COMMISSION STAFF WORKING DOCUMENT Assessment of the 2014 national reform programme and convergence programme for UNITED KINGDOM Accompanying the document Recommendation for a COUNCIL RECOMMENDATION on United Kingdom’s 2014 national reform programme and delivering a Council opinion on United Kingdom’s 2014 convergence programme
Date: 2014-06-02
Institutions: European Commission
Subjects: United Kingdom, budget deficit, economic disparity, economic growth, economic reform, economic stabilisation, financial control, job creation, macroeconomics, right to housing, social situation, stability programme













EUR-Lex - 52014SC0429 - EN











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52014SC0429

COMMISSION STAFF WORKING DOCUMENT Assessment of the 2014 national reform programme and convergence programme for UNITED KINGDOM Accompanying the document Recommendation for a COUNCIL RECOMMENDATION on United Kingdom’s 2014 national reform programme and delivering a Council opinion on United Kingdom’s 2014 convergence programme /* SWD/2014/0429 final */









CONTENTS
Executive summary. 3
1....... Introduction. 5
2....... Economic situation and outlook. 5
3....... Challenges and assessment of policy agenda. 6
3.1......... Fiscal policy and taxation. 6
3.2......... Financial sector 12
3.3......... Labour market, education and social
policies. 15
3.4......... Structural measures promoting sustainable
growth and competitiveness. 19
3.5......... Modernisation of public administration. 24
4....... Conclusions. 25
Overview table. 26
Annex. 31

Executive summary 

In 2014, the UK’s economic growth is expected to become firmly established. GDP
growth is projected to strengthen further and rise to 2.7% in 2014 compared with
1.7% in 2013 and 0.3% in 2012. Strengthening growth is expected to be
maintained at 2.5% in 2015. To date, growth has been driven predominantly by
strong rises in private consumption but the composition of growth is projected
to broaden in 2014, in particular to investment, while the external
contribution will remain subdued. Inflation is projected to fall to 1.9% and the
unemployment rate is expected to decrease to 6.6% in 2014. 
Overall, the United Kingdom has made some progress in addressing the 2013 country-specific
recommendations. In certain areas, such as boosting
youth employment and the skills base, the authorities are implementing appropriate
policies but need to remain vigilant to any challenges that may arise during
implementation. Challenges remain in relation to the housing market, including the
need to increase the supply of houses to help dampen rapid rises in house
prices, and the need to raise investment in infrastructure. The 2014 national reform
programme and 2013-14 convergence programme set out details of policies that
address most of the 2013 country-specific recommendations and Europe 2020
priorities but some policies have yet to be fully implemented or take full
effect and, therefore, it is too early to definitively assess their
effectiveness in addressing the policy challenges. 
The strong
macroeconomic outlook in 2014 and 2015 needs to be secured over the medium term through effective policies to address long-standing structural
challenges, particularly in relation to the supply of housing, infrastructure
investment and skills and education. The analysis in this staff working document
leads to the conclusion that challenges identified in the 2013 country-specific
recommendations and the 2014 Annual Growth Survey remain valid: 
•     Public finances: The UK government is continuing with
its fiscal consolidation strategy and the deficit is now expected to fall more
quickly than foreseen in the previous convergence programme, mainly as a result
of higher-than-expected growth. However, the debt ratio, though lower than estimated
in the previous convergence programme, is forecast to continue rising and peak
in 2015-16. The deficit for 2014-15 is forecast to be 5% of GDP thereby not consistent
with the EDP deadline. Total public investment remains low but has increased
somewhat, thereby responding in some measure towards the challenge of
differentiated, growth-friendly fiscal tightening. 
•     Housing: Housing demand and house prices are growing
strongly. Additional action to further boost the supply of houses, including
by creating appropriate incentives at the local level, could better align
supply and demand in the short and medium terms. Continued close monitoring of
house prices, credit conditions in the housing market and mortgage indebtedness,
and clarification of the use of appropriate macro-prudential measures, would ensure
that the authorities remain vigilant to the risks associated with the
potentially destabilising impact of rapid house price rises. The risks are
particularly pronounced in certain regions, including London. There is a case to
update cadastral values (the property value roll), which was last updated in
1991, and associated measures relating to the rates/bands on which property tax
is applied, to reduce distortions in the property taxation system. 
•     Unemployment and skills: The labour market is
performing well overall. However, labour market outcomes are less positive for
the young in relative terms; the UK has a shortage of workers with high-quality
vocational and technical skills, which creates a demand/supply mismatch in the
job market. Employer engagement in bridging any skill gaps remains crucial.
•     Welfare reform and childcare: There are ongoing
challenges to address poverty, in particular, among children and people in
jobless households. The introduction of the Universal Credit has potential to streamline
the benefits system and improve work incentives. The supply of childcare has
risen in recent years and the government has introduced significant extensions
to tax incentives for childcare.
•     Financial sector: The banking sector continued to
stabilise in 2013 and banks raised capital to address capital shortfalls. Although
the supply of credit to households picked up, the supply of credit to
corporates, in particular to small and medium-sized enterprises (SMEs), continues to fall. The government responded with initiatives such as
adjusting the Funding for Lending Scheme to focus it solely on businesses and establishing
the 'Business Bank', which is designed to provide an additional source of
non-bank finance to SMEs. Steps have also been taken to boost competition in
the banking sector and encourage the formation of new 'challenger' banks. 
•     Infrastructure: The UK published a new national
infrastructure plan in December 2013, which takes a long-term
approach to the planning, funding and delivery of infrastructure and sets out a
'pipeline' of capital investment of GBP 375 billion to 2020 and beyond. While
the plan is ambitious, it is crucial to ensure that stringent mechanisms are in
place to monitor progress and delivery and mitigate significant risks,
including risks that the substantial amount of private sector funding (three-quarters
of the total) required to deliver the infrastructure investment may not fully
materialise. There are also risks related to regulatory certainty and the
efficient operation of the planning system.

1.        
Introduction 

In
May 2013, the Commission proposed a set of country-specific recommendations
(CSRs) for economic and structural reform policies for the United Kingdom. On the basis of these recommendations, the Council of the European Union
adopted six CSRs in the form of a Council Recommendation in July 2013. These
CSRs concerned growth-friendly fiscal consolidation, the housing market, youth
unemployment, support to low income households, access to finance for
businesses and investment in infrastructure. This staff working document (SWD)
assesses the state of implementation of these recommendations in the UK.
The
SWD assesses policy measures in light of the findings of the Commission’s 2014 Annual
Growth Survey (AGS)[1]
and the third annual Alert Mechanism Report (AMR)[2], which
were published in November 2013. The AGS sets out the Commission's proposals
for building the necessary common understanding about the priorities for action
at national and EU level in 2014. It identifies five priorities to guide Member
States to renewed growth: pursuing differentiated, growth friendly fiscal
consolidation; restoring normal lending to the economy; promoting growth and
competitiveness for today and tomorrow; tackling unemployment and the social
consequences of the crisis; and modernising public administration. The AMR
serves as an initial screening device to determine whether macroeconomic
imbalances exist or risk emerging in Member States. The AMR found positive
signs that macroeconomic imbalances in Europe are being corrected. To ensure
that a complete and durable rebalancing is achieved, the UK and 15 other Member States were selected for a review of developments in the accumulation and
unwinding of imbalances. These in-depth reviews were published on 5 March
2014 along with a Commission Communication.[3]
Against
the background of the 2013 Council Recommendations, the AGS, the AMR and
the in-depth review, the United Kingdom presented
updates of its national reform programme and of its convergence programme on 30
April 2014. These programmes provide detailed information on progress made
since July 2013 and on the plans of the government. While most
of the 2013 CSRs and Europe 2020 priorities are addressed, some policies have
yet to take full effect and implementation can be subject to risks The
information contained in these programmes provides the basis for the assessment
made in this staff working document.
The
programmes submitted went through a consultation process involving the national
parliament, devolved administrations and other interested stakeholders.

2.        
Economic situation and
outlook 

Economic
situation
Economic
growth rose throughout 2013 although it was driven mainly by growth in
household consumption, the labour market performed strongly and inflation
pressures abated. Growth picked up in 2013, to 1.7%, the highest rate
of growth since 2010 and an increase from 0.3% in 2012. Growth in private
consumption outstripped growth in household disposable income resulting in a
fall in the household saving rate from 7.3% in 2012 to 5.1% in 2013. Although
increasingly buoyant, growth remained unbalanced; gross fixed capital formation
declined by 0.6% in 2013 and net exports contributed only slightly to growth
(by 0.2 pps.), compared to a brisk rise in household consumption of 2.2%. The
unemployment rate fell to 7.5% in 2013 from 7.9% in 2012 while employment
growth remained steadily positive at a little over 1% in 2013. The resilience
in employment has, however, been accompanied by weak productivity growth as, in
aggregate, firms elected to increase employment rather than raise the
productivity of existing workers. Thus, productivity remains below the level before
the international economic crisis (i.e. in 2008). Low productivity is matched
by weak growth in the compensation of employees per head which grew by 2.1% in
2013. Inflation fell from 2.8% in 2012 to 2.6% in 2013 reflecting lower rises
in energy prices than previously seen, subdued commodity price rises, a modest
appreciation of the exchange rate and an absence of upstream price pressures.
The
overall positive trends in 2013 continued into early 2014. Brisk
output growth was maintained while resilience in the labour market remained and
inflation continued to abate.
Economic
outlook
Growth
is projected to become firmly established in 2014 and 2015 and with some
rebalancing towards investment. Strong growth in private
consumption is expected to continue and investment is projected to increase.
However, the contribution of the external sector to growth is expected to
remain weak. Robust employment growth is expected and the unemployment rate is
projected to continue declining. Inflation is expected to remain at, or close
to, its target of 2%.
The
outlook in the convergence programme (CP) is realistic and consistent with the
Commission's analysis as reported in its spring 2014 economic forecast.[4] The CP
projects GDP growth of 2.7% in 2014 and 2.3% in 2015, in line with that of the
Commission of 2.7% and 2.5%. Consumption will continue to be a strong driver of
growth but the household saving rate will continue to fall under the CP's
projections but stabilise under the Commission's projections. Investment growth
is projected to pick up markedly following a slight decline in 2013. Although
exports are projected to grow modestly in the CP, and by the Commission, growth
is matched by increasing imports so that net trade contributes only slightly to
growth in 2014 and 2015.
In
addition, the CP and the Commission expect that the labour market will remain
resilient with continued employment growth and falls in the unemployment rate
and, moreover, that productivity growth will pick up while inflation pressures
are projected to remain subdued. The CP's projections for
inflation are consistent with those of the Commission. Inflation is projected
at, or very close to, 2% in 2014 and 2015, that is, at the Bank of England's
target for annual growth in inflation. For the labour market, again, the CP's
projections are in line with those of the Commission. The unemployment rate is
projected to continue its downward trajectory to 6.8% and 6.5% in 2014 and 2015,
respectively; very close to that projected by the Commission. Employment is
projected to reach 30.9 million by 2016. The CP forecasts a pick-up in labour
productivity from its current low levels, again consistent with the Commission's
projections.

3.        
Challenges and assessment of policy agenda 
3.1.                
Fiscal policy and taxation

The
aim of the UK’s convergence
programme is to balance the cyclically-adjusted current budget by the end of a
five-year rolling period, currently ending in 2018-19; the
fiscal mandate. Alongside this, there is a supplementary debt target
which dictates that public sector net debt should be falling as a share of GDP
in 2015-16. However, the programme's plans do not reduce the deficit below the
3% of GDP reference value by the deadline in 2014-15. Also, the UK does not specify a medium-term objective (MTO) in the convergence programme and is
therefore not in line with the legislation. However, the fiscal framework, set
up in 2010, is a step towards compliance with the Stability and Growth Pact
objectives, as it is designed to bring the fiscal position close
to balance over the medium term.
The headline balance for 2013-14 is 6.0%
of GDP; an improvement of 0.8 pp. compared with plans of the previous year’s
programme. This was mainly due to the substantial upward
revision to GDP growth in 2013 and 2014, by 1.2 pp. to 1.8% and
0.9 pp. to 2.7%, respectively. For 2014-15, the planned deficit is also
revised markedly downwards by 1 pp. to 5.0%. In both years, tax receipts are
higher than forecast in the previous convergence programme and current spending
is lower, with investment spending increased slightly. 
The two major fiscal announcements since
the last convergence programme were the Autumn Statement, published in December
2013, and the Budget 2014 published in March. Both continued
with the trajectory of the fiscal consolidation strategy with policy changes at
the margin. In the Autumn Statement, the main taxation measures were a
scrapping of the fuel duty rise due in 2014, a discount for two years in
business rates for small retailers, a removal of employer National Insurance
Contributions for employees under 21 years, an increase in the bank levy and an
extension of Capital Gains Tax to property sales by non-residents. The
main spending announcements were further reductions in departmental spending of
1.1% in 2014-15 and 2015-16 and details on the cap on overall welfare spending
from 2015-16, which excludes the basic state pension and job seekers allowance.
In the Budget, the Personal Income Tax allowance was increased from April 2015
and the threshold for the higher income tax rate was raised in April 2014 and
further in April 2015. Further measures were introduced to tackle tax avoidance
with extra powers being given to the Revenue and Customs department (HMRC). The
10% savings tax rate was abolished on the first GBP 5 000 of savings and a
single new Individual Savings Account (NISA) was introduced from July 2014.
Regarding pensions, all tax restrictions on access to pensions were removed
thereby ending the requirement of buying an annuity and the withdrawal tax rate
on pensions was also reduced. On spending, the government provided details of
the permanent cap on welfare spending with the cap being set at
GBP 119 billion in 2015-16 allowing for increases with inflation
thereafter; additional increases will need parliamentary approval. 
The headline
deficit forecast by both the Commission and convergence programme are very
similar
with both estimating a deficit of 5.0% in 2014-15 and only a 0.1 pp. difference
the following year; the convergence programme marginally lower at 4.0%. The
debt ratios are also consistent in 2014-15 and 2015-16; the former year being
91.8% of GDP for both estimates and the latter being 93.1% in the CP and 93.4%
in the Commission estimates.
     ||   Box 1: Main budgetary measures ||   
   || Revenue || Expenditure ||   
   ||   2013-14 ||   
   || ·      Increase in personal income tax allowance to GBP 9 440 (EUR 11 500) (-0.07% of GDP) ·      Corporation tax decrease to 23%          (-0.05% of GDP) || ·      Reductions in departmental spending (0.07% of GDP) ||   
   ||   2014-15 ||   
   || ·      Increase in personal income tax allowance to GBP 10 000 (EUR 12 200) (-0.07% of GDP) ·      Corporation tax decrease to 21%          (-0.05% of GDP) || ·      Reductions in departmental spending (0.16% of GDP) ||   
   ||   2015-16 ||   
   || ·      Increase in personal income tax allowance to GBP 10 500 (EUR 12 800) (-0.1% of GDP) ·      Corporation tax decrease to 20%          (-0.05% of GDP) ||   ||   
   ||   2016-17 ||   
   || ·      Changes to public and private sector pensions (+0.4% of GDP) ||   ||   
   || Note: The budgetary impact in the table is the impact reported in the programme, i.e. by the national authorities. A positive sign implies that revenue / expenditure increases as a consequence of this measure. ||   
There
are a number of one-off and transitory items included in the deficit out-turns
for the UK. In April 2012, there is a transfer of the Royal
Mail pension fund (GBP 28 billion, EUR 34 billion) to the general
government accounts. In February 2013, the sale of 4G mobile phone licences
(GBP 2.3 billion, EUR 2.8 billion) is included along with the one-off
receipt of GBP 0.9 billion (EUR 1.1 billion) from the Swiss capital tax
agreement in May that year. Furthermore, the deficit figures benefit from the
transfer of the Asset Purchase Facility (APF) from the Bank of England to the
government accounts. The decision to transfer the APF to the general government
accounts entails a reduction in the deficit in the short term but a potential
increase in the deficit in the medium term. As quantitative easing is unwound,
the government would be liable for capital losses related to its bond holdings.
In 2012-13, the deficit is reduced by GBP 6.4 billion and by GBP 12.2 billion
in 2013-14. The estimated reduction, determined by the OBR, is for the deficit
to fall by GBP 11.6 billion in 2014-15, by GBP 6.9 billion in 2015-16
and by GBP 2.9 billion in 2016-17. In subsequent years, the transfers are
projected to become negative and increase the deficit.
Box 2:
Excessive deficit procedure for the United Kingdom
The United Kingdom is currently subject to the corrective arm of the Stability and Growth Pact.
On 8 July 2008, the Council decided that an excessive deficit existed in the United Kingdom. The most recent Council Recommendation under Art. 126(7) TFEU in conjunction
with Article 126(13) thereof was adopted on 2 December 2009. The Council
recommended that the UK authorities should put an end to the present excessive
deficit situation by 2014-15 at the latest. 
The United Kingdom authorities should bring the general government deficit below 3% of GDP in a
credible and sustainable manner by taking action in a medium-term framework.
Specifically, to this end, the United Kingdom authorities should: (a) implement
the fiscal measures in 2009-10 as planned in the 2009 Budget, avoiding further
measures contributing to the deterioration of public finances, and start
consolidation in 2010-11 in order to bring the deficit below the reference
value by 2014-15; (b) to this end ensure an average annual fiscal effort of 1¾ % of GDP
between 2010-11 and 2014-15, which should also contribute to bringing the
government gross debt ratio back on a declining path that approaches the
reference value at a satisfactory pace by restoring an adequate level of the
primary surplus; (c) further specify the additional measures that are necessary
to achieve the correction of the excessive deficit by 2014-15, cyclical
conditions permitting, and accelerate the reduction of the deficit if economic
or budgetary conditions turn out better than currently expected. In addition,
the United Kingdom authorities should seize opportunities beyond the fiscal
effort, including from better economic conditions, to accelerate the reduction
of the gross debt ratio back towards the reference value. The United Kingdom should ensure that its revised fiscal framework limits the risks to the
adjustment and, after the excessive deficit has been corrected, underpins
sustained budgetary consolidation.
An
overview of the current state of excessive deficit procedures is available on: http://ec.europa.eu/economy_finance/economic_governance/sgp/deficit/index_en.htm.
The programme, based on a growth
forecast carried out by the UK’s Office of Budget Responsibility (OBR),
envisages an improvement in the headline balance of of 2.6 pp. between 2011-12
and 2014-15 to 5.0%. However, the programme projects that
the excessive deficit procedure (EDP) deadline, set by the Council on 2
December 2009 of 2014-15, will be missed by two years, with the deficit falling
to 2.4% in 2016-17. The Commission’s 2014 spring forecast has similar fiscal
projections to the programme with the deficit also estimated at 5.0% in
2014-15.
The improvement in
the (recalculated) structural balance[5]
foreseen in the 2013-14 convergence programme is lower than the Council
recommendation of 2 December 2009. The Council recommended an
annual average improvement in the structural balance of 1¾% of GDP between
2010-11 and 2014-15. However, the average adjusted fiscal effort undertaken
between 2013-14 and 2014-15 averaged at just 0.9% of GDP. This dips to an
annual structural effort of 0.8% in 2015-16 before climbing back to at least 1%
in each of 2016-17, 2017-18 and 2018-19. The Commission’s 2014 spring forecast
estimates an adjusted improvement of 1.1% over the entire 5-year period.
The time profile for correcting the
excessive deficit between 2010-11 and 2014-15 is relatively front-loaded and
will be almost 80% based on spending cuts. The headline
deficits have been falling almost constantly over the period, with the
exception of 2012-13 in which two one-off items cause the headline balance the
following year to be higher. The annual structural balances have also fallen
over the entire period but the rate of decline was lower in the latter years of
the EDP period. 
The general government debt ratio has
been increasing steadily for more than a decade. The convergence
programme projects that the ratio will peak in 2015-16 at 93.1% before
declining in the subsequent two years. The Commission's 2014 spring forecast
also estimates that the debt ratio will also increase until 2015-16 but is
unable to determine the turning point as this is the last point on the forecast
period. In that year, the forecasts are very similar as the Commission’s
estimate is 93.4%. The maturity profile of gilts and treasury bills is quite
long with almost 60% of these maturing after seven years. Only 20% of gilts and
treasury bills are ultra-short and due for repayment within three years.[6]
Long-term sustainability
Government
debt, at 89.6% of GDP in 2013-14 and expected to rise to 93.4% in 2015-16, is
currently above the Treaty threshold of 60% of GDP and is projected to rise
further by 2030.[7] However,
the full implementation of the convergence programme would put debt on a
decreasing reaching the 60% of GDP reference value in 2030.
The UK appears to face high fiscal sustainability risks in the medium-term. The
medium-term sustainability gap, showing the adjustment effort up to 2020
required to bring debt ratios to 60% of GDP in 2030, is at 4.3% of GDP, and is primarily
related to the high level of government debt (93.4% of GDP in 2015-16) and the
structural primary deficit in 2015-16. In the long-term, the UK appears to face medium fiscal sustainability risks, primarily related to the structural
primary balance in 2015-16 and the projected ageing costs over the very long
run. The long-term sustainability gap shows the adjustment effort needed to
ensure that the debt-to-GDP ratio is not on an ever-increasing path, is at 4.9%
of GDP.
Risks
would be higher in the event of the structural primary balance reverting to
lower values observed in the past, such as the average for the period 2004-2013. It
is therefore appropriate for the UK to reduce government debt and to further
contain age-related expenditure growth to contribute to the sustainability of
public finances in the long term. 
Fiscal frameworks
The government introduced a new framework
for fiscal policy setting in May 2010. The
independent Office for Budget Responsibility (OBR) is tasked with producing
official economic and fiscal forecasts and assessing whether the chances of the
government meeting the fiscal mandate and debt sustainability target are
greater than 50%. In its latest assessment, March 2014, the OBR concluded that
the government remains on course to meet the fiscal mandate. However, the OBR
forecasts that the government will miss the debt sustainability target by one
year.
While the UK's fiscal framework is
generally sound and benefits from well-established domestic good practice, no
specific efforts have been undertaken to align it with EU developments which
impact the UK. The UK does not set an explicit
medium-term objective (MTO) as recommended by the code of conduct on the
Stability and Growth Pact (SGP) and the Stability and Convergence Programmes
(SCP). Furthermore, the UK authorities’ definitions of national debt and
deficit targets differ from those in the Maastricht Treaty. The national deficit
target refers to the cyclically-adjusted current account balance, excluding
financial interventions, whereas the excessive deficit procedure (EDP) deficit
is defined as general government net borrowing, including investment
expenditure and interest from swaps and forward rate agreements. The national
authorities’ debt target is public sector net debt excluding financial
interventions which is defined in net terms and includes the debt of
non-financial public corporations but excludes that of public sector banking
groups. The EDP definition refers to general government gross debt thereby
excluding both the debt of non-financial public corporations and public sector
banking groups, and being a gross measure of debt.
The UK’s most recent Spending Round was
published in June 2013 and it set out the government’s spending plans for
2015-16. The previous
Spending Review[8], which covered multiple years, was set to end in 2014-15. Spending plans beyond 2015-16 will be set out by the new government
following elections likely to be held in May 2015. Spending Rounds in general
set out multi-annual limits for predictable spending in every department
through Departmental Expenditure Limits. The remainder of spending, mainly
social security, debt interest payments, public sector pensions and EU
contributions, is classified as Annually Managed Expenditure (AME). The
government introduced a cap on a significant proportion of AME from 2015-16,
including many welfare payments but excluding pensioner benefits and jobseekers
allowance. Spending rounds/reviews focus solely on spending, not
taxation.
Tax systems 
The overall tax system in the UK reflects the priorities of the Annual Growth Survey. The tax
composition is relatively growth-friendly with consumption and recurrent taxes
on property accounting for 43.3% of total taxation; a share which is among the
highest in the EU. At 35.4% in 2012-13 (latest available year), the UK's total tax-to-GDP ratio is below the EU-28 weighted average (39.4%). The UK has a very competitive regime for the taxation of employment income, including personal
taxation and social contributions, by EU standards, which at 46% of the total
tax burden is significantly lower than other large Member States. The UK also has the second lowest implicit rate of income tax on employees in the EU (25.2% of
average income). Since 2008, the corporation tax rate has decreased from 28% to
20%, as of April 2015. The UK is a strong supporter of initiatives on tax
compliance, such as the OECD's global standard on automatic exchange of
information. Ongoing actions on tax simplification and the reduction of
administrative burdens include its HMRC digital strategy initiative and the
report on the taxation of employee benefits and expenses. 
In 2013, the country-specific recommendations
to the UK included tax recommendations on property taxation and VAT base
broadening. Overall, the analysis in this
SWD leads to the conclusion that UK has made only limited progress to address
these recommendations and the challenges which were identified in 2013 remain
relevant. The areas of property taxation and
consumption taxes offer scope for greater efficiencies and a higher proportion
of growth-friendly taxes. 
In general terms, there has been little
reform in the field of land and property taxation to either reduce distortions
or to promote timely residential construction.
However, measures include a 7% rate of Stamp Duty Land Tax (SDLT) introduced in
March 2012 for the purchase of residential properties costing over GBP 2
million (EUR 2.5 million) (increased to 15% if purchased by certain non-natural
persons). Further tax charges
are being introduced to discourage people from using corporate structures to
invest in housing and a capital gains tax on profits made by non-residents
disposing of UK residential property, from April 2015. Property taxation as a
proportion of GDP was 4.1% in 2012, of which 3.4% was recurrent. Further
discussion on housing is in Section 3.4. 
There were no reforms of the VAT base in
2013. The UK average VAT policy gap[9], at 47% between 2000 and 2011, is amongst the highest in the EU,
and well above the average of 36%. The VAT compliance gap stood at 12%
during the same period. The policy gap captures the revenue loss due to
the various tax expenditures[10]. The UK applies a zero-percent rate to a broad range of goods and
services including many foodstuffs, books, domestic transport, pharmaceutical
products, the supply of water, certain construction services and supplies of
new housing. The UK applies a reduced rate of 5% to certain supplies of
home heating oil and LPG, electricity and natural gas. HMRC has estimated, in
its analysis of the main tax expenditures, that the cost of the zero and
reduced rates was GBP 44.8 billion (EUR 54.5 billion) in 2013-14.[11] 
Negative social impacts from VAT base
broadening can be mitigated by gradual reform and targeted compensation
measures. In respect of the zero-percent rates, the
UK also has the option to avail of the provisions in Article 113 of the VAT
Directive, which allows a Member State to tax goods and services previously
taxed below 5% at one of two reduced rates even if such goods and services are
not included in Annex III of the Directive. Such a policy choice would minimise
any inflationary effects of an immediate move to the standard VAT rate, as well
as lessen the impact on the most vulnerable in society. Many of the applied
zero- and reduced rates are sensitive as they are deemed to address social
impacts.[12]Although the UK VAT compliance gap at 12% is at the EU average, there
should be scope to narrow this rate. It is relevant that each 1% decrease in
the compliance gap in the UK would yield approximately EUR 1.5 billion (GBP
1.22 billion) in revenues. 
In terms of the direct tax base, the UK
avails of high levels of tax expenditure (both in
numbers and amounts) in relation to personal income tax (PIT) and corporate
income tax (CIT)[13], which should be evaluated on a regular basis to ensure the
allowance is targeted correctly and meets its objective. In 2013-14, GBP 32.8 billion (EUR 40 billion) was claimed in tax
expenditures in direct income tax alone[14] while the UK provides generous allowances for business investment
in plant and machinery. A patent box was introduced in 2013 with an estimated
cost of GBP 1.1 billion (EUR 1.4 billion) per year by 2017.[15] 

3.2.                
Financial sector 

The
banking sector continued to stabilise and return to health in 2013 as the
sector raised capital to address capital shortfalls. Credit
supply to households picked up but supply to corporates, including SMEs,
continued to decline. Scope remains to reduce concentration in the banking
sector. The availability of finance, particularly for SMEs, remains constrained
although policy action has been taken to address the issue. 
In
2013, the United Kingdom received a CSR concerning the availability of finance,
competition in the banking sector and the need to implement prudent capital
requirements. 
Box
 3: Potential impact of structural reforms
on growth – a benchmarking exercise
Structural reforms are crucial for boosting
growth. It is therefore important to know the potential benefits of these
reforms. Benefits of structural reforms can be assessed with the help of
economic models. The Commission uses its QUEST model to determine how
structural reforms in a given Member State would affect growth if the Member
State narrowed its gap vis-à-vis the average of the three best EU performers on
key indicators such as the degree of competition in the economy and female
labour market participation. Improvements on these indicators could raise the
GDP of the United Kingdom by about 4.8% in a 10-year period. Some reforms could
have an effect even within a relatively short time horizon. The model
simulations corroborate the analysis of Section 3.3, according to which large
gains would likely stem from reducing skills gaps, albeit in the long term. In
this respect, the simulations support the priority placed by the authorities on
apprenticeships and traineeships.
Table:
Structural indicators, targets, and potential GDP effects[16]

Source:
Commission services. Note: Simulations assume that all Member States undertake
reforms which close their structural gaps by half. The table shows the
contribution of each reform to total GDP after five and ten years. If the
country is above the benchmark for a given indicator, we do not simulate the
impact of reform measures in that area; however, the Member State in question can still benefit from measures taken by other Member States. * The long run
effect of increasing the share of high-skilled population would be 0.5% of GDP
and of decreasing the share of low-skilled would be 2.9%. ** EU average is set
as the benchmark.
The UK has made substantial progress in addressing the financial sector CSR. Implementation
of the Financial Policy Committee's (FPC) recommendation of March 2013, relating
to a prudent assessment of bank capital requirements and the need to address
immediate capital shortfalls - is close to completion. The FPC reported,
in March 2014, that most UK large banks and building societies had met the 7%
target for capital ratios by the end of 2013. Capital has been raised by equity
issuance, asset disposals and retained earnings. The FPC also noted that
funding and liquidity risks had diminished. The Prudential Regulation Authority
(PRA) has agreed to ease the requirements related to liquid asset holdings for
the major banks and building societies that have adequate capital requirements.
Major banks have also reduced exposure to riskier assets. They need to plan for
the implementation of the Basel III requirements in relation to leverage and
capital ratios by 2019.[17]
However, vulnerabilities remain. The Royal Bank of Scotland (RBS) continues to
report heavy losses (a pre-tax loss of GBP 8 billion was reported for
2013 taking combined losses since 2008 to GBP 46 billion) and it remains
majority-owned by the government. The government sold two tranches of shares in
Lloyds, which raised GBP 3.2 billion in September 2013 and GBP 4.2 billion in
March 2014, and reduced its share-holding to 25%.
The
supply of finance to the corporate sector, especially SMEs, remains constrained although the government is taking positive steps to
ease funding constraints. As set out in the 2014 In-depth Review,
the stock of outstanding credit to the corporate sector and SMEs continued to
decline throughout 2013. However, survey measures indicate that the
availability of credit is expected to improve, alongside an increase in demand
for credit, although the extent to which this
translates into large increases in net credit supply, particularly for SMEs, remains
to be seen. It would appear that corporates are, in aggregate, continuing the
process of deleveraging which began in 2010. 
Moreover,
the authorities are implementing policies which should, in time, further
increase the availability of bank and non-bank finance. In
November 2013, the Funding for Lending Scheme (FLS), which provides incentives
to banks and building societies to expand lending by reducing their funding
costs, was restricted to corporates effective from January 2014. The move is
appropriate and should encourage banks to boost lending to firms rather than
households. Most importantly, plans to establish a 'Business Bank'[18] are
well advanced and it is expected that the bank will become
fully operational during 2014. It is to be noted that the Business
Bank will need to comply with the EU State Aid regime. The
establishment of the Business Bank is a positive step forward as it
specifically addresses gaps in the market provision of finance. It should
eventually help SMEs obtain non-bank finance to expand and invest.
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. In addition, the Scottish Investment Bank
has been established to deliver risk capital and debt finance support to
technology-based companies and exporting SMEs, and Finance Wales plc, a Welsh government
subsidiary, provides debt and equity finance to Welsh businesses.
The
  UK's experience in the establishment of Financial Engineering Instruments
(FEIs) is positive. This scheme is part of the UK European
Regional Development Fund (ERDF) programmes, which amounted to a total
investment of around EUR 1 167 million (GBP 960 million) out of which 47%
were covered by the ERDF (EUR 550 million, GBP 450 million). In general, the
take-up of ERDF-supported SME investment funds has been good, especially in
view of the fact that there remains another two years to complete their implementation.
Although there was a slow start-up, recent experience suggests a strong
pipeline and a full investment by the end of 2015.
Some
steps to boost competition in the banking sector have been taken. The
banking sector is characterised by a small number of large national banks and
relatively few regional banks or building societies with a presence limited to
a narrow geographical area. However, a number of small and
new so-called 'challenger banks' have commenced operation in recent years. An
increase in competition may follow from the divestiture of bank branches and
other assets following the provision of support from the government in 2008-09.
As a condition of EU approval for State Aid, the Lloyds Banking Group was
required to divest retail banking business of at least 600 branches
(approximately 20% of the branch network), a share of 4.6% of the personal
current account market and up to 19% of mortgage assets. Following the
divestiture, a new bank, TSB, was established in 2013, although it is not yet
fully independent. RBS is also required to divest assets including around 300
branches which will be facilitated by the formation of a new bank, Williams and
Glyn, and which is currently being established. The Financial Conduct Authority
(FCA) and PRA are implementing measures, including significantly lowering
capital and liquidity requirements for new banks and an improved authorisation
process, to increase competition and a new Payments System Regulator is being
established. It is unclear, however, whether new/challenger banks will be able
to gain significant market share and, where relevant, expand activities to the
SME sector. 
A number of other actions to address competition in the banking
sector are underway. The government is
consulting on proposals to require banks to share information on their SME
customers with other lenders through credit reference agencies. In
September 2013, steps were taken to ease the ability of customers to switch
current accounts but results are mixed. The Competition and Markets Authority 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. A decision is pending on whether to undertake a more
detailed investigation of the retail banking sector. The former Office of Fair
Trading provided an update on its banking study of the SME sector in March 2014
in which it expressed concern about the level of competition in the sector.

3.3.                
Labour market[19], education and social policies 

The
labour market is performing well overall. Employment growth
was a healthy 1.2% in 2013, the fourth consecutive year of growth, while the
unemployment rate continued to fall. Further growth in employment and falls in
the unemployment rate are projected in 2014 and 2015. Growth in private sector
employment was positive in 2013, thus continuing a trend that began in 2010. 
Nonetheless,
the UK faces several challenges in specific areas. While there is
still relatively significant unemployment and underemployment among young
people, the youth unemployment and NEET rates decreased between 2012
and 2013.[20] In
addition, the UK has a shortage of workers with high-quality vocational and
technical skills and issues with basic skills. Also, lifelong learning
provision decreased between 2009 and 2012 but improved between 2012 and 2013,
when it was 16.1%.[21] If
the negative trend resumes, it may have an impact on the skills and
productivity of the age group which benefits from lifelong learning. There are also ongoing
challenges in tackling the share of children in jobless households and child
poverty. Despite a decreasing trend, at 16.5%[22]
(2012), the proportion of UK children living in workless households is one of
the highest in the EU. The 'at-risk of poverty or social exclusion' rate is
considerably higher for people with disability.[23]
Further continuing challenges include material deprivation[24], in-work
poverty[25], and
affordable,
high-quality, childcare. 
In
2013, the United Kingdom received a CSR concerning youth unemployment,
improving vocational education and skills provision and a second one covering welfare
reform, poverty and childcare. 
Labour
market
The
  UK has achieved some progress in addressing the CSR on youth unemployment. It
has put a wide range of measures in place, such as the Work Programme
and the Youth Contract, with a focus on providing
apprenticeships and getting people into work. Despite
initial difficulties, the performance of the Work Programme has improved
significantly with 22 000 individuals remaining in employment. On the Youth
Contract, the government made substantial progress in providing work experience
placements and launching more and better quality apprenticeships. Recent
figures show that the employer take-up has been low and fewer wage incentive payouts
than expected have been made.[26] To
respond better to employer requirements, the government increased the duration of
apprenticeships to a minimum of 12 months. The government
also introduced an assessment at the end of an apprenticeship to ensure higher
levels of competence. Employers will also be given more responsibility for
developing the standards that will replace the current apprenticeship framework
and will have greater control over which training providers receive funding.
This will ensure a better matching of training provision to employers' needs. The
government decided to increase business engagement and investment in skills
provision by routing public money directly to employers rather than via
training providers.[27] Through
the Employer Ownership Pilot businesses are invited to set out the public
funding they need to support their own investment in skills, training and
apprenticeships. All these measures are likely to ensure more effective
apprenticeships. However, whilst the number of higher apprenticeships has been increasing
steadily, they still make up a very small proportion of apprenticeships (2%)
when compared to intermediate (57%) and advanced apprenticeships (41%).[28] The
predominant intermediate apprenticeships do not convey the advanced vocational
and technical skills lacking in the UK, therefore the increase in funding for
higher apprenticeships announced in the Autumn Statement and Budget 2014 is a
welcome contribution towards a rebalancing of the apprenticeship programme
towards higher skills.
Education

The
  UK has made some progress on measures taken to address the 2013 CSR on
skills. However,
there is still a lack of basic skills among young people, especially
early school leavers. Recent evidence from the OECD Survey of Adult Skills in
England shows that a relatively high proportion of young people with lower
secondary education lack basic skills in numeracy and literacy. In response,
the new Traineeship Programme was launched in England in August 2013. It targets
16-24 year olds who want to work but lack the necessary skills to find either a
job or an apprenticeship. The programme combines work preparation training, study
of English and maths, and a high-quality work placement lasting at least six
weeks. However, the size of the programme is yet to be determined and the
absence of specific quality requirements may inhibit its success. Through the
'Opportunities for All' commitment, the Scottish Government aims to offer a
place in education or training to all 16-19 year olds who are not already in
learning, training or employment. Finally, increasing the age of compulsory
participation in education and training to 17 in 2013 and to 18 in 2015 should
help reduce the UK’s early school leaving rate.
The
government is also reforming the education system, including reviewing the
national curriculum. The measures in the education system to
improve young people’s skills
are likely to have a positive long-term impact. In order to address the lack of
ICT skills, the government recently overhauled the school ICT curriculum,
introducing coding as a compulsory subject from primary school onwards. 
Despite
measures to reform it, the qualifications system remains complex.[29] Many
qualifications in the initial and continuous vocational education and training
system are not linked to occupations. They therefore do not achieve an
occupational standard that employers recognise and associate with knowledge and
skills applicable to a particular sector. To tackle this issue, and following
the Wolf Report, Tech Levels are being introduced from September 2014 as an
equivalent of A levels for those who want to take a vocational route. Although
it adds more qualifications to the system, this is a positive step. The
government has published a reform plan for vocational qualifications[30] to
simplify the qualifications regime and improve its quality. More clarity in the
system will ease the transition from school to further education and lead to
better recognition of qualifications by employers.
Varying
skills levels can be explained by educational disadvantages linked to the
effect of socio-economic backgrounds on educational achievement. In
2011, the government published a Social Mobility Strategy announcing several
measures to narrow the gaps in attainment between children from different
backgrounds. Besides measures to raise standards across the overall schooling
system, the government introduced the Pupil Premium[31] to
help raise the educational attainment of disadvantaged pupils. Academies and Free
Schools, with more autonomy than most state schools also received support in
disadvantaged areas. An Education and Employers Taskforce has been given the
task of encouraging graduates to offer career advice in their old schools and
the Education Endowment Fund has been set up to promote innovative ways of
helping disadvantaged pupils. However, despite the increased funding through
the Pupil Premium for pupils from deprived backgrounds who risk becoming NEETs,
there is evidence to suggest that the measure is not promoting innovative
solutions and often not targeting individual disadvantaged children as planned.[32] 
Box
4: The delivery of a Youth Guarantee in the UK[33] 
Important
challenges to deliver a Youth Guarantee in the UK[34] are:
·                                                                                                                                                                                                             
equipping
young people, particularly NEETs with the skills and work experience required
by the labour market, through employer engagement in skills provision and by
providing more and higher-level quality apprenticeships. Despite current
progress in implementing apprenticeship reform there is a need to increase the
supply of higher apprenticeships for young people under 25 as well as to ensure
sufficient employer demand for them;
·                                                                                                                                                                                                             
insufficient
take-up of wage subsidies provided by the Youth Contract. In order to make up
for this, the Youth Contract, in particular its work experience component, and
the apprenticeship reform now need to better incentivise employers to employ
young people and to target a larger group of young people;
·                                                                                                                                                                                                             
to
achieve a sufficient high number of young people, especially NEETs, who
successfully and quickly transition from school to work and remain on the
labour market in the long term.  
Social policies
The
  UK has made some progress on measures taken to address the 2013 CSR on
welfare reform, poverty and childcare. The
introduction of Universal Credit has the potential to streamline the benefits
system and improve work incentives. The benefit will replace
six existing benefits; although a positive development that will cover most
social issues, there are some potentially significant issues of delays in its
rollout, complexity and overlaps. The major improvement in work
incentives is due to a tapering effect that allows individuals to keep more of
their income as they move into work by introducing a slower withdrawal rate of
benefits when their earnings increase. In certain
instances, this may provide weaker incentives for the second earner in couples
to move into work. The
effectiveness of the Universal Credit on employment and poverty reduction will
depend on implementation and support services.
The
poverty implications of the new provisions relating to the up-rating of certain
social security benefits and tax credits need to be closely monitored. The government's
benefit cap, introduced on a national scale from October 2013, may affect
larger families living in areas with high housing costs and disabled people with
additional living costs to pay. Many working-age benefits will be adjusted
below the projected inflation rate. The Welfare Benefits Up-rating Act provides
that such benefits will be increased by 1% per year in the period from 2013 to 2016.
Changes to the conditions for receiving in-work benefits mean that couples with
children have to work at least 24 hours a week between them (and one member of
the couple has to work at least 16 hours) to qualify for working tax credits.  
The
availability of affordable, high-quality, full-time childcare remains a key issue. Although
the supply of childcare has increased in recent years, its costs in the UK are high on an internationally comparable basis[35], and
children from disadvantaged backgrounds are the least able to use childcare
facilities. The availability of childcare is improving for pre-school children,
although there is still a need to make childcare easily accessible to the
disadvantaged as the current system involves restricted hours, part-payment or
retrospective funding. To the extent that the cost and availability of
childcare results in women taking involuntary part-time employment, there is a
risk that the declining trend in the gender pay gap is reversed and the gender
gap in pensions widens. The government has announced measures that include free
hours of childcare, vouchers and tax breaks. Under Universal Credit, the
government has pledged to increase childcare support for households where both
earners earn enough to pay income tax (i.e. GBP 833.33 per earner); these
households will be able to claim 85% of childcare costs. Eligibility is
dependent on savings, capital and household income, and is determined on a case-by-case
basis. Families that earn less will only receive the 70% level of support, up
to the monthly limits.[36] However,
intervention from the demand side rather than the supply side might increase
prices rather than availability. Moreover, the system remains complex as it
consists of several support arrangements, each with different rules.[37]

3.4.                
Structural measures
promoting sustainable growth and competitiveness 

While
the UK’s economy is dynamic and
relatively flexible overall, there is scope to boost competitiveness.[38] On
the external side, its export market share has persistently declined. This can
be partly attributed to the restructuring of industrial sectors and to increases
in unit labour cost in recent years. More specifically, wage costs have outstripped
productivity since 2008; labour productivity declined following the crisis and
has continued to stagnate since. Increases in infrastructure investment,
particularly energy and transport infrastructure, are likely to boost
productivity. The link between structural reform and growth is discussed in Box 3. Over the medium term, this is essential to sustain rises in household and corporate
incomes, and living standards.
In
2013, the United Kingdom received a CSR concerning infrastructure, and another
one dealing with the housing market.
The
  UK has made some progress on measures taken to address the 2013 CSR on
infrastructure. In December 2013, it published an updated national
infrastructure plan[39], a
long-term and strategic approach to the planning, funding, finance and delivery
of infrastructure. The plan is ambitious in its scale and scope and is a
welcome initiative to address challenges relating to infrastructure. The plan sets
out a 'pipeline' of capital investment to 2020 and beyond of GBP 375 billion
(EUR 460 billion) in total. A large proportion of the 'pipeline' (GBP
340 billion) comprises investment in the energy and transport sectors. Around
three-quarters of the funding is projected to be privately-sourced while the remainder
is foreseen to be publicly funded. Although the plan is a welcome initiative,
there are a number of concerns relating to funding and feasibility. First,
there are significant risks surrounding the private sector element of financing.
Greater detail is required on the sources of such funding and there is a risk
that a substantial amount of private sector funding required to deliver the
infrastructure investment may not materialise fully or within the required
time-frames. Secondly, there are risks related to the need for high levels of regulatory
certainty (especially in the energy sector) before large projects can proceed and
certainty relating to the operation of the planning system, in particular, the
need for developers to obtain timely planning permission (in this regard, the
government announced positive measures to reform the planning system as they
relate to judicial review, in February 2014[40]). Thirdly,
there is also a need for clarity in relation to investment for building new
infrastructure as distinct from that targeted at improving the quality of
infrastructure (i.e. existing infrastructure may have been insufficiently
maintained due to under-spending in the past and at least some of the
investment projected in the plan may be spending that was previously deferred).
Fourthly, there is a need for high levels of transparency and accountability, for
example the publication of clear and consistent data on previous and projected
expenditure on infrastructure, detail on the progress of delivery for
individual projects and the provision of funds, and amount spent, on each
project. Provision of regular reports is essential to enable effective
assessment and rigorous scrutiny of the flow of private finance and delivery of
individual projects detailed in the plan. In this respect, the government published
a useful methodological note on infrastructure spending following Budget 2014. 
 Box 5. Conclusions from the March 2014 In-depth Review of the United Kingdom The 2014 In-depth Review (IDR) for the UK is the third IDR conducted as part of the Macroeconomic Imbalances Procedure and was published on 5 March 2014. On the basis of this review, the Commission concluded that the United Kingdom continues to experience macroeconomic imbalances, which require monitoring and policy action. More specifically: ·         an imbalance exists in the housing market which, in the absence of policy action, is likely to persist and worsen. Demand for housing is increasing rapidly, outstripping the increase in supply. As a result, house prices and mortgage indebtedness are on the rise. Although moderately increasing, supply remains constrained. Demand is projected to continue to outstrip supply over the medium term; ·         export share continues to decline but this is unlikely to pose short-term risks. However, it points to structural challenges for exporters over the medium term; ·         the risks and challenges associated with high corporate indebtedness are low as corporate balance sheets are healthy although some SMEs report difficulties accessing finance. The IDR also discusses the possible policy response: ·         to address the imbalance between the supply and demand for housing, increasing supply by seeking solutions at the local level, reforming the planning system, providing greater detail and transparency in relation to macro-prudential regulation and updating the valuation of the property roll; ·         to support exporters, delivering improvements in skills and infrastructure investment, particularly in the transport and energy sectors, ·         to boost access to finance for SMEs, while corporate deleveraging should continue, continue the implementation of current policies. 
The emphasis on
investment in transport and energy infrastructure is considered appropriate. These
issues were identified in the 2014 In-depth Review, in the context of
addressing bottlenecks for exports. Plans for a new high-speed rail
route, 'High Speed 2', connecting London and Birmingham in its first phase and
then onwards to Manchester and Leeds in a second phase, are advancing and
should ease congestion, address future capacity constraints and help address
shortages of housing in London by facilitating easier access for commuters to
the capital. The plan does not, however, provide certainty on increasing
airport capacity in South East England, which is a long-standing and
increasingly urgent challenge. 
Recent
energy infrastructure reforms have lowered the market risk for most low-carbon
investments. In addition, they also address the political
uncertainty that has surrounded the regulatory framework for investment in new
energy capacity. The reforms include the adoption of the Energy Act and the
Electricity Market Reform although the details of the relevant implementing
legislation are still to be decided. These reforms could potentially have a
major impact on types of investment; they could promote investments, for
example, in renewables and new nuclear capacity but potentially diminish the
viability of investments in areas such as gas fired power plants. The
government is implementing measures to reduce the cost of energy and to provide
greater security of supply. However, there remains a need to clarify the role
of interconnection in terms of national infrastructure planning. In October
2013, the government announced the details of an agreement to build a new nuclear
reactor, Hinkley Point C.[41]
Construction of the plant should boost energy supply and security (it is
expected to produce 7% of the UK’s total energy needs by the time it is
completed in 2023). In relation to communications infrastructure, the UK is one of the leading countries in the EU regarding the rollout and take-up of
high-speed, fixed and wireless broadband communications. 
The
need for the UK to better leverage its world-leading science base into a more
innovation-intensive economy remains a key challenge. The
relatively low and decreasing level of business R&D intensity[42]
reflects this need. In its strategy for innovation, the government identified
four priority areas for policy development: strengthening the sharing and
dissemination of knowledge; fostering the development and use of a more
coherent innovation infrastructure; driving business innovation in all sectors
of the economy; and transforming the public sector into a major driver of
innovation. The choice of priorities is appropriate and in line with the
dimension of the challenge. 
Climate change and resource efficiency
The UK is currently on track to meet its Europe 2020 target for
greenhouse gas emissions not covered by the EU Emissions Trading Scheme (ETS).[43] The UK continued to develop measures
aimed at reducing emissions from both ETS and non-ETS sectors. Some challenges remain
relating to the Green Deal and Energy Companies Obligation, support to promote
low carbon heat and a rationalisation of policies aimed at enhancing energy
efficiency in the commercial and industrial sectors. A significant role is
played by emissions in the road transport sector, in particular emissions from passenger
cars. The government aims to reduce emissions from transport by supporting
ultra-low emission vehicles, the use of biofuels and the use of local transport
projects.
In Budget 2014, the government announced a cap to the Carbon
Support rate[44], at
GBP 18 from 2016-17 to 2019‑20, and that it would extend compensation to
energy-intensive industries for its cost and for the cost of the EU Emissions
Trading Scheme. The government also announced that it would introduce a new
compensation scheme to support energy-intensive industries with high
electricity costs resulting from the renewables obligation and small-scale feed
in tariffs for renewable generation from 2016-17.
The UK has made some progress towards meeting the 2020 renewable
energy targets, namely, a share of 15% in final energy consumption and a 10%
share in that of the transport sector. However,
as the targets become progressively more demanding towards the end of the
period 2005-2020, the timeframe to ensure the required investment is tight. Successfully
meeting the 15% target by 2020 thus remains uncertain.
The regulatory framework for renewable energy sources is becoming
more stable. The adoption of the Energy Act with its
Electricity Market Reform should help by providing clarity about rules for
developers and investors in renewable projects, projected funding from consumer
bills and support levels for the different technologies until 2019. Stabilising
the regulatory framework concerning renewable energy generation represents a
fundamental step in addressing uncertainties in the market, however, it
is important to ensure a smooth transition from the existing Renewable
Obligation (quota based) to the Contracts-for Difference (CfD) regime, which
relates to market prices. It is also difficult to ascertain, at this stage,
whether the new CfD regime will be sufficient to increase the amount of
electricity coming from renewables to 30% by 2020 in line with the UK plans to meet the overall renewable target.
The take-up of the Green Deal[45] has been disappointing. The
low conversion rate of assessments into plans to make use of Green Deal finance
has been attributed to the complexity of the system as well as the lack of
flexibility in the application of the 'golden rule' (i.e. the charge attached
to the bill should not exceed the expected savings). The government announced that
the Green Deal will undergo a series of changes in order to become simpler and to
provide stronger incentives. The design and implementation of such changes will
affect the emission reduction potential of the building sector.
The management and prevention of floods could be more cost efficient. One in six properties is at risk of
flooding from all types of floods across England and Wales. The latest climate
change projections imply an increase in the risk of floods.[46] Further support for flood defences was announced in the Budget
2014.
Operation
of the housing market 
The
  UK has made limited progress on measures to address the 2013 CSR on the
housing market. Demand for housing is rising rapidly. House
prices are rising strongly by around 9% on an annual basis[47] and
price rises are beginning to feed into a rise in household mortgage
indebtedness as demand for housing continues to outstrip supply. Housing policy
is contributing to demand. The Help to Buy 2 (loan guarantee) policy, for
existing or new properties , which aims to support households to obtain a loan
that they may not otherwise be able to obtain due to credit constraints, is
likely to boost demand relative to supply.[48] In
the absence of a strong supply response, the predominant impact of Help to Buy
2 is likely to increase house prices. At a time when credit constraints are
easing, the need for the Help to Buy 2 policy may diminish. In its Budget 2014,
the government announced that Help to Buy 1 (equity loan), applicable only for
new properties, would be extended to March 2020 which should further increase
demand and supply. The requirements of the FCA's Mortgage Market Review came
into operation in April 2014 and should help address risks associated with an
excessive easing of credit constraints through mandatory requirements for affordability
tests and interest rate stress tests prior to the granting of a mortgage[49].
Nevertheless, the authorities need to remain vigilant to the potentially
destabilising impact of rapid increases in housing market activity, house
prices and mortgage indebtedness. The
risks are particularly pronounced in certain regions, including London and the south east.[50]
Macro-prudential
regulation policy, which is the responsibility of the Financial Policy
Committee, can address concerns relating to the stability of the housing sector. The
FPC's determination of the trade-offs between the benefits, costs, risks and
unintended side effects associated with the options for macro-prudential
regulation in its tool kit could be developed further. A 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, would boost not only
transparency but also the effectiveness of the instruments at its disposal.
Supply
is increasing, although it remains low, and lags behind demand; shortages of
housing are likely to persist. A number of policies to stimulate
supply have been announced in 2013 and 2014 including measures to strengthen
the National Planning Framework to ensure that economic factors are at the
heart of the planning decisions. The reforms to the planning system are
appropriate and potentially far-reaching and should, in time, stimulate supply.
In order to encourage the release of more land for development, an appropriate
incentive structure for local authorities to increase and accelerate the
release of such land would help facilitate local and regional solutions to
increasing supply. In the 2014
Budget, the government announced a loan scheme to provide finance to spur
construction on sites held by small and medium-sized builders. Changes to the
taxation system, which include the extension of the Annual Tax on Enveloped
Dwellings (and the related capital gains tax charge) to properties with a value
of more than GBP 1 million from April 2015 and GBP 500 000 from April
2016, the related extension of SDLT at 15% to houses worth more than GBP 500 000
(EUR 615 000) from March 2014 when these properties are owned through
companies, changes to the council tax treatment of empty homes and the
introduction of Capital Gains Tax for non-residents disposing of UK property
from 2015, may also have some impact on the demand and supply balance. Supply
constraints are likely to be especially marked in certain regions, particularly
  London. In March 2014, the government announced further measures to boost
supply near London, including support for a new garden city at Ebbsfleet to
provide capacity for up to 15 000 new homes.
Scope
to mitigate distortions in the taxation of property[51]
should be considered, in particular, an updating of the cadastre (the 'property
valuation roll') could reduce distortions in the property taxation system. The
cadastre, the basis for the assessment of council tax, has not been updated
since 1991.[52] A
revaluation could correct distortions resulting from property value
developments in the intervening decades. The UK is one of more than one-third of
EU Member States that levies property taxes on outdated cadastral values.[53] Use
of an outdated property value roll may lead to distortions in property taxation
between, and within, regions and a bias in the tax system towards
over-investment in property. The degree of regression in the tax system may
also increase. Moreover, regular revaluation of the roll would smooth property
tax increases rather than result in a sudden increase in the annual council tax
liabilities if only irregular updates are carried out. In addition,
progressivity in rates and the number of bands could be re-evaluated as
properties in the lower valuation bands pay proportionally more tax relative to
properties in higher valuation bands. Furthermore, undeveloped land with
planning permission is currently taxed on sale or transfer. Therefore, there is
an incentive, for owners to hold on to land for speculation rather than for
timely residential construction. 
In
relation to the rental market, greater security in rental agreements could be
beneficial for tenants that seek it. The private
rented sector in the UK is relatively unregulated compared to that in some other
EU Member States. The rights of tenants and responsibilities of landlords are
relatively limited. While some tenants and landlords may prefer short-term
tenancy arrangements, other tenants might prefer greater stability in the form
of longer-term tenancy arrangements that landlords may be unwilling to provide.
The development of a model tenancy agreement to help tenants and landlords
understand their rights and obligations could have provided greater impetus
towards encouraging long-term tenancies. 

3.5.                
Modernisation of public administration 

In
2013, the UK did not receive a CSR on the modernisation of public
administration.
The
  UK performs very well in surveys of the quality, efficiency and effectiveness
of government. For most key measures of government effectiveness
as measured by the European Commission (government effectiveness; tools for
public administration; absence of corruption and fraud; ease of obtaining
business starts and licences; public procurement; tax compliance and
administration and the efficiency of civil justice), the UK is at or above the
EU average.[54]
Moreover, at 5.6% of GDP in 2010, spending on 'core administration' (excluding
defence) is the second lowest of all EU Member States. The government publishes
six-monthly progress updates on deregulation through its 'Red Tape Challenge'.[55] Along
with the one-in-two-out rule, which aims to reduce the regulatory burden, in
June 2013 the government announced a small and micro business assessment (SMBA)
which aims to reduce disproportionate burdens of regulation on smaller
businesses.[56]
This is an extension and an increase in scope of a previous moratorium that
exempted microbusinesses from burdensome new regulations. The SMBA will apply
to new regulations that come into force after 31 March 2014. Such policies operate
positively to keep the regulatory burden low.
An
area of concern is the capacity of governance at the sub-regional level. In
2010, thirty-nine Local Enterprise Partnerships (LEPs) were established at the
sub-national governance level in England following the abolition of the
Regional Development Agencies. Although these newly created bodies are still gaining
experience and building capacity, there remain risks to delivery of policy,
including EU policy, at the sub-regional level. For example, the effective and
efficient use of 2014-20 European Structural and Investment Funds (ESIF
programmes) could be adversely affected. Moreover, the process of designing a
Smart Specialisation Strategy, under which priorities for the use of ESIF and
other funds are set out, could be affected.

4.        
Conclusions 

Economic
growth is becoming firmly established, driven by increases in private
consumption, and is projected to broaden as investment rises although the
contribution of the external sector to growth is expected to remain subdued. Employment
growth has been healthy and is expected to remain so. Productivity growth is
expected to pick up although it currently remains below its 2008 level. The
strong macroeconomic outlook in 2014 and 2015 needs to be secured over the
medium term through effective policies to address long-standing structural
challenges. In particular, increased investment in infrastructure and education
should support and secure growth over the medium term. A shortage of housing
has been a structural phenomenon afflicting the UK as rapid rises in demand
result in high house price rises. Policies to boost supply can secure
medium-term growth by mitigating the risk that rises in demand result in
potentially destabilising and rapid house price rises, and increases in
mortgage indebtedness. Policies are in place to boost the supply of finance to
corporates, especially small and medium-sized enterprises, thus assisting the
ability of corporates to expand and invest and contribute to growth. All of
these issues were addressed in the 2013 country-specific recommendations.
The
analysis in this staff working document leads to the conclusion that the UK has made some progress in addressing the 2013 country-specific recommendations. In
some areas, policies have been announced and/or are being implemented, but further
time is required before the effectiveness of these policies can be assessed. The
need for both increased infrastructure investment and increased housing supply
is likely to continue over the medium term. Similarly, on labour market policy
and welfare policy, while labour market outcomes at the macroeconomic level are
highly positive, policy is yet to take full effect on the quality of youth labour
force participation and further action is required on childcare provision. The national
reform programme and convergence programme set out details of policies that
address most of the 2013 CSRs and Europe 2020 priorities but some policies have
yet to take full effect and implementation can be subject to risk. 
Challenges
identified in July 2013 and reiterated in the Annual Growth Survey remain
valid. Limited
progress has been made in the area of housing. While action has been taken to
fine-tune the National Policy Planning Framework, the supply of houses,
although rising, remains low and well below demand, although a further period
of time is required for the policies that have been announced and/or are being
implemented to take full effect. There has been limited progress in reforming
land and property taxation. Some progress has been made in the areas of
employment and the labour market, welfare and infrastructure investment. There
has been substantial progress in policies to strengthen the financial sector,
for instance, the increase in capital ratios in the banking sector is almost complete.
The government has introduced the National Infrastructure Plan 2013, which sets
out an ambitious scale and scope for infrastructure investment to 2020 and
beyond although further action is required to increase the clarity of some elements
of the plan and ensure that mechanisms are in place to ensure effective
delivery and scrutiny of the plan. 

Overview table[57]
 
 2013 commitments || Summary assessment 
 Country-specific recommendations (CSRs) 
 CSR 1: Implement a reinforced budgetary strategy, supported by sufficiently specified measures, for the year 2013-14 and beyond. Ensure the correction of the excessive deficit in a sustainable manner by 2014/15, and the achievement of the fiscal effort specified in the Council recommendations under the EDP and set the high public debt ratio on a sustained downward path. A durable correction of the fiscal imbalances requires the credible implementation of ambitious structural reforms which would increase the adjustment capacity and boost potential growth. Pursue a differentiated, growth-friendly approach to fiscal tightening, including through prioritising timely capital expenditure with high economic returns and through a balanced approach to the composition of consolidation measures and promoting medium and long-term fiscal sustainability. In order to raise revenue, make greater use of the standard rate of VAT. || The UK has made limited progress in addressing CSR 1: ·         some progress in implementing a reinforced budgetary strategy; ·         some progress in ensuring the correction of the excessive deficit; The deficit is continuing to fall and the fiscal consolidation plans are continuing but the EDP deadline will not be reached; ·         some progress in the implementation of structural reforms; According to the OBR, the UK's debt rate will peak in 2015-16 and decline thereafter; COM's forecast does not go beyond 2015-16. The government has proposed a permanent welfare cap to curtail spending; ·         some progress in growth-friendly approach to fiscal tightening; The government have shifted focus from current to capital spending; ·         no progress in making greater use of the standard rate of VAT. The government has announced tax avoidance measures. 
 CSR 2: Take further action to increase housing supply, including through further liberalisation of spatial planning laws and an efficient operation of the planning system. Ensure that housing policy, including the Help to Buy scheme does not encourage excessive and imprudent mortgage lending; and promote greater supply to avoid higher house prices. Pursue reforms including to land and property taxation to reduce distortions and promote timely residential construction. Take steps to improve the functioning of rental markets, in particular by making longer rental terms more attractive to both tenants and landlords. || The UK has made limited progress in addressing CSR 2: ·         some progress in increasing housing supply – completions have increased and policies introduced to fine-tune the planning system but more time is needed for them to take full effect; ·         some progress in relation to policies that constrain excessive demand – the FLS was removed for lending to households and safeguards built into the Help to Buy 2 policy but the thrust of the policy is unchanged; ·         limited progress in reforming land and property taxation; ·         limited progress in affecting the operation of rental markets and longer-term tenancies. 
 CSR 3: Building on the Youth Contract, step up measures to address youth unemployment, for example through a Youth Guarantee. Increase the quality and duration of apprenticeships, simplify the system of qualifications and strengthen the engagement of employers, particularly in the provision of advanced and intermediate technical skills. Reduce the number of young people aged 18-24 who have very poor basic skills, including through effectively implementing the Traineeships programme. || The UK has made some progress in addressing CSR: ·         some progress on apprenticeships, simplifying the qualifications and engaging employers. Provided effective implementation, a number of measures taken may increase the impact of the Youth Contract on the labour market; ·         some progress in the implementation of the traineeship program; however, it is too early to assess its impact. 
 CSR 4: Enhance efforts to support low-income households and reduce child poverty by ensuring that the Universal Credit and other welfare reforms deliver a fair tax-benefit system with clearer work incentives and support services. Accelerate the implementation of planned measures to reduce the costs of childcare and improve its quality and availability. || The UK has made some progress in addressing CSR 4: ·         some progress in supporting low-income households, reducing child poverty and the introduction of Universal Credit. The number of people in sustainable job as a result of the Work Programme is still low. Poverty, particularly in work-poverty is likely to increase; ·         some progress in supporting childcare, which still remains expensive (particularly full-time) and of variable quality. There is a need to continue implementation of planned measures to improve the quality and availability of childcare as well as its affordability. 
 CSR 5: Take further steps to improve the availability of bank and non-bank financing to the corporate sector, while ensuring that the measures primarily target viable companies, especially SMEs. Reduce barriers to entry in the banking sector, lower switching costs and facilitate the emergence of challenger banks through a divestiture of banking assets. Effectively implement the Financial Policy Committee’s recommendations on prudent assessment of bank capital requirements and on addressing identified capital shortfalls. || The UK has made substantial progress in addressing CSR 5: ·         substantial progress in facilitating an improved supply of finance to the corporate sector through the establishment of the Business Bank, and fine-tuning the FLS, although bank credit continues to decline; ·         substantial progress in relation to boosting competition in the banking sector – TSB was set up as a new bank (although not yet fully independent) through divestiture of bank assets from Lloyds and reforms have been made to reduce switching costs. However, there is not a significant presence of challenger banks; ·         implementation of the Financial Policy Committee's recommendations has been fully addressed. 
 CSR 6: Take measures to facilitate a timely increase in network infrastructure investment, especially by promoting more efficient and robust planning and decision-making processes. Provide a stable regulatory framework for investment in new energy capacity, including in renewable energy. -Improve the capacity and quality of transport networks by providing greater predictability and certainty on planning and funding and by harnessing the most effective mix of public and private capital sources.   || The UK has made some progress in addressing CSR 6: ·         some progress in strengthening the planning framework – although the measures have been announced they have yet to be implemented; ·         some progress in relation to regulatory stability for energy capacity – the Energy Act 2013 received royal assent – and detailed funding streams and proposals have been set out in the National Infrastructure Plan although implementation is partial to date; ·         some progress in relation to the quality and quantity of transport networks – a major new rail network (Crossrail) is underway and the National Infrastructure Plan sets out considerable detail on funding new projects although implementation is partial to date. 
 Europe 2020 (national targets and progress) 
 Employment rate target: No target set in NRP || 74.9% of the population aged 20-64 was employed in 2013 (an increase from 74.2% in 2012). The UK employment rate is now marginally below the Europe 2020 target of 75%. In 2013, private sector employment grew sufficiently to offset reductions in public sector employment and the growth of the workforce. To raise employment in the longer term, the UK also faces challenges to increase employability of young people not in education, employment or training (NEET) by reintegrating them into the education system or the labour market thus raising their skills level, work incentives and parental employment, to improve access to high quality, affordable childcare. 
 Early school leaving target: No target in NRP || Early school leaving rate: 14.9% in 2010; 15.0% in 2011; 13.5% in 2012 and 12.4% in 2013. The early school leaving rate is falling but remains slightly above the EU average (11.9% in 2013). Raising the age of compulsory participation in education or training from 16 to 18 in 2015 should have a significant effect on reducing early school leaving. 
 Tertiary education target: No target in NRP || Tertiary attainment rate: 43.0% in 2010; 45.8% in 2011; 47.1% in 2012 and 47.6% in 2013. The UK tertiary attainment rate has increased significantly from 29% in 2000, and is well above the EU average (36.6% in 2013). 
 Target on the reduction of population at risk of poverty or social exclusion in number of persons: Existing numerical targets in the 2010 Child Poverty Act and Child Poverty Strategy 2011-14 || The at-risk of poverty rate remained with 16.2% unchanged between 2011 and 2012[58]. The percentage of the population at risk of poverty or social exclusion increased from 22.7% in 2011 to 24.1% in 2012[59], slightly below the EU-28 average of 24.8%, driven mainly by the increase between 2011-2012 of severe material deprivation (from 5.1% to 7.8%) and the share of people in low work intensity households (from 11.5% to 13.0%). Planned real terms reductions in some working age welfare benefits are likely to increase in-work-poverty rates. 
 R&D target: No target set in NRP. || 1.86% (2009), 1.77% (2010), 1.77% (2011), 1.72% (2012) The share of R&D spending in UK GDP is below the EU average of 2.06%. It has averaged around 1.8% over the past decade. The trend since 2000 shows an initial fall, a mild recovery from 2005 (peaking in 2009), and a recent decline. 
 2020 Greenhouse gas emissions target: -16% (compared to 2005 emissions in non-ETS sectors) || Change in non-ETS greenhouse gas emissions between 2005 and 2012: -8.6%. According to the latest national projections and taking into account existing measures, the target is expected to be achieved: -19% in 2020 compared to 2005 (with a margin of 3 percentage points). 
 2020 Renewable energy target: 15% 2020 renewable energy target in transport: 10% || RES share in 2012: 4.2% RES share in transport in 2012: 3.7% The UK has made some progress towards meeting the 2020 renewable energy target, however the pathway gets more demanding towards 2020, and therefore success is not assured. 
 Energy Efficiency target: 129.2 Mtoe (final energy consumption on a net calorific value basis) By 2020: level of 177.6 Mtoe primary consumption and 157.8 Mtoe final energy consumption || The United Kingdom notified the policy measures it plans to adopt to implement Article 7 of the Energy Efficiency Directive Energy efficiency policy in the UK is integrated within the wider climate change policy. The UK is making good progress towards reaching its targets. 

Annex

Standard
Tables
Table I.
Macro-economic indicators
Table
II. Comparison of macroeconomic developments and forecasts
Table
III. Composition of the budgetary adjustment
Table
IV. Debt dynamics
Table V. Sustainability indicators
Table
VI. Taxation indicators
Table
VII. Financial market indicators
Table
VIII. Labour market and social indicators
Table
IX. Product market performance and policy indicators
Table X. Green Growth
List
of indicators used in Box 3 on the potential impact on growth of structural
reforms
Final goods sector mark-ups: price
cost margin, i.e. the difference between the selling price of a good or service
and its cost. Final goods mark-ups are proxied by the mark-ups in selected
services sectors (transport and storage, post and telecommunications,
electricity, gas and water supply, hotels and restaurants and financial
intermediation but excluding real estate and renting of machinery and equipment
and other business activities[60]).

Source: Commission services estimation
using the methodology of Roeger (1995) based on EUKLEMS 1996-2007 data. 
Entry costs: cost of
starting a business in the intermediate sector. The intermediate sector is
proxied by the manufacturing sector in the model. 
Source: starting business costs in % of
income per capita, 2012 data. Doing Business Database. www.doingbusiness.org 
Implicit consumption tax rate:
defined as total taxes on consumption over the value of private consumption. In
the simulations it is used as a proxy for shifting taxation away from labour to
indirect taxes; the implicit consumption tax-rates are increased (halving the
gap vis-à-vis the best performers) while labour tax-rates are reduced, so that
the combined impact is ex-ante budget-neutral.
Source: European Commission, Taxation
trends in the European Union, 2013 edition, Luxembourg, 2013, 2011 data.            
Shares of high-skilled and low-skilled:
share of high skilled workers are increased, share of low-skilled workers are
reduced (halving the gap vis-à-vis the best performers). Skill definitions:
Low-skilled correspond to ISCED 0-2 categories, high-skilled correspond to
scientists (in mathematics and computing, engineering, manufacturing and
construction). The remainder is medium-skilled. 
Source: 2012 data or latest available,
EUROSTAT. 
Female non-participation rate: percentage
of female that do not work/search for a job (non-active female
population/female of a working age)
Source:
2012 data or latest available, EUROSTAT.
Low-skilled male non-participation
rates: percentage
of low-skilled male that do not work/search for a job (non-active low-skilled
male population/ male of a working age)
Source:
2012 data or latest available, EUROSTAT.
Elderly non-participation rates (55-64 years):
it
is the percentage of the elderly population (55-64 years) that do not
work/search for a job (non-active elderly population/55-64-year-old population)
Source:
2012 data or latest available, EUROSTAT.
ALMP: Active Labour
Market Policy expenditures in % GDP over the share of unemployed in the
population. 
Source:
2011 or latest available data. EUROSTAT   
Benefit replacement rate: % of
a worker's pre-unemployment income that is paid out by the unemployment scheme.

Source: average of net replacement rates
over 60 months of unemployment, 2012 data, OECD, Benefits and Wages Statistics.
www.oecd.org/els/benefitsandwagesstatistics.htm.
[1] COM(2013) 800 final
[2] COM(2013) 790 final
[3] Aside from the 16 Member States identified
in the AMR, Ireland was also covered by an in-depth review, following the
conclusion by the Council that it should be fully integrated into the normal
surveillance framework after the successful completion of its financial
assistance programme.
[4] European Economic Forecast, Spring 2014, European Economy 3/2014
and 2013-14 Convergence Programme for the United Kingdom, HM Treasury 
[5] Cyclically-adjusted balance net of one-off
and temporary measures, recalculated by the Commission services on the basis of
the information provided in the programme, using the commonly agreed
methodology.
[6] Debt Management Office (February 2014), Quarterly Review
[7] Methodology based on Fiscal Sustainability Report 2012; government
date ratio in financial years corresponds to 90.6% in 2013 and 92.7% in 2015 on
a calendar year basis.
[8] “Spending Reviews” give details for multiple years; the “Spending
Round” is for one year only.
[9] See page 36 of the Study to quantify and analyse the VAT Gap in the
EU-27 Member States http://ec.europa.eu/taxation_customs/resources/documents/common/publications/studies/vat-gap.pdf

[10] Tax expenditures are deviations from a benchmark tax system where
no allowances, exemptions, reduced rates, deferrals or tax credits exist. These
tax reliefs, which reduce the taxpayer's obligations and represent a transfer
of public resources through the taxation system, may reduce its efficiency and
entail distortions.
[11] https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/253142/table1-5.pdf

[12] Zero-rates and reduced rates are often not the most suitable
instrument for ensuring redistribution to poor households and they translate
into significant subsidies to higher rate taxpayers. If VAT base broadening was
to be undertaken it may need to be accompanied by a compensation payment to
disadvantaged groups e.g. the poor, families with children, the elderly,
students etc, as argued in the Mirlees Review.
[13] OECD (2010a), Tax expenditures in OECD Countries, Paris. 
[14] http://www.hmrc.gov.uk/statistics/expenditures/table1-5.pdf
[15] http://www.ifs.org.uk/bns/bn112.pdf
[16] Final goods sector
mark-ups are the difference between the selling price of a good/service and its
cost. Entry cost refers to the cost of starting a business in the intermediate
sector. The implicit consumption tax rate is a proxy for shifting taxation away
from labour to indirect taxes. The benefit replacement rate is the % of a worker's pre-unemployment income that is
paid out by the unemployment scheme. For a detailed explanation of indicators
see Annex.
[17] Note that the UK will not be a participant in EU Banking Union
including the Single Supervisory Mechanism and the Single Resolution Mechanism.
[18] Despite its name, the Business Bank is not a bank in the
conventional sense of the term 'bank' (i.e. a privately-owned deposit taking
institution). Rather, the Business Bank is a government-backed 'bank' that
supports economic development by making targeted loans to selected corporates.
The bank will deploy capital to address gaps in the provision of finance for
SMEs. It has been provided with GBP 1 billion of new capital which will be
levered up through the involvement of the private sector. In addition, a number
of existing schemes to support access to finance (a total value of GBP 2.9
billion) of both a debt and equity nature will be rolled into the bank.
[19] For further details, see the 2014 Joint Employment Report, COM(2013)801,
which includes a scoreboard of key employment and social indicators.
[20] Youth unemployment was at 20.5% in 2013 according to the Eurostat
measure (age 15-24) and 19% in the
three months to March 2014 according to the UK measure, which is based on a
different age band (16-24) and has a different in classification of people who
are not seeking work because they have already found a job which they are due
to start in the future. The NEET rate (not in education, employment,
or training) was 13.3% in 2013 according to the Eurostat measure (age 15-24)
and 13.5% in the three months to March 2014 according to
the ONS measure (age 16-24).
[21] Eurostat. Lifelong learning refers to persons aged 25 to 64 who
stated that they received education or training in the four weeks preceding the
survey
[22] Eurostat. Share of persons aged 0-17 who are living in households
where no-one works. ONS data for end of 2013, based on a 0-16 age band, confirm
the decreasing trend.
[23] 38% of persons aged 16-64 with disabilities were at risk of poverty
or social exclusion, according to 2011 EU-SILC data.
[24] The severe material deprivation rate rose from 2008 to 2012
according to the latest available data from Eurostat. However, it is subject to
break in the series in 2012. 
[25] In-work poverty (of the working age population 18-64) has risen
from a low of 6.3% in 2009 to 7.8% in 2011 (8.8% in 2012 but subject to break
in series).
[26] House of Commons Library, Apprenticeship statistics, 10 February
2014.
[27] The Autumn Statement 2013 announced that the new funding mechanism
should be in place by 2016.
[28] The three levels of apprenticeships in England are Higher, Advanced
and Intermediate.
[29] The current system has over 19 000 regulated vocational
qualifications available through 176 awarding organisations, out of which 1 780
qualifications account for over 90% of achievement.
[30] https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/286749/bis-14-577-vocational-qualification-reform-plan.pdf
[31] GBP 488
per eligible pupil was allocated in 2011-12, rising to GBP 623 in
2012-13. In 2013-14, the sums are GBP 900 per
eligible pupil in secondary education and GBP 953 in primary
school. Budget 2014 announced in addition the Early Years Pupil Premium which will provide nurseries, schools and other providers
of government funded early education with extra money for disadvantaged 3 and 4
year olds.
[32] Department
of Education (July 2013), Evaluation of Pupil Premium: Research Report, at https://www.gov.uk/government/publications/evaluation-of-pupil-premium
[33] The UK presented a plan entitled "Youth Guarantee
Implementation Plans: The UK Response" in March 2013.
[34] Pursuant to the Council
Recommendation of 22 April 2013 on establishing a Youth Guarantee (2013/C
120/01): "ensure that all young people under the age of 25 years receive a
good-quality offer of employment, continued education, an apprenticeship or a
traineeship within a period of four months of becoming unemployed or leaving
formal education".
[35] See, for example, European Commission Report: "Barcelona
Objectives: the development of childcare facilities for young children in Europe" (2013), p. 13.
[36] Analysis by the Joseph Rowntree Foundation (2013) indicates that
around 60% of households would not be eligible for reimbursement of childcare
costs because not all adults in the household earn enough to pay tax.
[37] Institute for Fiscal Studies (2014), State support for early
childhood education and care in England.
[38] A discussion of recent developments in competitiveness can be found
in the In-Depth Review 2014
[39] HM Treasury (2013). The updated plan follows the first National
Infrastructure Plan, published in 2010 and subsequent updates in 2011 and 2012.
The government announced an updated approach to building public infrastructure
through the Private Finance Initiative ('Private Finance Initiative 2') in
December 2012 (HM Treasury (2012)). In addition, Scotland and Wales have published infrastructure plans.
[40] Ministry of Justice, Written Ministerial Statement, Judicial
Review, February 2012
[41] The Commission is currently examining the compatibility of the
support which the UK government is providing to this project and has State aid
procedures laid down in Article 108(2) of the Treaty on the Functioning of the
European Union (C(2013) 9073 final).
[42] R&D intensity decreased from 1.16% in 2001 to 1.09% in 2012. The
EU average is 1.30%.
[43] In 2012 emissions increased slightly compared to the previous year,
turning into a reduction of 8.6% from 2005 levels, just above the interim 2013
target of 8% set by the Effort Sharing Decision. Projections based on existing
measures indicate that emissions from non-ETS sectors will be 19% below 2005
levels by 2020, over-achieving the 16% target under Europe 2020. See EEA, 15
January 2014 MS' submissions to Commission and EEA, MS' GHG projections
submissions under Art. 3(2) of the EU MMD (19/03/2013).
[44] The Carbon Support rate is the amount levied by the UK on fossil fuels used for electricity generation above the EU ETS emissions price. This
measure has been introduced in 2013 with the aim of providing further
incentives for investments in low-carbon electricity generation, however, it is
not expected to help achieve the national greenhouse gas emissions target under
Europe 2020, which refers to emissions from non-ETS sectors, nor to help achieving
additional emission reductions in the EU ETS, since emissions from ETS-sectors
are determined by the cap at EU level.
[45] The Green Deal is a market mechanism, operational from January 2013,
that allows energy efficiency measures to be financed through energy bill
savings. The energy efficiency of buildings is also addressed by the Building
Regulation.
[46] Between 2002 and 2013, there were flood damages of about EUR 23
billion (approximately GBP 19 billion). An illustration of the inefficiency is
provided by a study showing that investments in flood prevention could return
benefits 6-8 times the cost. See Study on Economic and Social Benefits of
Environmental Protection and Resource Efficiency Related to the European
Semester, 2014.
[47] According to the Office for National Statistics, house prices
increased in the UK by 8.0% in the year to March 2014 and by 17% in London.
[48] Help to Buy 2, which came into effect in October 2013, enables
households to purchase a property of up to GBP 600 000 (EUR 737 000) in value
with a 5% deposit and with the government guaranteeing 5-15% of the loan. Further
details can be found in the 2014 In-depth Review.
[49] It is noteworthy that, on 20 May 2014, one of the largest mortgage
lenders, Lloyds Banking Group, announced that it would limit mortgage lending
to a multiple of four times income for loans of more than £500,000.
[50] London and the south east account for a little more than one-third
of total UK output.
[51]Property taxation as a proportion of GDP at 4.1% in 2012, of which
3.4% is recurrent. 
[52] However, the cadastre was updated in Wales in 2003.
[53] See European Commission (2013) Tax Reforms in
EU Member States 2013, European Economy 5/2013.
[54] See, for example, European Commission (2013) Excellence in public
administration for competitiveness in EU Member States, or the World Bank's
(2014) Ease of doing business index (the UK ranks 10th of 189
countries).
[55] It estimates that total annual savings to business were GBP 1.19
billion between January 2011 and December 2013. See UK government Red Tape
Challenge http://www.redtapechallenge.cabinetoffice.gov.uk/home/index/
[56] Seventh Statement of New Regulation, December 2013, Department for
Business, Innovation and Skills.
[57] The following categories are used to assess progress in
implementing the 2013 country-specific recommendations: No progress: The
Member State has neither announced nor adopted any measures to address the CSR.
This category also applies if a Member State has commissioned a study group to
evaluate possible measures. Limited progress: The Member State has announced some measures to address the CSR, but these measures appear insufficient
and/or their adoption/implementation is at risk. Some progress: The Member State has announced or adopted measures to address the CSR. These measures are
promising, but not all of them have been implemented yet and implementation is
not certain in all cases. Substantial progress: The Member State has adopted measures, most of which have been implemented. These measures go a
long way in addressing the CSR. Fully addressed: The Member State has adopted and implemented measures that address the CSR appropriately
[58] Eurostat, at-risk of poverty rate.
[59] Break in time series. Eurostat estimations for 2012,
published December 2013. 
[60] The real estate sector is excluded because of statistical
difficulties of estimating a mark-up in this sector. The sector renting of
machinery and equipment and other business activities is conceptually part of
intermediate goods sector.