lhs)

Major purchases at present (rhs)

Personal loan
Bank Rate
Bank Rate tracker mortgage
Two-year fixed-rate mortgage (75% LTV)
Two-year fixed-rate mortgage (90% LTV)
Five-year fixed-rate mortgage (75% LTV)

Source: Bank of England and Bloomberg

Graph 3.38: 2-Year fixed mortgage Rate and 2-
Year Swap Rates

%

2.5

2.0

1.5

1.0

0.5

0.0

5.0

4.0

3.0

2.0

1.0

0.0

%

09

10

11

12

13

2-year swap rate (lhs)

75% LTV 2-year fixed rate (rhs)

Source: Capital Economics

Moreover, the impact of the Bank of England's 
impact  of 
statements  regarding  the  future 
monetary  policy,  may  have  boosted  households' 
confidence  to  purchase  houses  in  the  expectation 
that interest rates may remain low for an extended 
period of time. 

confidence 

households' 

Second, 
and 
expectations  of  future  income  may  have  risen 
throughout  2013  in  part  reflecting  the  increase 
in  growth  in  this  period.  Survey  measures  of 
households'  expectations 
their 
personal  financial  position,  unemployment  and 
general  economic  situation  all  improved  in  2013. 
In  addition,  there  has  been  a  steady  increase  in 
consumers' confidence that  now is a good time in 
which to make a major purchase (Graph 3.39). 

in  relation 

to 

the 

Third,  credit  conditions  facing  households 
continue  to  ease  as  improved  conditions  in  the 
banking  sector  mean  that  households  are 
subject to weaker credit constraints than in the 
immediate  past.  The  availability  of,  and  spreads 
on,  secured  loans  to  households  have  improved 
since  their  troughs  in  early  2012,  indicating 
loosening  credit  conditions.  Since  June  2012, 
mortgage  lending  rates  have  fallen  by  0.6-1  pps. 
type  of  mortgage.  Credit 
depending  on 
availability  is  expected  to  improve  further  in  Q1 
2014  (69).  In  addition,  the  number  and  range  of 
mortgage products available has increased and the 
proportion of loans at a loan-to-value ratio of over 
95% is rising. Furthermore, the proportion of new 
mortgage advances  with high income  multiples of 
all  new  mortgage  advances  is  increasing  and 
stands at 42% compared with 38% a year ago and, 
for  first-time  buyers,  the  median  mortgage  as  a 
multiple of income has steadily risen from a trough 
in  February  2009  (of  3)  to  stand  at  3.4  in 
December  2013  (70).  However,  easing  in  credit 
conditions  is  likely  to  be  reflected  in  the  stock  of 
credit  outstanding 
to  households  secured  on 
dwellings with a lag.  Credit outstanding grew at a 
3-month  annualised  rate  of  1.3%  in  the  year  to 
December  2013,  a  little  more  than  double  that  at 
December 2012 and similar to the previous peak of 
March 2012. 

Fourth, Government policy is also likely to have 
increased demand for housing, namely, through 
the impact of the Funding for Lending Scheme 

(69)  See Bank of England (2014). 
(70)  A  high  income  multiple  is  defined  as  4  or  higher  on  a 
single  income  or  3  or  higher  on  a  joint  income.  Source: 
Bank  of  England  (2013b),  Capital  Economics  (2014a  and 
b) 

42 

 
 
 
 
                                                           
(FLS)  (71)  and  Help  to  Buy  policy.  The  second 
stage  of  the  scheme,  Help  to  Buy  2  (loan 
guarantee),  which  came  into  effect  in  October 
2013, enables households to purchase a property of 
up to GBP 600,000 in value with a 5% deposit and 
with  the  government  guaranteeing  5-15%  of  the 
loan.  The  objective  is  to  support  households  to 
obtain a loan that they  may  not otherwise be able 
to do. Although recently withdrawn for lending to 
households (see below), the FLS was in force until 
the  end  of  2013  and  may  have  contributed  to  the 
falling in the cost of borrowing noted above. 

Fifth,  buoyant  demand  is  likely  to  reflect  a 
delayed  response  to  high 
levels  of  unmet 
demand  during  the  economic  downturn  and 
international  economic  crisis  –  the  result  of  a 
structural  imbalance  between  high  demand  and 
low supply.  

Supply 

The  increase  in  demand  is  slowly  translating 
into  increased  construction  of  new  property. 
UK-wide  data  show  that  starts  and  completions 
were  broadly  unchanged  in  2011  and  2012  but 
began  to  pick  up  in  Q2  2013  (Graph  3.40).  For 
England,  more  recent  data  suggests  that  housing 
starts  picked  up  in  Q3  2013  -  starts  averaged  a 
little  over  10,800  per  month  in  that  quarter 
compared to around 8,300 per month in 2012 (72).  

Graph 3.40: Private sector housing starts and 
completions

70

60

50

40

30

20

s
d
n
a
s
u
o
h
T

00 01 02 03 04 05 06 07 08 09 10 11 12 13

Housing starts

Housing completed

Source:  Department for Communities and Local Government

(71)  A  brief  explanation  of  the  FLS  can  be  found  in  Section 

3.2.8. 

(72)  The data in this sentence is for England only as data for the 
UK  after  Q2  2013  had  not  been  published  at  the  time  of 
publication of the IDR. 

3. Imbalances and Risks 

Moreover, there has been a marked increase in 
indicators of future starts and completions - for 
example,  planning  approvals  granted  in  Q3  2013 
were 33% higher than a year earlier (73). 

The  increase  in  supply  is  already  placing 
pressure on capacity in the construction sector. 
For example, there have been reports of shortages 
of  skilled  labour  (74)  and  materials  (75)  that  may 
impede  builders'  ability  to  respond  to  the  need  to 
increase supply to meet increasing demand. 

Government policy and supply 

A  number  of  policies  to  stimulate  supply  have 
been  announced  since  the  2013  IDR.  The  most 
significant  development  is  a  set  of  measures  to 
strengthen 
the  National  Planning  Framework 
(NPF)  to  ensure  that  economic  factors  are  at  the 
heart of the planning decisions (76)(77). 

House prices 

Despite some increase in supply, the increase in 
demand  has  resulted  in  increases  in  house 
prices.  House  prices  increased  by  around  8%  in 
the  year  to  Q4  2013  and  the  average  pace  of 
growth has picked up from 2012 (78). House price 
levels are close to the level of the previous peak in 
2008  (Graph  3.41).  Moreover,  house  prices  rises 
are occurring from already elevated levels. 

A number of indicators indicate that buoyancy 
in  house  prices  will  continue  in  the  near  term. 
For example, the selling price achieved as a share 

(73)  See Home Builders Federation (2013). 
(74)  See,  for  example,  UK  Commission  for  Employment  and 

Skills (2014).  

(75)  See,  for  example,  Construction  Products  Association 

(2013). 

(76)  See HM Treasury (2013).  
(77)  In  December  2013,  the  government  announced  that  it 
would  consult  on  a  proposal  for  a  legal  requirement  for 
local authorities to have a local plan in place.  Local plans 
need  to  set  out  expected  demand  for  housing  and  the 
impact  of  economic  factors  such  as  employment  and 
growth.  Moreover,  local  authorities  would  be  required  by 
the  NPF  to  take  decisions  in  accordance  with  their  local 
plan. If a local authority did not have a local plan in place 
and, therefore, is unable to demonstrate that an application 
for  development  is  inconsistent  with  its  objectives,  then 
that application is treated as approved. 

(78)  According  to  the  most  recent  monthly  data,  in  the  twelve 
months  to  January  2014,  house  prices  increased  by  8.8% 
and  7.3%  according  to  the  Nationwide  and  Halifax  price 
indices respectively. 

43 

 
 
                                                           
                                                           
3. Imbalances and Risks 

of  asking  price  and  surveyors'  expectations  for 
house  price  rises  are  projected  to  rise  (Graphs 
3.42a and b). 

Graph 3.41: House Price Index

0
0
1
=
5
0
0
2

110

100

90

80

70

60

50

40

00Q4 02Q4 04Q4 06Q4 08Q4 10Q4 12Q4

Source: Commission services

Graph 3.42a: Selling price achieved as a share 
of the asking price

98

96

94

92

%

90

88

86

84

03

04

05

06

07

08

09

10

11

12

13

Source: Bank of England

Graph 3.42b: House price expectations 
12-months ahead

80

60

40

20

0

-20

-40

-60

80

70

60

50

40

30

20

09

10

11

12

13

RICS house price expectations (lhs)

Knight Frank future sentiment (rhs)

Source: RICS and Knight Frank

44 

Affordability 

Despite  the  rise 
in  house  prices  housing 
affordability remains, broadly, at its level of the 
past  four  years.  Although  the  cost  of  borrowing 
remains 
low  and  modest  nominal  disposable 
income  growth  continues,  both  factors  have  been 
matched  by  the  rise  in  house  prices  leaving 
affordability  broadly  unchanged.  The  pattern  is 
confirmed  by  recent  movements  in  the  house 
prices  to  rent  ratio  which  has  also  remained 
broadly  unchanged  over  the  past  four  years. 
Nevertheless,  both  measures  of  affordability 
remain at high levels (Graph 3.43 and 3.44). 

Graph 3.43: House prices to disposable income

0
0
1
=
0
1
0
2

120

110

100

90

80

70

60

00 01 02 03 04 05 06 07 08 09 10 11 12 13

Source: OECD

Graph 3.44: Price to rent

120

110

100
0
0
1
=
0
1
0
2

90

80

70

60

00 01 02 03 04 05 06 07 08 09 10 11 12 13

Source: OECD

Furthermore,  a  third  measure  of  housing 
affordability,  mortgage  interest  payments  as  a 
percentage  of 
subdued, 
reflecting the importance of the continued low cost 
of  borrowing  in  maintaining  improved  levels  of 
affordability  compared  to  the  situation  before  the 
international economic crisis (Graph 3.45). 

income,  remains 

 
 
 
 
 
 
3. Imbalances and Risks 

Graph 3.45: Mortgage interest payments as a 
percentage of household disposable income

I

D
G

f
o
%

9

8

7

6

5

4

3

2

1

0

Graph 3.47: Regional house prices 
(change in levels)

35

30

25

20

15

10

P
B
G
0
0
0
0
1
x

00 01 02 03 04 05 06 07 08 09 10 11 12

Interest payments / gross disposable income, Households

Interest payments / gross disposable income, Households, EA17

2012

2013

Source: Commission Services

Source: Nationwide Building Society

Regional house price movements 

Momentum  in  house  prices  varies  across  the 
regions. As can be seen in Graph 3.46, house price 
rises  have  been  steepest  in  London  since  2012, 
followed  by  the  south  east.  House  price  rises 
outside London and the south east of England have 
been considerably more modest. 

Graph 3.46: Regional house price 
developments

2012

2013

y
o
y
%

10
8
6
4
2
0
-2
-4
-6
-8
-10

Source: Nationwide Building Society 

Moreover, the steep house price rises in London 
have occurred from a higher base; the average 
house  price  in  London  is  now  considerably 
higher  than  that  in  any  other  region  (Graph 
3.47).  The  high  level  of  house  prices  in  London 
has  contributed  to  a  reduction  in  affordability  in 
London relative to other regions of the UK (Graph 
3.48). 

Graph 3.48: Housing affordability by region

o

i
t

a
R

14

12

10

8

6

4

2

0

97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13

North West
South West

London
Wales

South East
Scotland

Source: Nationwide Building Society, Halifax and Office for 
National Statistics

and  prospective 

The  difference  in  house  price  rises  may  reflect 
the  different 
economic 
performance  of  the  regions  in  the  UK.  It  may 
also  reflect  factors  specific 
to  London,  for 
example,  the  influence  of  foreign  investors  which 
make  cash  payments  for  property  and  who  are 
attracted by the  'safe  haven' status of  the property 
market although the evidence to support this view 
is 
relative 
strength  of  London  is  unlikely  to  be  a  short-term 
phenomenon;  there  is  a  medium-term  trend  for 
large cities  to outperform the rest of the economy 
(79). The study found that in some 'superstar' cities, 
house  prices  continually  rise  above  the  national 
average over a period of around 50 years.  

largely  anecdotal.  Moreover, 

the 

Given  the  importance  of  London  in  the  UK 
economy,  it  is  unsurprising,  that  house  price 
growth  in  London  has  outstripped  that  in  the 
rest  of  the  UK.  Over  the  medium  term,  it  is 

(79)  As argued by Gyoruko, Mayer and Sinai (2006).  

45 

 
 
 
 
 
 
 
 
 
 
 
                                                           
3. Imbalances and Risks 

reasonable  to  expect  the  trend  to  continue.  If  it 
does,  the  high  and  rising  house  rises  in  London 
pose  challenges  to  the  authorities  in  terms  of  the 
affordability of  houses in  London, particularly for 
lower income groups, and labour mobility between 
regions of high and low house prices. 

3.3.3.  Risks 

house 

prices 

activity, 

Four  risks  are  discussed  below:  'excessive'  rises 
in 
and  mortgage 
indebtedness,  an  unexpected  rise  in  the  cost  of 
borrowing, a negative income shock, an excessive 
relaxation  of  credit  standards  and  an  inadequate 
response of supply.  

Excessively  rapid  increases  in  the  level  of 
activity, mortgage debt and house prices 

Most quantity-based measures of housing sector 
activity are rising. However, activity is increasing 
from a low base and remains well below previous 
peaks.  For  example,  the  number  of  transactions, 
completions  and  building  approvals  remain  below 
their peaks of 2008 as noted above. 

Nevertheless,  even  at  modest  levels  of  activity, 
house  prices  are  rising 
(Graph  3.49).  As 
discussed above, near-term indicators point to such 
rises  continuing  and,  possibly,  intensifying.  Past 
experience  suggests  that  present  house  price  rises 
can  be  followed  by  further  increases  in  house 
self-fulfilling 
prices 
expectations  of  future  price  rises.  Such  rises  may 
induce 
in  supply  and,  of 
increases 
further 
themselves, deter demand. 

followed  by 

and  be 

Graph 3.49: Mortgage approvals and house 
price growth

s
0
0
0

145

125

105

85

65

45

25

30
25
20
15
10
5
0
-5
-10
-15
-20

y
/
y
%

98

00

02

04

06

08

10

12

Mortgage approvals for house purchases (lhs)
Nationwide house prices (rhs)

Source: Bank of England, Nationwide Building Society

46 

The risks associated with rising house prices are 
likely  to  translate  into  increasing  risks  relating 
to  household  debt.  Rising  house  prices  can  be 
in  household 
in  a 
expected 
indebtedness  over  the  short  and  medium  term  as 
cumulative  rises  in  new  mortgage  debt  outstrip 
repayments of mortgage debt (Graph 3.50).  

result 

rise 

to 

Graph 3.50: House prices and mortgage debt

0
0
1
=
9
9
9
1

300

250

200

150

100

50

0

99 00 01 02 03 04 05 06 07 08 09 10 11 12 13

Nominal house price index
Loans for house purchasing

Source: Nationwide 

Although  the  stock  of  outstanding  mortgage 
debt has increased  modestly, it is, nevertheless, 
rising from high levels. Given the extent of house 
price rises, it could be expected to rise further (80).  

Rising  mortgage  debt  may  leave  households 
vulnerable  to:  a  rise  in  the  cost  of  borrowing,  an 
unexpected shock to household disposable income 
and  excessive  relaxation  of  credit  standards  (in 
which  households  acquire  excessive  debt).  These 
risks are discussed below.  

However, house prices are rising rapidly only in 
London  (and,  to  a  lesser  extent,  the  south  east  of 
England).  Outside  these  regions,  there  has  been 
modest  evidence  of  house  price  growth  and  no 
evidence of excessive house price growth. Indeed, 
the  affordability  of  housing  has  yet  to  deteriorate 
significantly  outside  London  and  has  remained 
broadly unchanged for four years. 

Therefore,  until  rapidly  rising  house  prices 
spread  beyond  London  and  the  south  east  of 
England,  the  risks  associated  with  house  price 
rises are assessed as moderate in the short term. 
However, should, in the medium term, rapid house 

(80)  Rises  in  household  indebtedness  are  projected  by  the 

Office for Budget Responsibility (2013). 

 
 
 
                                                           
3. Imbalances and Risks 

price rises spread more widely across the UK then 
the medium-term risks become pronounced. 

Rises in the cost of borrowing 

The  main  risk  associated  with  high  and  rising 
household debt is the sensitivity of such debt to 
rises  in  interest  rates.  As  noted  above,  quoted 
mortgage  rates  have  been  low  and  stable  for  the 
past  four  years.  This  reflects  low  yields  in  the 
money  markets.  However,  as  assessed  by  market 
expectations  of  future  rises  in  the  bank  rate, 
forward  market  rates  are  projected  to  rise  in  the 
next  18-24  months  (Graph  3.51).  Moreover,  as 
2013 and 2014 have progressed, the date at which 
money  market  rates  are  projected  to  rise  has 
become closer(81); it is reasonable to expect that a 
rise in money market rates translates into a rise in 
mortgage rates.  

Graph 3.51: Market expectations of future 
yields

2.5

2

1.5

1

0.5

0

09

10

11

12

13

14

15

16

Bank Rate
August 2013 Report

November 2013 Report
May 2013 Report

Source: Bank of England and Bloomberg

The  extent  of  the  rise  in  rates  faced  by 
increasingly  indebted  households  depends  on 
whether  rates  on  their  mortgages  are  fixed  or 
variable.  Typically,  the  majority  of  loans  taken 
out are variable rate mortgages. In Q3 2013 around 
two-thirds  of  new  mortgage  loans  were  variable 
rate mortgages ( 82) – a proportion in line with that 
of  the  last  five  years.  As  a  result,  the  increase  in 
mortgage  rates  following  a  rise  in  market  rates 
could  be  swift.  Moreover,  households  may  not 
have  fully  taken  into  account  such  a  rise  in  their 
calculations  on  their  ability  to  service  mortgage 
debt  in  terms  of  either  magnitude  or  timing  - 

(81)  Dates  are  indicated  according  to  the  date  of  various 

Inflation Reports published by the Bank of England. 

(82)  Bank of England (2013e).  

unexpected rises in credit costs can be an example 
of  'dangerous  near-sightedness'  (83)  which  can 
result  in  a  sharp  correction  in  house  prices  and 
activity with macroeconomic consequences. 

low 

Crucially,  as  noted  above,  mortgage  interest 
payments  as  a  percentage  of  income  are  at 
levels  reflecting  a  cost  of 
relatively 
borrowing  that  is  historically  low.  In  addition, 
household gearing ratios (i.e. interest and mortgage 
repayments  as  a  percentage  of  disposable  income 
also  remain  at  historic  low  levels).  There  would 
seem to be at least  some  scope for households, in 
aggregate,  and  in  the  short  term,  to  absorb  a 
modest  rise  in  mortgage  interest  rates  should  the 
risk eventuate. 

However, in the medium term, the risk is more 
pronounced.  A  sequence  of  rises  in  the  cost  of 
borrowing  following  a  rapid  rise  in  house  prices 
and mortgage indebtedness could leave households 
vulnerable in the face of higher levels of mortgage 
indebtedness.  The  Governor  of  the  Bank  of 
England (2013) (84) has warned households of the 
risks posed by possible future increases in the costs 
of borrowing.  

Furthermore,  the  aggregate  position  masks 
vulnerabilities  across  household  type.  High 
levels of debt have amplified the impact of shocks 
on  income  but  the  degree  of  amplification  is 
greater  for  highly  indebted  households  ( 85).  An 
unexpected  rise  in  the  cost  of  borrowing  is, 
therefore, likely to have a disproportionate impact 
on highly indebted households.  

Overall,  although  households  are  increasingly 
vulnerable to rises in the cost of borrowing, the 
impact of such a risk on the economy is assessed 
as moderate in the short term. 

A  negative  shock  to  household  disposable 
income 

A  further  risk  is  an  unexpected  decline  in 
household disposable income growth (or future 
expected 
the  risk 
income  growth).  Should 
eventuate,  the  ability  of  households  to  service  the 
mortgage stock may be reduced.  

(83)  Glaeser et al (2008).  
(84)  Governor of the Bank of England (2013).  
(85)  Bank of England (2013c).  

47 

 
 
                                                           
                                                           
3. Imbalances and Risks 

The  signs  of  the  risk  materialising  are  mixed. 
On  the  one  hand,  some  indicators  suggest  a 
relaxation  of  standards  that  rivals  or  exceeds  that 
of  the  previous  sharp  and  prolonged  rise  in  house 
prices.  For  example,  the  share  of  new  mortgages 
for  house  purchase  with  a  loan  to  income  ratio 
greater  than  4.5  has  increased  steadily  since  the 
trough  in  2009  and,  for  properties  of  a  value  of 
GBP  300,000  or  more,  and  for  all  properties  in 
London,  is  well  above  previous  peaks  of  2007. 
Furthermore,  more  than  half  of  first  home  buyers 
have taken out mortgages with a repayment period 
exceeding the typical 25 years. On the other hand, 
however,  the  proportion  of  lenders  expecting  to 
increase  mortgage  applications  is  not  expected  to 
continue  (Graph  3.53).  Also,  on  other  measures, 
there are signs that standards remain conservative.  

such 

growth 

However,  this  risk  needs  to  be  set  against  a 
positive,  and 
improving,  economic  outlook. 
Economic growth has surprised on the upside and 
is expected to continue at a strong rate in 2014 and 
2015 (86). Continued growth in nominal disposable 
incomes  is  consistent  with  nominal  economic 
growth.  Moreover, 
supports 
households' ability to service increased mortgages. 
Even  if  growth  in  nominal  household  disposable 
income  remains  below  that  of  house  prices,  and 
mortgage  indebtedness,  there  may  be  scope  for 
households to run down savings further to service 
such  debt  as  the  household  saving  ratio  remains 
well  above  its  trough  of  2008.  Over  the  longer 
term,  rates  of  arrears  and  repossessions  have 
remained 
the  crisis  and 
subsequent  recession,  suggesting  that  households 
remain resilient to shocks (Graph 3.52). 

low,  even  during 

Graph 3.52: Mortgage arrears and 
repossession rates

4.0

3.5

3.0

2.5

2.0

%

1.5

1.0

0.5

0.0

90 92 94 96 98 00 02 04 06 08 10 12

Mortgage arrears (lhs)

Properties taken into possession  (rhs)

0.9

0.8

0.7

0.6

0.5

0.4

0.3

0.2

0.1

0

40

20

0

%

%

-20

-40

-60

-80

Graph 3.53: Proportion of mortgage 
applications approved (% balance)

expected

09

10

11

12

13

14

Availability of High LTV mortgage

Proportion of loans approved

Source: Department for Communities and Local Government

Source: Bank of England

Therefore,  the  likelihood  of  the  risk  occurring 
in the short-term, and its impact, is assessed to 
be modest. However, rising levels of house prices 
leave  households 
and  mortgage 
exposed to the risk of a negative income shock in 
the medium term. 

indebtedness 

Excessive 
increases in availability 

relaxation  of 

standards  and 

There  is  a  risk  that  the  relaxation  of  credit 
standards  and  conditions  could  intensify  and 
excessive  credit  made  available  to  households. 
Further  relaxation  of  credit  standards  could  be 
excessive  particularly  if  it  further  boosts  house 
prices  or  vulnerable  households  acquire  excessive 
debt and may be unable to service such debt.  

(86)  As set out by European Commission (2014). 

48 

In  any  case,  the  authorities  have  responded  to 
the  risk  -  primarily  by  way  of  the  Financial 
Conduct  Authority's  Mortgage  Market  Review 
(MMR) (87). The MMR  is due to come into  force 
in  2014.  Banks  will  be  required  to  verify  fully 
borrowers'  incomes  and  assess  that  a  mortgage  is 
income  and  essential 
affordable  given  net 
account  market 
into 
expenditure, 
expectations  of  future  interest  rate  rises.  For 
interest-only mortgages, lenders will be required to 
assess affordability on a capital and interest basis.  

taking 

(87)  In addition, other actions taken by the authorities mitigate 
the  risk:  the  FLS  can  no  longer  be  used  to  provide  credit 
for  housing  (see  section  3.3.4),  the  Prudential  Regulation 
Authority  (PRA)  has  ended  its  temporary  capital  relief  on 
new  household  lending  qualifying  for  the  FLS  and  the 
Financial  Conduct  Authority  requires  mortgage  lenders  to 
have  regard  to  any  future  FPC  recommendations  on 
appropriate 
in  the 
assessment of loan affordability. 

interest  rates  stress 

to  use 

tests 

 
 
                                                           
 
                                                           
Given  the  ameliorative  measures  in  place,  the 
risk  of  excessively  low  credit  standards  is 
assessed  as  modest.  The  measures  underway 
should  limit  the  risks  associated  with  excessive 
mortgage  lending  to  households  and  hence  their 
vulnerability to unexpected rises in the future cost 
of borrowing or unexpected falls in future income.  

Prudent balance sheets  

There  is  little  risk  to  balance  sheets  stemming 
from  increased  activity  in  the  housing  market. 
Households'  real  assets  accounts  for  about  half  of 
households'  total  wealth.  Households'  mortgage 
debt  accounts  for  about  10%  of  households' 
balance 
sheets.  Therefore,  households'  hold 
considerable net wealth so their balance sheets are 
relatively strong despite high gross household debt 
levels  (88).  The  structure  of  households'  balance 
sheets  increases  resilience  to  shocks  discussed 
above  although  this  is  an  aggregate  position  and 
masks differences between households.  

Inadequate response of supply 

There  is  a  risk  that  the  supply  of  new  houses 
does  not  respond  to  the  signals  sent  by  rising 
house  prices.  As  noted  above,  supply  has  been 
slow to respond to recent increases in demand and, 
as a result, house prices are rising from an already 
elevated  base.  The  extent  to  which  increases  in 
demand  translate  into  higher  prices  or  increased 
supply  depends  upon  the  price  elasticity  of  the 
demand curve – the more price-inelastic the supply 
curve,  the  higher  the  prices  that  will  result  for  a 
given increase in demand.  

typical 

The sluggish response of supply to price signals 
is  a 
feature  of  housing  markets 
internationally  (89)  but  nevertheless,  a  divergent 
response  in  supply  could  explain  house  price 
dispersion  across  countries.  For  example,  one 
study  (90)  found  that,  following  a  house  price 

(88)  However,  although  the  aggregate  solvency  risk  seems 
small,  there  is  liquidity  risk,  for  example,  a  proportion  of 
households'  financial  assets  are  likely  to  be  held  as 
insurance reserves which are less liquid than other forms of 
financial assets. 

(89)  see e.g. OECD (2008).  
(90)  Gattini and Ganoulis (2012).  

3. Imbalances and Risks 

shock,  the  price  response  is  higher  in  countries 
with constrained supply.  

The  supply  responsiveness  -  which  has  been 
estimated at 0.4 (91) - is likely to be lower than 
that for demand and is reasonably inelastic. The 
typical  experience  of  UK  housing  cycles  is  that 
house  price  rises,  and  the  rise  in  the  number  of 
transactions, 
in 
residential construction as discussed above. 

increases 

outstrip 

rapidly 

The  size  of  the  supply  response  depends  upon 
the  responsiveness  of  the  factors  determining 
the  availability  of  land  that  can  be  developed. 
Such factors include: fundamental geographic and 
demographic  constraints,  the  planning  system, 
insufficient incentives to for developers to develop 
land  and/or  constraints 
in  obtaining  finance. 
Evidence  suggests  that  the  elasticity  of  supply  is 
associated  with  restrictions  surrounding  land  use 
(92) and,  moreover, that the elasticity of supply in 
the  UK  is  around  the  average  of  EU  comparative 
countries for which data is available (Table 3.1). 

(91)  OECD ibid.  
(92)  See OECD ibid. 

49 

 
                                                           
                                                           
 
3. Imbalances and Risks 

government's stated policy of increasing the supply 
of houses are given appropriate weight.  

is  unlikely 

that  supply  will 

increase 
It 
sufficiently rapidly to meet increases in demand 
in  the  short  term  -  although  the  government  has 
announced,  and  is  implementing,  a  number  of 
policies to boost supply, given the constraints and 
time likely to elapse before such policies take full 
effect, constraints on supply are likely to continue.  

A  further  risk 
is  that  developers  obtain 
planning permission to develop land but do not 
proceed with the development. Reasons for such 
action  include:  an  inability  to  obtain  development 
finance,  an  unexpected  shortage  of  materials  or 
skilled  labour  or  speculation  about  future  capital 
gains. Should such action be significant, the supply 
of land for development is restricted. It is difficult 
to assess the extent of this risk in practice. It is also 
important to note that at least some land banks are 
to  manage  an 
inevitable  as  developers  seek 
appropriate 
of 
land 
supply 
development  in  the  pipeline.  However,  it  is 
noteworthy  that  planning  permission  expires  if 
land 
is  not  developed  within  a  particular 
timeframe.  

continual 

of 

Capacity constraints 

As  noted  above,  there  is  evidence  that  the 
construction 
sector  may  be  experiencing 
capacity  constraints.  Firms  typically  report  that 
they  are  at  or  near  capacity;  should  capacity 
constraints continue, the risk that supply is unable 
to increase to meet growing demand is intensified. 

Medium-term  gap  between 
demand 

supply  and 

More  broadly,  a  shortage  of  supply  is  unlikely 
to  be  a  short-term  phenomenon  and  could 
extend  to  the  medium  term.  Medium-term 
demand for new houses is likely to be determined 
by  the  rate  of  new  household  formation.  It  is 
currently projected that, in England, an average of 
around  220,000  households  will  be  formed  each 
year  between  2012  and  2021  (94).  However,  new 

(94)  Department  of  Communities  and  Local  Government 

(2013d).  

Table 3.1:

Elasticity of supply

Country

Regulation 
restriction

BE

DK

DE

IE

ES

FR

IT

NL

AT

PL

FI

SE

UK

0.32

1.21

0.43

0.63

0.45

0.36

0.26

0.19

0.23

0.44

0.99

1.38

0.40

Source:  OECD

Planning system 

that 

the  planning 

The  role  of  the  planning  system  in  impeding 
supply  has  come  under  particular  focus.  It  has 
is 
been  argued 
system 
excessively  bureaucratic  and  unresponsive 
to 
changes in demand (93). As a result, the supply of 
land is restricted and the costs of developing it are 
unnecessarily  high.  The  constraints  may  be 
particularly tight around large cities in which land 
designated  as 
is  protected  from 
development. 

'green  belt' 

to 

the  supply  of 

Decisions  relating 
land 
available for housing development are typically 
taken  by  local  authorities  in  the  first  instance 
although  such  decisions  are  subject  to  appeal 
which  is  assessed  as  part  of  an  independent 
process.  As  part  of  these  processes,  the  planning 
system  attempts  to  balance  legitimate  competing 
interests  on  the  use  of  land.  Achieving  such  a 
balance 
in  practice. 
However,  in  balancing  competing  interests  it  is 
crucial  that  the  role  of  economic  factors  and  the 

straightforward 

is  not 

(93)  UK Government (2012).  

50 

 
 
                                                           
                                                           
supply is currently around 110,000 per year ( 95) – 
well  below  the  rate  of  new  household  formation. 
The  imbalance  between  supply  and  demand  is 
likely to underpin currently high house price levels 
and  spur  further  rises  in  house  prices  over  the 
medium term as demand outstrips supply. 

Risks - conclusion 

In  conclusion,  levels  of  activity  remain  below 
previous  peaks.  Nevertheless,  house  prices  are 
rising  and  the  increase  in  prices  and  level  of 
activity is likely  to be reflected in rising  levels of 
mortgage  debt  (and  that  rise  is  occurring  from  an 
already  elevated  base).  The  main  risk  on  the 
demand  side  is  households'  vulnerability  to  a  rise 
in the cost of borrowing while the response of the 
authorities  has  mitigated  risks  associated  with  an 
excessive  lowering  of  credit  standards.  The  main 
risk  on  the  supply  side  is  that  reforms  to  the 
planning  system  and  other  initiatives  to  increase 
supply do not deliver increases in new housing of 
the amount required, or do so sufficiently quickly, 
to  forestall  further  rises  in  house  prices  and 
mortgage indebtedness.  

Overall,  the  short-term  risks  are  rising  but 
remain  modest.  The  rise  in  activity  is  based  on 
stronger  fundamentals  in  the  housing  market  – 
improved confidence, a low cost of borrowing and 
some, and not wholly on an excessive relaxation in 
credit availability and standards. 

However,  in  the  medium  term,  as  house  prices 
and  household  mortgage  indebtedness  become 
increasingly  elevated, 
the  risks  are  more 
marked,  as  households  are  more  exposed  should 
the cost of borrowing rise rapidly and/or a negative 
income  shock  eventuates.  There  is,  therefore,  a 
case for a policy response to mitigate the impact of 
potential medium-term risks 

(95)  Department  of  Communities  and  Local  Government 

(2013c).  

3. Imbalances and Risks 

3.3.4.  Government  policy  - 

responses  and 

challenges 

Demand 

Help to Buy 2 

As  noted  above,  under  Help  to  Buy  2,  the 
provision  of  guarantees  by  the  government 
improves  households'  ability  to  obtain  high 
value loans with a relatively small deposit. Help 
to  Buy  2  compliments  the  earlier  Help  to  Buy  1 
(96)  but  there  are  significant  differences  on  the 
impact on relative demand and supply. Under Help 
to Buy 1, there is an increase in the supply of new 
property  to  match  each  new  equity  loan  whereas 
the guarantee under Help to Buy 2 extends to pre-
existing  property  and  is  unlikely  to  generate  a 
similar simultaneous increase in new supply ( 97).  

The impact of Help to Buy 2 on housing activity 
and  prices  depends  partly  upon  its  size.  The 
policy, which is in place for three years, is capped 
at  a  total  exposure  to  the  Government  of  GBP  12 
billion,  and  could  be  expected  to  lead  to  a 
maximum  increase  in  loans  available  of  around 
GBP  100  billion.  Even  assuming  a  mid-point 
estimate of a contingent liability of GBP 6 billion, 
the  increase  in  mortgage  lending  of  around  GBP 
50 billion over three years is significant although it 
is difficult to assess the  'additionality' afforded by 
Help  to  Buy  2  –  that  is,  the  number  of  loans  that 
would have been provided to the same households 
in  the  absence  of  the  policy.  However,  and  as  is 
also the case  for Help to Buy 1, Help to Buy 2 is 
likely  to  have  boosted  general  confidence  in  the 
housing market and exerted an impact more widely 
on prices and activity. 

In the absence of a strong supply response, the 
predominant impact of Help to Buy 2 is likely to 
increase house  prices; indeed, supply is likely to 
respond  only  indirectly  and  slowly  given  its 

(96)  Under  the  Help  to  Buy  1  (equity  loan)  scheme  that  came 
into effect in April 2013 the UK  Government provides an 
equity  loan  of  between  5  and  20  per  cent  for  households 
seeking a loan for the purchase of a new property of up to 
GBP 600,000 in value with a minimum deposit of 5%. The 
aim of the policy is to enable households to purchase new 
build  property  but  would  otherwise 
the  funds 
sufficient to obtain a deposit to do so.  

lack 

(97)  As at December 2013, around 13,000 equity loans had been 
completed under Help to Buy 1 of which a little under 1000 
were 
in  London  boroughs.  See  Department  of 
Communities and Local Government (2013a) 

51 

 
                                                           
                                                           
3. Imbalances and Risks 

policy to continue is unclear given buoyant activity 
in  the  housing  market  and  easing  access  to  credit 
for  households.  Continuation  of  the  policy  risked 
further boosting demand and house prices. 

Role of macro-prudential regulation 

(FPC).  Consistent  with 

There  may  be  scope  for  a  regulatory  response 
by the Financial Policy Committee of the Bank 
of  England 
its 
responsibilities  for  protecting  and  enhancing  the 
resilience of the UK financial system, in the event 
that it felt that excessive credit was flowing to the 
household  sector,  and  that  flow  posed  risks  to 
financial  stability,  the  FPC  could  take  action  to 
affect banks' provision of mortgages. Such actions 
could include (101): 

•  decisions  on  the  countercyclical  buffer  –  that 
is,  to  require  banks  to  directly  increase  loss-
absorbing capital against the impact (on banks) 
of an economic downturn; 

•  make  recommendations  on  maximum  loan-to-
value  ratios,  loan-to-income  ratios,  debt  to 
income  ratios  or  mortgage  terms  –  to  restrict 
mortgages of a particular type; 

•  make recommendations – or directions – to the 
Prudential  Regulation  Authority  (PRA)  on 
bank  capital  requirements  on  residential  real 
estate  lending,  that  is,  to  require  banks  to 
directly  increase  loss-absorbing  capital  against 
the 
(on  banks)  of  an  economic 
impact 
downturn;  

•  make 

recommendations 
Financial  Conduct  Authority 
underwriting standards; and/or 

to 

the  PRA  or 
(FCA)  on 

•  make  recommendations  to  the  Government 

regarding its Help to Buy policy. 

The  FPC  only  came  into  existence  relatively 
recently – an interim FPC held its first meeting 
in June 2011 - so it is relatively untested. Many 
of the options available to the FPC have been used 
in  other  countries.  The  FPC's  views  on  the  trade-
the  benefits,  costs,  risks  and 
offs  between 

(101) As set out by the Bank of England) (2013b). Some of these 
give 

actions 
recommendations or directions to the PRA and the FCA. 

implemented 

powers 

are 

by 

to 

historically  lagged  and  muted  response  to  price. 
House prices are likely to rise further at a time in 
which house prices are already rising although the 
extent  of  any  increase  depends  on  the  regions  in 
which  guarantee  loans  are  provided  for  purchase 
(98). The policy is also likely to increase household 
indebtedness  –  although  part  of  that  increase  in 
debt is guaranteed by the government.  

At a time in which credit constraints are easing 
in the mortgage market, the need for the policy 
may  diminish.  While  some  constraints  remain  – 
for  example,  as  noted  above,  the  median  deposit 
required for a first home buyer is currently double 
that  of  2008  while  that  for  all  home  buyers  has 
been volatile but broadly unchanged – the policy is 
not  explicitly  targeted  to  such  segments  of  the 
market ( 99). 

Close  monitoring  of  credit  availability  and 
is 
associated  macroeconomic  developments 
required  ( 100)  given  the  risks  associated  with 
Help to Buy 2 and the policy could be scaled back 
–  and/or  more  closely  targeted  –  should  credit 
supply  growth  rise  further  and  credit  constraints 
continue to ease.  

The Funding for Lending Scheme  

In  November  2012  it  was  announced  that  the 
FLS  would  be  withdrawn  for 
lending  to 
households – effective from January 2014. Other 
factors held constant, the FLS could be expected to 
affect the cost of borrowing and/or the quantity of 
finance available to households and, as such, could 
have boosted housing sector activity in 2013. 

The  withdrawal  of  the  FLS  for  lending  to 
households  is  appropriate.  The  need  for  the 

(98)  Under Help to Buy 1, as set out in footnote 79, the majority 
of equity loans were provided for purchase outside London. 
Should  a  similar  pattern  of  guarantee  loans  be  provided 
under  Help  to  Buy  2,  then  the  impact  on  house  prices  is 
likely  to  be  less  than  if  most  loans  were  provided  for 
purchase in London. 

(99)  Although  it  is  worth  noting  that,  as  at  September  2013, 
92% of loans advanced under Help to Buy 1  were to first 
home buyers. See DCLG (2013b). Data is not yet available 
for  guarantee  loans  under  Help  to  Buy  2  although,  under 
both  arms  of  the  policy,  loans  are  available  at  only  high 
loan-to-value  ratios,  suggesting  that  first  home  buyers  are 
likely to benefit disproportionately. 

(100) The Financial Policy Committee of the Bank of England is 
required to report to the Government if it believes that the 
policy poses risks to financial stability. 

52 

 
                                                           
                                                           
unintended  side  effects  associated  with  the  above 
suite  of  options  and  their  relative  efficiency  and 
effectiveness in addressing policy challenges could 
be further publicly developed.  

There  is  a  case  for  a  more  detailed  public 
assessment  by  the  FPC  of  the  merits  of  the 
various  instruments  available  to  it  and  the 
situations  in  which  they  would  be  deployed. 
Such  an  assessment  would 
increase  markets' 
understanding  of  the  FPC's  reaction  function 
which would boost not only transparency but also 
the  effectiveness  of  the  instruments  if/when  they 
are deployed. 

Valuation of the cadastre 

Broadly, taxation of owner-occupied property is 
levied through an annual council tax – which is 
collected  by  local  authorities  and  is  based  on 
property  values  –  and  taxes  on  transfers,  viz, 
stamp duty and inheritance tax. The property value 
roll – the basis for the assessment of council tax - 
has not been updated since 1991. The UK is one of 
more  than  half  of  Member  States  that  levied 
property taxes on outdated cadastral values ( 102). 

Use of an outdated property value roll may lead 
to  distortions:  owner-occupied  property  becomes 
under-taxed and there is a bias in the tax system to 
over-investment  in  owner-occupied  property,  the 
degree of regression in the tax system increases, as 
property  values  have  not  increased  uniformly 
across,  or  within,  regions  there  can  be  inter  and 
intra-country  distortions  and  the  amount  of  tax 
collected moves inversely with value of the object 
of  the  taxation.  Moreover,  regular  revaluation  of 
the  roll  would  reduce  sudden  increases  in  the 
annual  council  tax  liabilities.  However,  other 
factors  held  constant,  revaluation  may  lead  to  a 
large,  and  possibly  sudden,  increase  in  taxation, 
particularly  for  groups  that  have  benefitted  from 
rises in house prices since 1991. 

An  updating  of  the  property  value  roll  should 
reduce  distortions  in  the  taxation  system.  Any 
excessive  tax  increases  falling  on  certain  groups 
can be mitigated through adjustments elsewhere in 
the taxation system (including property taxation). 

(102) European Commission (2013i).  

3. Imbalances and Risks 

Housing supply 

such  as 

Until  relatively  recently,  the  planning  system 
did  not  place  appropriate  weight  on  economic 
supporting  economic  and 
factors 
employment  growth.  Reforms  enacted  by  the 
government  in  2012  and  2013  as  part  of  the 
National Planning Framework (NPF) (103) require 
local  authorities  to  place  economic  factors  at  the 
heart  of  planning  decisions  including  the  demand 
for  housing.  A  key  component  is  the  need  to 
prepare a Strategic Housing Market Assessment to 
assess  their  full  housing  needs  taking  account  of 
household  and  population  projections,  migration 
and  demographic  change  and  caters  for  housing 
demand and the scale of housing supply necessary 
to  meet  this  demand.  In  addition,  'local  plans'  are 
required  that  set  include  the  strategic  priorities 
need to deliver the required number of homes and 
jobs in each area. 

the  NPF 

In  December  2013,  the  government  announced 
that  it  would  consult  on  a  proposal  for  a  legal 
requirement for local authorities to have a local 
plan  in  place.  Moreover,  local  authorities  are 
in 
required  by 
accordance  with  their  local  plan.  If  a  local 
authority  does  not  have  a  local  plan  in  place  and, 
therefore, 
that  an 
application for development is inconsistent with its 
objectives,  then  that  application  is  treated  as 
approved.  As  at  December  2013,  76%  of  local 
authorities had a plan in place. 

to  demonstrate 

take  decisions 

is  unable 

to 

The  reforms  to  the  planning  system  are 
appropriate.  Nevertheless,  it  will  take  time  for 
local authorities to fully reflect such criteria when 
taking  decisions,  not  least  because  they  will  need 
to  develop  the  expertise  to  do  so.  However,  the 
increased  role  played  by  demand  for  housing  in 
determining  the  supply  of  developable  land  for 
housing  should,  in  time,  stimulate  supply  and 
represents a major change from previous practice. 

In  addition,  it  is  essential  that  decisions  taken 
by  local  authorities  are  taken  efficiently  and 
transparently.  Delays  are  minimised  so  that  new 
supply  can  commence  as  quickly  as  possible. 

(103) Department  of  Communities  and  Local  Government 

(2012).  

53 

 
                                                           
                                                           
3. Imbalances and Risks 

overburden rate' ( 105) is higher for renters than for 
home-owners (Graph 3.54) suggesting that there is 
considerable financial pressure on tenants. 

Graph 3.54: Housing tenure and housing cost 
overburden rates

80

70

60

50

40

30

20

10

0

)

%

(
n
o
i
t
a
u
p
o
p

l

f
o
e
r
a
h
S

Tenant

Owner

Low inc.

High inc.

United Kingdom

EA17

EU27

Housing cost overburden rate 

Owner occupancy rate

Source: Commission Services
Note: Average 2008-2011

There is a case to foster greater stability in the 
tenant-landlord  relationship  in  a  way  that 
provides  greater  security  of  tenure  to  tenants. 
While  some  tenants  and  landlords  may  prefer 
short-term tenancy arrangements others may prefer 
greater  stability 
longer-term 
contracts;  in  particular,  some  tenants  may  prefer 
long-term tenancy arrangements that landlords are 
Furthermore, 
unwilling 
uncertainty  regarding  tenure  in  the  rental  market 
may  encourage  home  ownership  thus  increasing 
pressure in the housing market. 

the  form  of 

provide 

(106). 

in 

to 

3.3.5.  Conclusion 

Activity in the housing sector can be expected to 
increase  further.  Given  the  gap  between  the 
formation of  new  households and supply, demand 
is likely to continue to outstrip supply. Relaxation 
of credit constraints is also likely to boost demand. 
Therefore  house  price  rises  are  likely  to  continue 
to  rise  particularly  in  London.  It  follows  that 
household indebtedness is also likely to rise.  

(105) The  overburden  rate  is  the  %  of  the  population  living  in 
households  for  which  the  total  housing  costs  (net  of 
housing  allowances) 
than  40%  of 
disposable income (net of housing allowances). 

represent  more 

(106) For example, according to a recent survey among renters in 
London, 66% of respondents wanted reform for 'the option 
of  a  longer-term  tenancy  so  I  can  settle  in  my  home'.  See 
Shelter (2013). 

Recent policies announced in 2013 aim to increase 
the efficiency of the planning system (104).  

the  government 

In order to encourage the release of  more land 
for  development, 
could 
consider the appropriate incentive structure for 
local  authorities  to  increase  and  speed  up  the 
release  of  such  land  in  the  context  of  facilitating 
local  solutions  to  the  issue.  Such  local  solutions 
may  also  include  the  taxation  of  vacant  property. 
In  addition, 
the  government  could  consider 
whether  there  is  a  case  for  a  stronger  regional 
approach  to  decisions  on  the  supply  of  land  for 
development involving clusters of local authorities.  

In  conclusion,  the  government  has  undertaken 
some reform of the planning sector. Further time 
is  needed  to  assess  whether  they  will  result  in  a 
timely  increase  in  supply  and  further  analysis  is 
needed as to whether barriers to supply lie outside 
the  planning  system.  However,  there  is  scope  to 
move  further  –  including  the  development  of 
appropriate  and 
local 
authorities 
land  with  planning 
permission attached for development in the context 
of  local  solutions  to  inadequate  supply.  Local 
solutions  may  also  include  the  taxation  of  vacant 
property. 

targeted 
release 

incentives  for 

to 

Rental sector 

In  part  reflecting  a  medium-term  decline  in 
the  proportion  of 
housing  affordability, 
households  that  own  a  house  has  decreased  in 
the  UK  from  69%  in  2001  to  65%  in  2013 
although the rate of home ownership in the UK is 
broadly in line with other EU Member States. 

The private rented sector in the UK is relatively 
unregulated  compared  to  that  in  other  EU 
Member  States.  The  rights  of 
tenants  and 
responsibilities of landlords are relatively limited.  

The rental market may be dominated by a large 
number  of  short-term  and  relatively  insecure 
temporary  contracts.  In  addition,  the  'household 

(104) For  example,  it  has  been  announced  (UK  Government 
2013a)  that  the  government  would:  review  the  Nationally 
Significant  Infrastructure  Planning  Regime,  consult  on 
introducing  a  requirement  to  have  a  local  plan  in  place, 
address  delays  associated  with  the  discharge  of  planning 
conditions and reduce the number of applications for which 
statutory consultation is required. 

54 

 
                                                           
 
 
 
 
                                                           
The  challenge  associated  with  high  mortgage 
indebtedness  is,  therefore,  likely  to  persist  and 
worsen.  There  are  a  number  of  risks  associated 
with  high  mortgage  indebtedness:  excessive  rises 
in  activity  and  prices,  a  rise  in  the  cost  of 
borrowing,  a  negative  shock 
to  household 
disposable  income,  excessive  relaxation  of  credit 
standards  and  an  inadequate  response  of  supply. 
Although  the  likelihood  of  the  risks  materialising 
in  the  short  term  is  assessed  as  modest,  shocks  to 
house  prices  and  household  balance  sheets  may 
pose more marked medium-term risks.  

There  is  scope  for  action  on  the  demand  and 
supply  sides  of  the  housing  market  to  reduce 
medium-term risks. Given  the regional nature of 
house  prices  rises  such  action  may  require  local 
solutions. In the absence of action, the challenge is 
likely to worsen further, and persist for longer, and 
the risks associated with it are likely to increase. 

3. Imbalances and Risks 

55 

 
 
 
 
 
 
 
4. 

POLICY CHALLENGES 

Following from the analysis in Section 3, potential 
imbalances relate to both the external and internal 
side  of  the  economy,  namely,  a  medium-term 
decline in the export share and high private sector 
indebtedness,  particularly  households  mortgage 
indebtedness. 

These  challenges  were  also  identified  under  the 
Macroeconomic  Imbalance  Procedure  in  the  2012 
and 2013 IDRs and relevant policy responses were 
reflected  and  integrated  in  the  country-specific 
recommendations  (CSR)  issued  to  the  UK  in  July 
2012  and  2013  (CSR  1,  2,  3,  5  and  6).  The 
assessment  of  progress  in  the  implementation  of 
the recommendations will take place in the context 
of  the  assessment  of  the  UK  National  Reform 
Programme  and 
the  Convergence  Programme 
under  the  2014  European  Semester.  This  section 
discusses  possible  ways  to  address  the  challenges 
identified in this IDR. 

The challenge of export performance 

in 

Recent  growth  is  based  predominantly  on  strong 
private  consumption  growth.  A  shift 
the 
composition  of  growth  towards  exports  over  the 
medium  term  would  be  consistent  with  a  reversal 
of  the  trend  deterioration  in  export  market  share. 
To  achieve  such  rebalancing,  different  policy 
approaches  could  be  considered 
strengthening  the  skills  base,  improving  access  to 
finance, 
increasing 
promotion 
export 
investment in infrastructure. 

and 

such  as:    

Closing skill gaps  

To  stabilise,  and  possibly  reverse,  the  decline  in 
export  market  share,  a  key  challenge  is  to  ensure 
that  the  labour  force  has  the  necessary  skills  and 
aptitudes.  A 
intermediate  and 
advanced  technical  skills  can  result  in  capacity 
constraints.  

lack  of  both 

In October 2013, the government announced plans 
to  improve  the  quality  of  apprenticeships  in 
England.  Provision  of  high  quality  and  targeted 
apprenticeships  can  help  to  boost  the  availability 
of  relevant  skills.  Reviewing  the  exact  nature  of 
apprenticeships  in  cooperation  with  employers 
could contribute to meet the needs of the business 
and, particularly, the exporting sector.  

science, 

concentrating  on 

Correctly  accredited  vocational  training  schemes 
technology, 
and 
engineering  and  mathematics  (STEM) 
the 
in 
education system could help meet the requirements 
of employers. Addressing the skills gap would also 
address  the  2013  Council  recommendation  on 
young people’s skills 

Improving access to finance 

Alleviating  apparent  credit  constraints  could 
enhance  the  ability  of  exporters  to  receive  the 
finance  they  need  to  expand  into  export  markets. 
Despite measures implemented by the government 
to  boost  credit  supply  and  facilitate  access  to 
alternative  sources  of  finance,  credit  supply 
remains weak, particularly for SMEs.  

In 

addition, 

the  government 

The  government  has  a  number  of  initiatives  in 
place  to boost  access  to  finance.  For  instance,  the 
Funding for Lending Scheme (FLS) was altered in 
November 2013 by removing use of the Scheme to 
lend to households; the remaining focus on lending 
to  business  enables  closer  targeting  of  finance  to 
business. 
is 
establishing a Business Bank to provide alternative 
channels of finance for SMEs beyond bank credit. 
The Bank should be operational by the second half 
of 2014. SMEs, in particular, rely heavily on bank 
finance,  thus,  improving  access  to  bank  finance, 
via  the  FLS,  as  well  as  encouraging  alternative 
sources  of  finance,  via  the  Business  Bank,  are 
welcome and appropriate initiatives to ensure that 
SMEs obtain the finance they need to expand and 
export.  

to 

foster 

continuing 

greater 
Furthermore, 
competition  in  the  banking  sector,  e.g.  by  an 
increased  presence  of  challenger  banks,  may  help 
SMEs  access  credit.  Initiatives  in  this  area  also 
respond  to  the  2013  CSR  on  improving  credit 
availability. 

Broad-based export promotion  

to  address 

is  potential 

There 
information 
asymmetries that prevent firms that wish to export 
from  seizing  opportunities 
to  do  so.  The 
government has established a number of initiatives 
to  provide  export  credit  and  other  supporting 
services;  for  instance,  services  provided  by  UK 
Export Finance and UK Trade & Investment. 

57 

 
4. Policy Challenges 

The housing market challenge 

to 

for  housing  continues 

Demand 
increase 
particularly  in  London  and  the  south  east  of 
England. The increase in demand may result in an 
increased  imbalance  in  the  housing  sector  in  the 
short  and  medium  term  as  the  supply  of  new 
houses  continues  to  fall  below  projected  rates  of 
household  formation.  House  prices  are  rising 
steadily, especially in London and the south east of 
England  and  household  mortgage  indebtedness  is 
likely to increase.  

Policies  to 
purchase a house  

facilitate  households'  ability  to 

the 

second  phase 

The  purpose  of  the  government's  Help  to  Buy 
scheme is to facilitate households' ability to buy a 
house.    Whilst  the  first  phase  of  the  Help  to  Buy 
scheme ('equity loan' or  'Help to Buy 1') provides 
partial  loans  to  facilitate  a  mortgage  for  new 
houses  only, 
('mortgage 
guarantee' or 'Help to Buy 2'), applies to all houses 
(existing  or  new).  The  effect  on  demand  of  'Help 
to Buy 2' is likely to be immediate and direct while 
that  on  supply  is  likely  to  be  indirect  and  slow 
given  the  historically  lagged  and  muted  response 
of new supply to demand. Therefore, the policy is 
likely  to  boost  house  prices  further  and  at  a  time 
when  they  are  already  rising.  The  policy  is  also 
likely 
indebtedness, 
although  part  of  that  increase  in  debt  is  directly 
guaranteed by the government.  

increase  household 

to 

developments 

Close  monitoring  of  credit  availability  and 
associated  macroeconomic 
is 
required  given  the  risks  associated  with  Help  to 
Buy 2 and the policy could be scaled back – and/or 
more  closely  targeted  –  should  credit  supply 
growth rise further and credit constraints continue 
to ease. 

Macro-prudential regulation 

Consistent  with  its  responsibilities  for  protecting 
and  enhancing  the  resilience  of  the  financial 
system,  in  the  event  that  the  Financial  Policy 
Committee of the Bank of England (FPC) felt that 
excessive  credit  was  flowing  to  the  household 
sector,  and  that  flow  posed  risks  to  financial 
stability, the FPC could take action to affect banks' 
provision of mortgages. 

The  effectiveness  of  these  initiatives  hinges  on 
awareness  in  the  business  community,  as  well  as 
taking appropriate account of regional diversity in 
their design. More generally, trade openness relies 
on  the  ability  to  interact  with  foreign  commercial 
partners.  Finally,  facilitating  the  recruitment  of 
foreign  experts  could  improve  firms'  ability  to 
engage in international trade.  

Investing in infrastructure 

in 

A  potential  bottleneck  hindering  competitiveness 
results from its under-investment in infrastructure. 
Improvement 
the  quality  and  quantity  of 
infrastructure  could  also  raise  long-term  potential 
growth  by  raising  productivity.  Upgrading  and 
expanding the transport infrastructure could reduce 
bottlenecks in distribution.  

The  government  published  an  ambitious  National 
Infrastructure Plan 2013 in December 2013, which 
sets out investment plans worth GBP 375 billion to 
2020 and beyond.  Around two-thirds of the  funds 
are  to  be  provided  by  private  sources  of  funds. 
Most  of  the  investment  is  in  the  energy  and 
transport  sectors  and  is  back-loaded  time  wise.  A 
list  of  ‘Top  40’  projects  has  been  published; 
priority  projects  were  chosen  based  on  their 
to  economic  growth, 
potential  contribution 
national significance and attractiveness for private 
investors.  Bringing  forward  the  delivery  of  these 
planned  projects  where  possible  and  ensuring 
effective  implementation  would  boost  the  impact 
of  the  Plan.  Facilitating  increased  investment  in 
infrastructure  and  harnessing  private  sources  of 
capital  also 
the  2013  Council 
recommendation. 

responds 

to 

The challenge of private sector indebtedness 

Although the pace of deleveraging has slowed, and 
corporate  indebtedness  remains  high,  PNFCs  as  a 
whole  are  net  savers  and  hold  high  levels  of 
financial  assets.  However,  aggregate  PNFCs' 
indebtedness  masks  the  divergence  between  the 
construction/property  sector  and  other  sectors  for 
which the size of deleveraging has been greater. 

The  potential  imbalance  and  risks  arising  from 
to  high 
indebtedness 
private 
household  mortgage  debt,  which  in  turn  flows 
from developments in the housing market.  

sector 

relate 

58 

 
There  is  a  case  for  a  more  detailed  public 
assessment by the FPC of the merits of the various 
instruments  available  to  it  and  the  situations  in 
they  would  be  deployed.  Such  an 
which 
assessment would increase markets' understanding 
of  the  FPC's  reaction  function  which  would  boost 
not only transparency but also the effectiveness of 
the instruments if and when they are deployed. 

Reform of property taxation 

By  EU  standards,  the  share  of  property  taxes  in 
total  government  receipts  is  high  in  the  UK. 
However,  the  efficiency  and  effectiveness  of  the 
property tax system could be improved.  Taxation 
of  owner-occupied  property  is  levied  through  an 
annual  council  tax  –  which  is  collected  by  local 
authorities  and  is  based  on  property  values  –  and 
taxes  on  transfers  via  stamp  duty  and  inheritance 
tax.  The  property  value  roll  –  the  basis  for  the 
assessment  of  council  tax  –  has  not  been  updated 
since 1991; a revaluation would reduce distortions 
in the taxation system in favour of owner-occupied 
housing.  

Reform of the planning system and supply 

Despite  improvements  in  the  planning  system,  a 
shortage  of  supply  persists.  Better  incentives  for 
local  authorities  could  be  considered  in  order  to 
increase  and  speed  up  the  release  of  land  with 
planning  permission  for  development 
the 
context of facilitating local solutions to inadequate 
supply. Improvements in this area would also be a 
response  to  the  2013  Council  recommendation  on 
housing. 

in 

Promotion of long-term tenancy agreements 

The rental  market is relatively  unregulated  by EU 
standards.  There  is  scope  to  foster  long-term 
tenancy  agreements  which  could  benefit  both 
tenants  and  landlords.  It  could  also  reduce  the 
tendency  towards  high  home-ownership  rates, 
which  in  turn  might  relieve  pressure  on  rising 
house  prices,  driven  by  those  attempting  to  get 
onto the property ladder. 

Curtailing  the  risk  of  excessive  relaxation  of 
credit standards 

The  bank  rate  is  currently  at  an  historic  low  and 
many  households  are  currently  able  to  borrow  at 

4. Policy Challenges 

historically  favourable  mortgage  rates.  Given  that 
much recent new borrowing is at a variable interest 
rate, there are potential risks to households' ability 
to service mortgages should the cost of borrowing 
increase. The reform of the mortgage market in the 
Financial  Conduct  Authority’s  Mortgage  Market 
Review is due to come into force in April 2014 and 
is  designed  to  limit  particularly  high-risk  lending 
and  support 
the  maintenance  of  high  credit 
standards and prudent lending. 

59 

 
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'Internationalisation  of 

House  of  Commons, 
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contribution  to  the  UK  economy  -  Commons 
Library Standard Note', 2013 

'The 

European 
Developments in Europe 2013', 2013e 

Commission, 

'Labour  Market 

European  Commission,  'Product  Market  Review 
2013 – Financing the real economy', 2013f 

European  Commission,  'Quarterly  Report  on  the 
Euro Area', 2013g  

'Tax  Reforms 

European  Commission, 
in  EU 
Member  States  –  Tax  Policy  Challenges  for 
Economic  Growth  and  Fiscal  Sustainability' 
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European  Commission,  'Tax  Reforms  in  Member 
States', 2013i 

Mayer, T., and Ottaviano, G., 'The happy few: the 
internationalisation of European firms - New facts 
based  on  firm-level  evidence',  Bruegel  Blueprint 
Series, 2007 

McKinsey,  'Education  to  Employment:  Getting 
Europe’s Youth into Work', 2013 

Monteiro,  D.,  'The  flow  of  credit  in  the  UK 
economy  and  the  availability  of  financing  to  the 
corporate sector', European Economy – Economic 
Papers 509, 2013  

Nabarro,  'Nabarro  Infrastructure  Index  Attracting 
investment', 2013 

European  Commission, 
Forecast, Winter', 2014 

'European  Economic 

National  Association  of  Pension  Funds,  'Pensions 
Infrastructure  Platform  asset  manager  update',  04 
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Federation  of  Small  Businesses,  'Voice  of  Small 
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National  Audit  Office,  'Infrastructure  investment: 
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Gattini and Ganouli,  'House  Price Responsiveness 
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'UK  Consumer  Confidence  Measures 

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OECD, 'PISA 2012 Results', 2013b 

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62 

 
OCCASIONAL PAPERS 

Occasional Papers can be accessed and downloaded free of charge at the following address: 
http://ec.europa.eu/economy_finance/publications/occasional_paper/index_en.htm. 

Alternatively, hard copies may be ordered via the “Print-on-demand” service offered by the 
EU Bookshop: http://bookshop.europa.eu. 

No. 1 

No. 2 

No. 3 

No. 4 

No. 5 

No. 6 

No. 7 

No. 8 

No. 9 

The Western Balkans in transition (January 2003) 

Economic Review of EU Mediterranean Partners (January 2003) 

Annual Report on structural reforms 2003, by Economic Policy Committee (EPC) (April 2003) 

Key  structural  challenges  in  the  acceding  countries:  the  integration  of  the  acceding  countries  into  the 
Community’s economic policy co-ordination processes; by EPC (July 2003) 

The Western Balkans in transition (January 2004) 

Economic Review of EU Mediterranean Partners (March 2004) 

Annual report on structural reforms 2004 “reinforcing implementation”, by Economic Policy Committee (EPC) 
(March 2004) 

The Portuguese economy after the boom (April 2004) 

Country Study: Denmark – Making work pay, getting more people into work (October 2004) 

No. 10 

Rapid loan growth in Russia: A lending boom or a permanent financial deepening? (November 2004) 

No. 11 

The  structural  challenges  facing  the  candidate  countries  (Bulgaria,  Romania,  Turkey)  –  A  comparative 
perspective (EPC) (December 2004)  

No. 12 

Annual report on structural reforms 2005 “Increasing growth and employment” (EPC) (January 2005) 

No. 13 

Towards  economic  and  monetary  union  (EMU)  –  A  chronology  of  major  decisions,  recommendations  or 
declarations in this field (February 2005) 

No. 14 

Country Study: Spain in EMU: a virtuous long-lasting cycle? (February 2005) 

No. 15 

No. 16 

No. 17 

Improving 
(March 2005) 

the 

Stability 

and 

Growth 

Pact: 

the 

Commission’s 

three 

pillar 

approach  

The economic costs of non-Lisbon. A survey of the literature on the economic impact of Lisbon-type reforms 
(March 2005) 

Economic  Review  of  EU  Mediterranean  Partners:  10  years  of  Barcelona  Process:  taking  stock  of  economic 
progress (April 2005) 

No. 18 

European Neighbourhood Policy: Economic Review of ENP Countries (April 2005) 

No. 19 

The  2005  EPC  projection  of  age-related  expenditure:  agreed  underlying  assumptions  and  projection 
methodologies (EPC) (November 2005) 

No. 20 

Consumption, investment and saving in the EU: an assessment (November 2005) 

No. 21 

Responding to the challenges of globalisation (EPC) (December 2005) 

No. 22 

Report on the Lisbon National Reform Programmes 2005 (EPC) (January 2006) 

 
 
No. 23 

The Legal Framework for the Enlargement of the Euro Area (April 2006) 

No. 24 

Enlargement, two years after: an economic evaluation (May 2006) 

No. 25 

European Neighbourhood Policy: Economic Review of ENP Countries (June 2006) 

No. 26 

 What do the sources and uses of funds tell us about credit growth in Central and Eastern Europe? (October 
2006) 

No. 27 

Growth and competitiveness in the Polish economy: the road to real convergence (November 2006) 

No. 28 

Country Study: Raising Germany’s Growth Potential (January 2007) 

No. 29 

Growth, risks and governance: the role of the financial sector in south eastern Europe (April 2007) 

No. 30 

European Neighbourhood Policy: Economic Review of EU Neighbour Countries (June 2007) 

No. 31 

2006 Pre-accession Economic Programmes of candidate countries (June 2007) 

No. 32 

2006 Economic and Fiscal Programmes of potential candidate countries (June 2007) 

No. 33 

Main results of the 2007 fiscal notifications presented by the candidates countries  (June 2007) 

No. 34 

Guiding Principles for Product Market and Sector Monitoring (June 2007) 

No. 35 

Pensions schemes and projection models in EU-25 Member States (EPC) (November 2007) 

No. 36 

No. 37 

Progress  towards  meeting  the  economic  criteria  for  accession:  the  assessments  of  the  2007  Progress 
Reports (December 2007) 

The  quality  of  public  finances  -  Findings  of  the  Economic  Policy  Committee-Working  Group  (2004-2007) 
edited  by  Servaas  Deroose  (Directorate-General  Economic  and  Financial  Affairs)  and  Dr.  Christian  Kastrop 
(President  of  the  Economic  Policy  Committee  of  the  EU.  Chairman  of  the  EPC-Working  Group  "Quality  of 
Public  Finances"  (2004-2008).  Deputy  Director  General  "Public  Finance  and  Economic  Affairs",  Federal 
Ministry of Finance, Germany) (March 2008) 

No. 38 

2007  Economic  and  Fiscal  Programmes  of  potential  candidate  countries:  EU  Commission's  assessments   
(July 2008) 

No. 39 

2007 Pre-accession Economic Programmes of candidate countries: EU Commission assessments (July 2008) 

No. 40 

European neighbourhood policy: Economic review of EU neighbour countries (August 2008)  

No. 41 

The  LIME  assessment  framework  (LAF):  a  methodological  tool  to  compare,  in  the  context  of  the  Lisbon 
Strategy,  the  performance  of  EU  Member  States  in  terms  of  GDP  and  in  terms  of  twenty  policy  areas 
affecting growth (October 2008) 

No. 42  

2008 Fiscal notifications of candidate countries: overview and assessment   (November 2008) 

No. 43 

Recent  reforms  of  the  tax  and  benefit  systems  in  the  framework  of  flexicurity  by  Giuseppe  Carone,  Klara 
Stovicek,  Fabiana  Pierini  and    Etienne  Sail  (European  Commission,  Directorate-General  for  Economic  and 
Financial Affairs) (Febrauary 2009) 

No. 44 

Progress  towards  meeting  the  economic  criteria  for  accession:  the  assessments  of  the  2008  Progress 
Reports (European Commission, Directorate-General for Economic and Financial Affairs) (March 2009) 

No. 45 

No. 46 

No. 47 

No. 48 

No. 49 

No. 50 

No. 51 

No. 52 

No. 53 

No. 54 

No. 55 

No. 56 

No. 57 

No. 58 

No. 59 

No. 60 

The quality of public finances and economic growth: Proceedings to the annual Workshop on public finances 
(28 November 2008) edited by Salvador Barrios, Lucio Pench and Andrea Schaechter (European Commission, 
Directorate-General for Economic and Financial Affairs) (March 2009) 

The  Western  Balkans  in  transition  (European  Commission,  Directorate-General  for  Economic  and  Financial 
Affairs) (May 2009) 

The  functioning  of  the  food  supply  chain  and  its  effect  on  food  prices  in  the  European  Union  by  Lina 
Bukeviciute,  Adriaan  Dierx  and  Fabienne  Ilzkovitz (European  Commission,  Directorate-General  for  Economic 
and Financial Affairs) (May 2009) 

Impact of the global crisis on neighbouring countries of the EU by European Commission, Directorate-General 
for Economic and Financial Affairs (June 2009) 

Impact of the current economic and financial crisis on potential output (European Commission, Directorate-
General for Economic and Financial Affairs)   (June 2009) 

What drives inflation in the New EU Member States? : Proceedings to the workshop held on 22 October 2008 
(European Commission, Directorate-General for Economic and Financial Affairs) (July 2009) 

The EU's response to support the real economy during the economic crisis: an overview of Member States' 
recovery measures by Giuseppe Carone, Nicola Curci, Fabiana Pierini, Luis García Lombardero, Anita Halasz, 
Ariane  Labat,  Mercedes  de  Miguel  Cabeza,  Dominique  Simonis,  Emmanuelle  Maincent  and  Markus  Schulte 
(European Commission, Directorate-General for Economic and Financial Affairs) (July 2009) 

2009  Economic  and  Fiscal  Programmes  of  potential  candidate  countries:  EU  Commission's  assessments 
(European Commission, Directorate-General for Economic and Financial Affairs) (July 2009) 

Economic  performance  and  competition  in  services  in  the  euro  area:  Policy  lessons  in  times  of  crisis  by 
Josefa  Monteagudo  and  Adriaan  Dierx  (European Commission,  Directorate-General  for  Economic  and 
Financial Affairs) (September 2009) 

An  analysis  of  the  efficiency  of  public  spending  and  national  policies  in  the  area  of  R&D  by  A.  Conte,  P. 
Schweizer,  A.  Dierx  and  F.  Ilzkovitz  (European  Commission,  Directorate-General  for  Economic  and  Financial 
Affairs) (September 2009) 

2009 Pre-Accession Economic Programmes of candidate countries: EU Commission's assessments (European 
Commission, Directorate-General for Economic and Financial Affairs) (October 2009) 

Pension schemes and pension projections in the EU-27 Member States - 2008-2060 by the Economic Policy 
Committee (AWG) and Directorate-General Economic and Financial Affairs (October 2009) 

Progress  towards  meeting  the  economic  criteria  for  accession:  the  assessments  of  the  2009  Progress 
Reports (European Commission, Directorate-General for Economic and Financial Affairs) (November 2009) 

Cross-country  study:  Economic  policy  challenges  in  the  Baltics  (European Commission,  Directorate-General 
for Economic and Financial Affairs) (February 2010) 

The  EU's  neighbouring  economies:  emerging  from  the  global  crisis  (European Commission,  Directorate-
General for Economic and Financial Affairs) (April 2010) 

Labour  Markets  Performance  and  Migration  Flows  in  Arab  Mediterranean  Countries:  Determinants  and 
Effects  —  Volume  1:  Final  Report  &  Thematic  Background  Papers;  Volume  2:  National  Background  Papers 
Maghreb  (Morocco,  Algeria,  Tunisia);  Volume  3:  National  Background  Papers  Mashreq  (Egypt,  Palestine, 
Jordan,  Lebanon,  Syria)  by  Philippe  Fargues  &  Iván  Martín  (European  Commission,  Directorate-General  for 
Economic and Financial Affairs) (April 2010) 

No. 61 

The Economic Adjustment Programme for Greece  (European Commission, Directorate-General for Economic 
and Financial Affairs) (May 2010) 

No. 62 

No. 63 

No. 64 

No. 65 

No. 66 

No. 67 

No. 68 

No. 69 

No. 70 

No. 71 

No. 72 

No. 73 

No. 74 

No. 75 

No. 76 

No. 77 

The  pre-accession  economies 
 (European Commission, Directorate-General for Economic and Financial Affairs) (June 2010) 

the  global  crisis: 

from  exogenous 

in 

to  endogenous  growth?

2010  Economic  and  Fiscal  Programmes  of  potential  candidate  countries:  EU  Commission's  assessments 
(European Commission, Directorate-General for Economic and Financial Affairs) (June 2010) 

Short time working arrangements as response to cyclical fluctuations, a joint paper prepared in collaboration 
by  Directorate-General  for  Economic  and  Financial  Affairs  and  Directorate  General  for  Employment,  Social 
Affairs and Equal Opportunities (June 2010) 

Macro structural bottlenecks to growth in EU Member States (European Commission, Directorate-General for 
Economic and Financial Affairs) (July 2010) 

External  Imbalances  and  Public  Finances  in  the  EU  edited  by  Salvador  Barrios,  Servaas Deroose,  Sven 
Langedijk and Lucio Pench  (European Commission, Directorate-General for Economic and Financial Affairs) 
(August 2010) 

National fiscal governance reforms across EU Member States. Analysis of the information contained in the 
2009-2010  Stability  and  Convergence  Programmes  by  Joaquim Ayuso-i-Casals  (European Commission, 
Directorate-General for Economic and Financial Affairs) (August 2010) 

The  Economic  Adjustment  Programme  for  Greece:  First  review  –  summer  2010  (European Commission, 
Directorate-General for Economic and Financial Affairs (August 2010) 

2010  Pre-accession  Economic  Programmes  of  candidate  countries:  EU  Commission  assessments 
(European Commission, Directorate-General for Economic and Financial Affairs (September 2010) 

Efficiency  and  effectiveness  of  public  expenditure  on  tertiary  education  in  the  EU  (European Commission, 
Directorate-General  for  Economic  and  Financial  Affairs  and  Economic  Policy  Committee  (Quality  of  Public 
Finances) (November 2010) 

Progress and key challenges in the delivery of adequate and sustainable pensions in Europe (Joint Report by 
the  Economic  Policy  Committee  (Ageing  Working  Group),  the  Social  Protection  Committee  (Indicators  Sub-
Group)  and  the  Commission  services  (DG  for  Economic  and  Financial  Affairs  and  DG  Employment,  Social 
Affairs and Equal Opportunities), (November 2010)  

The Economic Adjustment Programme for Greece – Second review – autumn 2010 (European Commission, 
Directorate-General for Economic and Financial Affairs) (December 2010) 

Progress  towards  meeting  the  economic  criteria  for  accession:  the  assessments  of  the  2010  Progress 
Reports  and  the  Opinions  (European Commission,  Directorate-General  for  Economic  and  Financial  Affairs) 
(December 2010) 

Joint Report on Health Systems prepared by the European Commission and the Economic Policy Committee 
(AWG) (December 2010) 

flows 

Capital 
(European Commission, Directorate-General for Economic and Financial Affairs) (February 2011) 

to  converging  European  economies  – 

from  boom 

to  drought  and  beyond 

The Economic Adjustment Programme for Ireland (European Commission, Directorate-General for Economic 
and Financial Affairs) (February 2011) 

The  Economic  Adjustment  Programme  for  Greece  Third  review  –  winter  2011  (European Commission, 
Directorate-General for Economic and Financial Affairs) (February 2011) 

No. 78 

No. 79 

No. 80 

No. 81 

No. 82 

No. 83 

No. 84 

No. 85 

No. 86 

No. 87 

No. 88 

No. 89 

No. 90 

No. 91 

No. 92 

No. 93 

No.94 

No. 95 

The Economic Adjustment Programme for Ireland—Spring 2011 Review (European Commission, Directorate-
General for Economic and Financial Affairs) (May 2011) 

The  Economic  Adjustment  Programme  for  Portugal    (European Commission,  Directorate-General  for 
Economic and Financial Affairs) (June 2011) 

2011  Pre-accession  Economic  Programmes  of  candidate  countries:  EU  Commission  assessments 
(European Commission, Directorate-General for Economic and Financial Affairs) (June 2011) 

2011  Economic  and  Fiscal  Programmes  of  potential  candidate  countries:  EU  Commission's  assessments 
(European Commission, Directorate-General for Economic and Financial Affairs) (June 2011) 

The  Economic  Adjustment  Programme  for  Greece  –  Fourth  review  –  spring  2011  (European Commission, 
Directorate-General for Economic and Financial Affairs) (July 2011) 

The Economic Adjustment Programme for Portugal - First Review - Summer 2011 
(European Commission, Directorate-General for Economic and Financial Affairs) (September 2011) 

Economic  Adjustment  Programme  for  Ireland—Summer  2011  Review  (European Commission,  Directorate-
General for Economic and Financial Affairs) (September 2011) 

Progress  towards  meeting  the  economic  criteria  for  accession:  the  assessments  of  the  2011  Progress 
Reports  and  the  Opinion  (Serbia)  (European Commission,  Directorate-General  for  Economic  and  Financial 
Affairs) (December 2011) 

The  EU's  neighbouring  economies:  coping  with  new  challenges  (European Commission,  Directorate-General 
for Economic and Financial Affairs) (November 2011) 

The  Economic  Adjustment  Programme  for  Greece:  Fifth  review  –  October  2011  (European Commission, 
Directorate-General for Economic and Financial Affairs) (November 2011) 

Economic  Adjustment  Programme  for  Ireland  —  autumn  2011  Review  (European Commission,  Directorate-
General for Economic and Financial Affairs) (December 2011) 

The Economic Adjustment Programme for Portugal - Second review - autumn 2011 (European Commission, 
Directorate-General for Economic and Financial Affairs) (December 2011) 

The  Balance  of  Payments  Programme  for  Romania.  First  Review  -  autumn  2011  (European Commission, 
Directorate-General for Economic and Financial Affairs) (December 2011) 

Fiscal  frameworks  across  Member  States:  Commission  services’  country  fiches  from  the  2011  EPC  peer 
review (European Commission, Directorate-General for Economic and Financial Affairs) (February 2012) 

Scoreboard  for  the  Surveillance  of  Macroeconomic  Imbalances  (European Commission,  Directorate-General 
for Economic and Financial Affairs) (February 2012) 

Economic  Adjustment  Programme  for  Ireland  —  Winter  2011  Review  (European Commission,  Directorate-
General for Economic and Financial Affairs) (March 2012) 

The  Second  Economic  Adjustment  Programme  for  Greece  —  March  2012  (European Commission, 
Directorate-General for Economic and Financial Affairs) (March 2012) 

The  Economic  Adjustment  Programme 
(European Commission, 
(April 2012) 

Directorate-General 

for  Portugal  —  Third 

for 

Economic 

review.  Winter  2011/2012 
and 

Financial 

Affairs)                            

 
 
No. 96 

No. 97 

No. 98 

Economic  Adjustment  Programme  for  Ireland  —  Spring  2012  Review  (European Commission,  Directorate-
General for Economic and Financial Affairs) (June 2012) 

2012 Economic and Fiscal Programmes of Albania, Bosnia and Herzegovina: EU Commission's overview and 
country  assessments  (European Commission,  Directorate-General  for  Economic  and  Financial  Affairs) 
(June 2012) 

2012 Pre-accession Economic Programmes of Croatia, Iceland, the Former Yugoslav Republic of Macedonia, 
Montenegro,  Serbia  and  Turkey:  EU  Commission's  overview  and  assessments  (European Commission, 
Directorate-General for Economic and Financial Affairs) (June 2012) 

No. 99 

Macroeconomic  imbalances  –  Belgium  (European Commission,  Directorate-General  for  Economic  and 
Financial Affairs) (July 2012) 

No. 100 

Macroeconomic  imbalances  –  Bulgaria  (European Commission,  Directorate-General  for  Economic  and 
Financial Affairs) (July 2012) 

No. 101 

Macroeconomic imbalances – Cyprus (European Commission, Directorate-General for Economic and Financial 
Affairs) (July 2012) 

No. 102 

Macroeconomic  imbalances  –  Denmark  (European Commission,  Directorate-General  for  Economic  and 
Financial Affairs) (July 2012) 

No. 103 

Macroeconomic imbalances – Spain (European Commission, Directorate-General for Economic and Financial 
Affairs) (July 2012) 

No. 104 

Macroeconomic  imbalances  –  Finland  (European Commission,  Directorate-General  for  Economic  and 
Financial Affairs) (July 2012) 

No. 105 

Macroeconomic imbalances – France (European Commission, Directorate-General for Economic and Financial 
Affairs) (July 2012) 

No. 106 

Macroeconomic  imbalances  –  Hungary  (European Commission,  Directorate-General  for  Economic  and 
Financial Affairs) (July 2012) 

No. 107 

Macroeconomic  imbalances  –  Italy  (European Commission,  Directorate-General  for  Economic  and  Financial 
Affairs) (July 2012) 

No. 108 

Macroeconomic  imbalances  –  Sweden  (European Commission,  Directorate-General  for  Economic  and 
Financial Affairs) (July 2012) 

No. 109 

Macroeconomic  imbalances  –  Slovenia  (European Commission,  Directorate-General  for  Economic  and 
Financial Affairs) (July 2012) 

No. 110 

Macroeconomic imbalances – United Kingdom (European Commission, Directorate-General for Economic and 
Financial Affairs) (July 2012) 

No. 111 

The  Economic  Adjustment  Programme  for  Portugal.  Fourth  review  –  Spring  2012  (European Commission, 
Directorate-General for Economic and Financial Affairs) (July 2012) 

No. 112     Measuring  the  macroeconomic  resilience  of  industrial  sectors  in  the  EU  and  assessing  the  role  of  product 
market  regulations  (Fabio  Canova,  Leonor  Coutinho,  Zenon Kontolemis,  Universitat  Pompeu  Fabra  and 
Europrism  Research  (European Commission,  Directorate-General  for  Economic  and  Financial  Affairs) 
(July 2012) 

No. 113    

Fiscal Frameworks in the European Union: May 2012 update on priority countries (Addendum to Occasional 
Papers No.91) (European Commission, Directorate-General for Economic and Financial Affairs) (July 2012) 

No. 114    

Improving tax governance in EU Member States: Criteria for successful policies by Jonas Jensen and Florian 
Wöhlbier (European Commission, Directorate-General for Economic and Financial Affairs) (August 2012) 

No. 115   

 Economic  Adjustment  Programme  for 
Directorate-General for Economic and Financial Affairs) (September 2012) 

Ireland  —  Summer  2012  Review 

(European Commission, 

No. 116   

The  Balance  of  Payments  Programme  for  Romania.  First  Review  -  Spring  2012  (European Commission, 
Directorate-General for Economic and Financial Affairs) (October 2012) 

No. 117    

The  Economic  Adjustment  Programme  for  Portugal.  Fifth  review  –  Summer  2012  (European Commission, 
Directorate-General for Economic and Financial Affairs) (October 2012) 

No. 118    

The  Financial  Sector  Adjustment  Programme  for  Spain  (European Commission,  Directorate-General 
for Economic and Financial Affairs) (October 2012) 

No. 119 

Possible  reforms  of  real  estate  taxation:  Criteria  for  successful  policies 
Directorate-General for Economic and Financial Affairs) (October 2012) 

(European Commission, 

No. 120 

EU  Balance-of-Payments  assistance 
Directorate-General for Economic and Financial Affairs) (November 2012) 

for  Latvia:  Foundations  of  success 

(European Commission, 

No. 121 

Financial  Assistance  Programme  for  the  Recapitalisation  of  Financial  Institutions  in  Spain.  First  review  - 
Autumn  2012  (European Commission,  Directorate-General  for Economic  and  Financial  Affairs)  (November 
2012) 

No. 122 

Progress towards meeting the economic criteria for EU accession: the EU Commission's 2012 assessments 
(European Commission, Directorate-General for Economic and Financial Affairs) (December 2012) 

No. 123 

The  Second  Economic  Adjustment  Programme 
(European Commission, Directorate-General for Economic and Financial Affairs) (December 2012) 

for  Greece.  First  Review 

-  December  2012 

No. 124 

The  Economic  Adjustment  Programme  for  Portugal.  Sixth  Review  –  Autumn  2012  (European Commission, 
Directorate-General for Economic and Financial Affairs) (December 2012) 

No. 125 

The  Quality  of  Public  Expenditures  in  the  EU  (European Commission,  Directorate-General  for Economic  and 
Financial Affairs) (December 2012) 

No. 126 

Financial Assistance Programme for the Recapitalisation of Financial Institutions in Spain. Update on Spain's 
compliance  with  the  Programme  -  Winter  2013  (European Commission,  Directorate-General  for Economic 
and Financial Affairs) (January 2013) 

No. 127 

Economic  Adjustment  Programme  for 
Directorate-General for Economic and Financial Affairs) (January 2013) 

Ireland  —  Autumn  2012  Review 

(European Commission, 

No. 128 

Interim  Progress  Report  on  the  implementation  of  Council  Directive  2011/85/EU  on  requirements  for 
budgetary frameworks of the Member States. (European Commission, Directorate-General for Economic and 
Financial Affairs) (February 2013) 

No. 129 

Market  Functioning  in  Network  Industries  -  Electronic  Communications,  Energy  and  Transport.  (European 
Commission, Directorate General for Economic and Financial Affairs) (February 2013) 

No. 130 

Financial Assistance Programme for the Recapitalisation of Financial Institutions in Spain. Second Review of 
the  Programme  -  Spring  2013  (European  Commission,  Directorate  General  for  Economic  and  Financial 
Affairs) (March 2013) 

No. 131 

Economic  Adjustment  Programme  for  Ireland  –  Winter  2012  Review  (European  Commission,  Directorate 
General for Economic and Financial Affairs) (April 2013) 

No. 132 

Macroeconomic Imbalances – Bulgaria 2013 (European Commission, Directorate General for Economic and 
Financial Affairs) (April 2013) 

No. 133 

Macroeconomic Imbalances – Denmark 2013 (European Commission, Directorate General for Economic and 
Financial Affairs) (April 2013) 

 
No. 134 

Macroeconomic  Imbalances  –  Spain  2013  (European  Commission,  Directorate  General  for  Economic  and 
Financial Affairs) (April 2013) 

No. 135 

Macroeconomic  Imbalances  –  Finland  2013  (European  Commission,  Directorate  General  for  Economic  and 
Financial Affairs) (April 2013) 

No. 136 

Macroeconomic  Imbalances  –  France  2013  (European  Commission,  Directorate  General  for  Economic  and 
Financial Affairs) (April 2013) 

No. 137 

Macroeconomic Imbalances – Hungary 2013 (European Commission, Directorate General for Economic and 
Financial Affairs) (April 2013) 

No. 138 

Macroeconomic  Imbalances  –  Italy  2013  (European  Commission,  Directorate  General  for  Economic  and 
Financial Affairs) (April 2013) 

No. 139 

Macroeconomic  Imbalances  –  Malta  2013  (European  Commission,  Directorate  General  for  Economic  and 
Financial Affairs) (April 2013) 

No. 140 

Macroeconomic  Imbalances  –  Netherlands  2013  (European  Commission,  Directorate  General  for  Economic 
and Financial Affairs) (April 2013) 

No. 141 

Macroeconomic  Imbalances  –  Sweden  2013  (European  Commission,  Directorate  General  for  Economic  and 
Financial Affairs) (April 2013) 

No. 142 

Macroeconomic Imbalances – Slovenia 2013 (European Commission, Directorate General for Economic and 
Financial Affairs) (April 2013) 

No. 143 

Macroeconomic  Imbalances  –  United  Kingdom  2013  (European  Commission,  Directorate  General  for 
Economic and Financial Affairs) (April 2013) 

No. 144 

Macroeconomic  Imbalances  –  Belgium  2013  (European  Commission,  Directorate  General  for  Economic  and 
Financial Affairs) (April 2013) 

No. 145 

Member  States'  Energy  Dependence:  An  Indicator-Based  Assessment  (European  Commission,  Directorate 
General for Economic and Financial Affairs) (April 2013) 

No. 146 

Benchmarks  for  the  assessment  of  wage  developments  (European  Commission,  Directorate  General  for 
Economic and Financial Affairs) (May 2013) 

No. 147 

The Two-Pack on economic governance: Establishing an EU framework for dealing with threats to financial 
stability in euro area member states (European Commission, Directorate General for Economic and Financial 
Affairs) (May 2013) 

No. 148 

The  Second  Economic  Adjustment  Programme  for  Greece  –  Second  Review      –  May  2013  (European 
Commission, Directorate General for Economic and Financial Affairs) (May 2013) 

No. 149 

The Economic Adjustment Programme for Cyprus (European Commission, Directorate General for Economic 
and Financial Affairs) (May 2013) 

No. 150 

Building a Strengthened Fiscal Framework in the European Union: A Guide to the Stability and Growth Pact 
(European Commission, Directorate General for Economic and Financial Affairs) (May 2013) 

No. 151 

Vade mecum on the Stability and Growth Pact (European Commission, Directorate General for Economic and 
Financial Affairs) (May 2013) 

No. 152 

The 2013 Stability and Convergence Programmes: An Overview (European Commission, Directorate General 
for Economic and Financial Affairs) (June 2013) 

No. 153 

The  Economic  Adjustment  Programme  for  Portugal.  Seventh  Review  –  Winter  2012/2013  (European 
Commission, Directorate General for Economic and Financial Affairs) (June 2013) 

No. 154 

Economic  Adjustment  Programme  for  Ireland  -  Spring  2013  Review  (European  Commission,  Directorate 
General for Economic and Financial Affairs) (July 2013) 

No. 155 

Financial  Assistance  Programme  for  the  Recapitalisation  of  Financial  Institutions  in  Spain.  Third  Review  of 
the  Programme  –  Summer  2013  (European  Commission,  Directorate  General  for  Economic  and  Financial 
Affairs) (July 2013) 

No. 156      Overall  assessment  of  the  two  balance-of-payments  assistance  programmes  for  Romania,  2009-2013 

(European Commission, Directorate General for Economic and Financial Affairs) (July 2013)                                                                                     

No. 157 

No. 158 

2013  Pre-accession  Economic  Programmes  of  Iceland,  the  Former  Yugoslav  Republic  of  Macedonia, 
Montenegro,  Serbia  and  Turkey:  EU  Commission's  overview  and  assessments  (European  Commission, 
Directorate General for Economic and Financial Affairs) (July 2013) 

2013 Economic and Fiscal Programmes of Albania and Bosnia and Herzegovina: EU Commission's overview 
and  country  assessments  (European  Commission,  Directorate  General  for  Economic  and  Financial  Affairs) 
(July 2013) 

No. 159 

The Second Economic Adjustment Programme for Greece - Third Review – July 2013 (European Commission, 
Directorate General for Economic and Financial Affairs) (July 2013) 

No. 160 

The  EU's  neighbouring  economies:  managing  policies  in  a  challenging  global  environment  (European 
Commission, Directorate General for Economic and Financial Affairs) (August 2013) 

No. 161 

The  Economic  Adjustment  Programme  for  Cyprus  -  First  Review  -  Summer  2013  (European  Commission, 
Directorate General for Economic and Financial Affairs) (September 2013) 

No. 162 

Economic  Adjustment  Programme  for  Ireland  —  Summer  2013  Review  (European  Commission,  Directorate 
General for Economic and Financial Affairs) (October 2013) 

No. 163 

Financial  Assistance  Programme  for  the  Recapitalisation  of  Financial  Institutions  in  Spain.  Fourth  Review      
–  Autumn  2013  (European  Commission,  Directorate  General  for  Economic  and  Financial  Affairs) 
(November 2013) 

No. 164 

The  Economic  Adjustment  Programme  for  Portugal  —  Eighth  and  Ninth  Review  (European  Commission, 
Directorate General for Economic and Financial Affairs) (November 2013) 

No. 165 

Romania:  Balance-of-Payments  Assistance  Programme  2013-2015  (European  Commission,  Directorate 
General for Economic and Financial Affairs) (November 2013) 

No. 166 

Progress towards meeting the economic criteria for EU accession: the EU Commission's 2013 assessments 
(European Commission, Directorate General for Economic and Financial Affairs) (December 2013) 

No. 167 

Economic  Adjustment  Programme  for  Ireland  —  Autumn  2013  Review  (European  Commission,  Directorate 
General for Economic and Financial Affairs) (December 2013) 

No. 168 

Fiscal frameworks in the European Union: Commission services country factsheets for the Autumn 2013 Peer 
Review (European Commission, Directorate General for Economic and Financial Affairs) (December 2013) 

No. 169 

The Economic Adjustment Programme for Cyprus – Second Review - Autumn 2013 (European Commission, 
Directorate General for Economic and Financial Affairs) (December 2013) 

No. 170 

Financial  Assistance  Programme  for  the  Recapitalisation  of  Financial  Institutions  in  Spain.  Fifth  Review         
–  Winter  2014  (European  Commission,  Directorate  General  for  Economic  and  Financial  Affairs) 
(January 2014) 

No. 171 

The  Economic  Adjustment  Programme  for  Portugal  —  Tenth  Review  (European  Commission,  Directorate 
General for Economic and Financial Affairs) (February 2014) 

No. 172 

Macroeconomic  Imbalances  –  Belgium  2014  (European  Commission,  Directorate  General  for  Economic  and 
Financial Affairs) (March 2014) 

No. 173 

Macroeconomic Imbalances – Bulgaria 2014 (European Commission, Directorate General for Economic and 
Financial Affairs) (March 2014) 

No. 174 

Macroeconomic Imbalances – Germany 2014 (European Commission, Directorate General for Economic and 
Financial Affairs) (March 2014) 

No. 175 

Macroeconomic Imbalances – Denmark 2014 (European Commission, Directorate General for Economic and 
Financial Affairs) (March 2014) 

No. 176 

Macroeconomic  Imbalances  –  Spain  2014  (European  Commission,  Directorate  General  for  Economic  and 
Financial Affairs) (March 2014) 

No. 177 

Macroeconomic  Imbalances  –  Finland  2014  (European  Commission,  Directorate  General  for  Economic  and 
Financial Affairs) (March 2014) 

No. 178 

Macroeconomic  Imbalances  –  France  2014  (European  Commission,  Directorate  General  for  Economic  and 
Financial Affairs) (March 2014) 

No. 179 

Macroeconomic  Imbalances  –  Croatia  2014  (European  Commission,  Directorate  General  for  Economic  and 
Financial Affairs) (March 2014) 

No. 180 

Macroeconomic Imbalances – Hungary 2014 (European Commission, Directorate General for Economic and 
Financial Affairs) (March 2014) 

No. 181 

Macroeconomic  Imbalances  –  Ireland  2014  (European  Commission,  Directorate  General  for  Economic  and 
Financial Affairs) (March 2014) 

No. 182 

Macroeconomic  Imbalances  –  Italy  2014  (European  Commission,  Directorate  General  for  Economic  and 
Financial Affairs) (March 2014) 

No. 183 

Macroeconomic  Imbalances  –  Luxembourg  2014  (European  Commission,  Directorate  General  for  Economic 
and Financial Affairs) (March 2014) 

No. 184 

Macroeconomic  Imbalances  –  Malta  2014  (European  Commission,  Directorate  General  for  Economic  and 
Financial Affairs) (March 2014) 

No. 185 

Macroeconomic  Imbalances  –  Netherlands  2014  (European  Commission,  Directorate  General  for  Economic 
and Financial Affairs) (March 2014) 

No. 186 

Macroeconomic  Imbalances  –  Sweden  2014  (European  Commission,  Directorate  General  for  Economic  and 
Financial Affairs) (March 2014) 

No. 187 

Macroeconomic Imbalances – Slovenia 2014 (European Commission, Directorate General for Economic and 
Financial Affairs) (March 2014) 

No. 188 

Macroeconomic  Imbalances  –  United  Kingdom  2014  (European  Commission,  Directorate  General  for 
Economic and Financial Affairs) (March 2014)