COMMISSION STAFF WORKING DOCUMENT Country Report United Kingdom 2017 Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP 2017 European Semester: Assessment of progress on structural reforms, prevention and correction of macroeconomic imbalances, and results of in-depth reviews under Regulation (EU) No 1176/2011 {COM(2017) 90 final} {SWD(2017) 67 final to SWD(2017) 93 final}
Date: 2017-02-22
Institutions: European Commission, Secretariat-General
Subjects: EU employment policy, EU investment, United Kingdom, economic development, economic recovery, euro area, fiscal policy, macroeconomics, multilateral surveillance, structural adjustment

EN 

   EN 

   EUROPEAN COMMISSION  Brussels, 22.2.2017  SWD(2017) 93 final   COMMISSION STAFF WORKING DOCUMENT Country Report United Kingdom 2017 Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP  2017 European Semester: Assessment of progress on structural reforms,  prevention and correction of macroeconomic imbalances, and results of in-depth reviews under Regulation (EU) No 1176/2011  {COM(2017) 90 final} {SWD(2017) 67 final to SWD(2017) 93 final}  
 
 
CONTENTS 

Executive summary 

1. 

Economic situation and outlook 

2. 

Progress with country-specific recommendations 

3. 

Reform priorities 

3.1.  Public finances and taxation 

3.2. 

Financial sector and housing 

3.3.  External issues 

3.4. 

Labour market, education and social policies 

3.5. 

Investment and productivity 

3.6. 

Sectoral policies 

A.  Overview Table 

B.  MIP Scoreboard 

C. 

Standard Tables 

References 

LIST OF TABLES 

1.1. 

2.1. 

Key economic, financial & social indicators 

Assessment of progress with 2016 CSRs 

3.1.1.  Composition of tax revenues, 2015-2016 

B.1. 

The MIP scoreboard 

C.1. 

Financial market indicators 

C.2. 

Labour market & social indicators — I 

C.3. 

Labour market & social indicators — II 

C.4. 

Product market performance & policy indicators 

C.5.  Green growth 

LIST OF GRAPHS 

1.1. 

1.2. 

1.3. 

Contributions to real GDP growth 

Contribution to growth of net exports & growth in exports and imports 

Private consumption, real household disposable income & the household saving ratio 

1 

3 

10 

13 

13 

16 

22 

24 

31 

35 

41 

44 

45 

50 

9 

11 

13 

44 

45 

46 

47 

48 

49 

3 

3 

4 

 
 
 
 
1.4. 

1.5. 

1.6. 

1.7. 

1.8. 

1.9. 

Gross fixed capital formation by component 

Potential growth & its composition 

Inflation 

Nominal effective exchange rate 

Unemployment-vacancies ratio & the labour force participation rate 

Composition of the trade balance in goods by trading partner 

1.10.  Composition of the trade balance in services by trading partner 

1.11.  Nominal unit labour costs (all sectors) 

1.12. 

Private sector indebtedness 

1.13.  Households’ financial assets & liabilities 2015 

3.1.1.  Debt projections based on probability 

3.1.2.  Gross public debt as a % of GDP 

3.2.1.  Financial services exports & imports (% GDP) 

3.2.2.  Exports of services: revealed comparative advantage 

3.2.3.  Bank capitalisation: core equity Tier 1 ratio – Q3 2016 

3.2.4.  Gross non-performing debt instruments (per cent of total, Q3 2016) 

3.2.5.  House price growth 

3.2.6.  Housing transactions & mortgage approvals 

3.2.7.  Housing starts & completions 

3.2.8.  Skills shortages in the construction sector 

3.3.1.  Current account balance and its components 

3.3.2.  Primary income balance and its components 

3.3.3.  Net international investment position 

3.4.1.  Key labour market indicators 

3.4.2.  Unemployment rate & potential additional labour force 

3.4.3.  At-risk-of-poverty rate and its components 

3.4.4.  Risk of poverty (AROPE) by age 

3.5.1.  Public & private investment shares, UK & EU28 

3.5.2.  UK public sector net investment (% of GDP) 

3.5.3. 

Investment by category in the UK & EU28 

3.5.4.  Output per hour, by country 

3.5.5.  Recent trends in UK productivity & real wages 

3.6.1.  Generation capacity (winter 2016/17) 

LIST OF BOXES 

2.1. 

Contribution of the EU budget to structural change in the United Kingdom 

3.5.1. 

Investment challenges and reforms in the United Kingdom 

4 

4 

5 

5 

5 

6 

7 

7 

8 

8 

14 

14 

16 

16 

17 

17 

18 

18 

19 

20 

22 

22 

23 

24 

24 

27 

28 

31 

31 

32 

32 

33 

38 

12 

34 

 
 
 
 
EXECUTIVE SUMMARY 

in 

the 

light  of 

the  survey, 

report  assesses 

the  United  Kingdom’s 
This 
economy 
the  European 
Commission’s  Annual  Growth  Survey  published 
the 
on  16  November  2016.  In 
Commission  calls  on  EU  Member  States  to 
redouble their efforts on the three elements of the 
virtuous  triangle  of  economic  policy  —  boosting 
reforms  and 
investment,  pursuing  structural 
ensuring  responsible  fiscal  policies.  In  so  doing, 
Member  States  should  focus  on  enhancing  social 
fairness, to deliver more inclusive growth. 

Economic  growth  remained  robust  in  2016  but 
is  expected  to  be  weaker  in  2017  and  2018.  In 
recent years growth has been driven by expanding 
domestic demand and employment, in a context of 
subdued  price  and  wage  pressures.  At  the  same 
time, net exports have persistently been weak and 
productivity remained stagnant. Following the vote 
to  leave  the  EU  in  the  referendum  on  23 June 
2016,  growth  is  projected  to  be  lower  in  2017 
(1.5%) and 2018 (1.2%) due to a subdued business 
investment  and 
in  private 
consumption. However, net exports are expected to 
contribute  positively  to  growth,  mitigating  the 
weakness in domestic demand. 

slower  growth 

Inflation rose steadily in 2016 and is expected to 
exceed  the  Bank  of  England’s  target  of  2 %  in 
2017  and  2018.  The  significant  depreciation  of 
sterling in 2016 raises the price of imports, which 
will  gradually  feed  through  to  higher  producer 
prices and consumer price inflation. 

The  labour  market  is  strong  but  there  is 
untapped  potential.  Employment  continues  to 
grow  and  unemployment  remains  low,  although 
the  headline  picture  masks  challenges  for  some 
groups.  A  stagnation  of  real  wages  is  expected  to 
limit the rise in unemployment due to slower GDP 
growth. 

The  trade  balance  remains  in  modest  deficit. 
The  United  Kingdom  continues  to  run  a  large  
deficit  in  goods  trade,  partially  offset  by  a 
substantial surplus in services. In 2016, the current 
account  deficit  reached  a  record  high  due  to  the 
substantial deficit in primary income flows. Recent 
developments  in  the  United  Kingdom’s  export 
market  share  have  been  positive.  Following  the 
depreciation of sterling, the current account deficit 
is  projected  to  narrow  as  the  result  of  a  boost  to 
exports and dampening of imports. 

1 

Private  sector  indebtedness  remains  relatively 
high  and  credit  growth  has  picked  up. 
Following  years  of  weakness  during 
the 
international  economic  and  financial  crisis,  the 
banking sector is returning to health. Bank lending 
to  private  non-financial  corporations  has  picked 
up.  The  cost  of  secured  borrowing  remains  at 
historic lows and fell further in 2016. House price 
growth has continued to exceed the modest growth 
in  both  secured  credit  and  household  disposable 
income.  Unsecured  lending  growth  accelerated  in 
2016.  Household  balance  sheets  remain  strong 
overall but there are some pockets of risky lending. 

of 

economic 

supportive 

towards 
it 

infrastructure  and  housing 

Overall,  the  United  Kingdom  has  made  some 
progress in addressing the 2016 country-specific 
recommendations. There has been some progress 
on 
investment.  A 
number  of  major  transport  and  energy  investment 
decisions  were  made  in  2016  and  the  government 
announced a further prioritisation of public capital 
spending 
infrastructure. 
However, 
is  not  clear  whether  adequate 
investment can be secured to address infrastructure 
backlogs  in  a  timely  and  cost-effective  way.  The 
reformed  planning  system,  and  a  range  of 
together 
complementary  housing  policies,  are 
somewhat  more 
increased 
construction.  Direct  public  spending  on  house 
building  is  modest  but  the  government  is  seeking 
to  take  a  more  active  role  in  facilitating  supply. 
Nevertheless,  housing  supply  is  set  to  remain 
insufficient. There has also been some progress on 
skills  and  childcare.  The  government  has 
continued to expand and reform the apprenticeship 
system, 
the 
by 
implementation  of  both  the  Apprenticeship  Levy 
the  Institute  for  Apprenticeships.  Skills 
and 
mismatches  are  being  addressed  by  the  new  Post-
16 Skills Plan, which is ambitious in intention but 
will  depend  on  coherent,  committed  and  timely 
is  mixed  progress  on 
implementation.  There 
improving  the  affordability,  quality  and  full-time 
availability of childcare. A pilot scheme to double 
the  free  childcare  offered  to  three  and  four  year 
olds has commenced, with full roll-out planned for 
September  2017.  Concerns  remain  over 
the 
adequacy of childcare supply. 

preparing 

including 

for 

Regarding progress in reaching the national targets 
under  the  Europe  2020  strategy,  the  United 
Kingdom  is  performing  well  on  greenhouse  gas 
emissions  and  should  meet  its  renewable  energy 

 
 
and  energy  efficiency 
challenges remain.  

targets, 

though  some 

The  main  findings  of  the  analysis  in  this  report, 
and the related policy challenges, are as follows: 

  The  high  general  government  debt  level 
represents  a  vulnerability.  Deficit  reduction 
continues,  though  the  pace  has  slowed.  Fiscal 
risks appear to be high in the medium term, and 
the  projected  cost of  ageing  poses  longer-term 
challenges  to  the  sustainability  of  the  public 
the  pensions  and  health 
finances  and 
systems.  The  debt  ratio  is  projected  to  remain 
close  to  90 %  of  GDP  and  it  is  sensitive  to 
potential  shocks  to  nominal  growth,  interest 
rates and the structural primary balance. 

to 

the 

and 

risks 

it  poses 

  Despite progress, new housing supply is still 
not  keeping  up  with  the  growth  in  demand. 
Activity  in  the  housing  sector  has  remained 
moderate 
to 
macroeconomic  stability  remain  low  in  the 
short  term.  However,  housing  costs  are  high 
and  house  prices  have  continued  to  outstrip 
earnings,  especially  around  poles  of  economic 
growth.  House  prices  are  forecast  to  keep 
rising, but at a more moderate pace. There is a 
persistent  housing  shortage  and  a  number  of 
constraints  on  housing 
remain, 
including very strict and complex regulation of 
the land market and residential construction. 

supply 

  At  5 %  of  GDP,  the  current  account  deficit 
is close to record highs. The trade deficit has 
been  stable  for  several  years  at  around  2 %  of 
GDP,  whereas  the  balance  of  income  on  FDI 
has  fallen  from  a  surplus  of  3 %  of  GDP  to 
balance.  While  the  current  account  deficit  is 
projected  to  narrow  significantly  in  2017  and 
2018,  heightened  uncertainty  increases  the 
risks surrounding its financing. 

overall 

  While  headline  labour  market  indicators 
remain  robust,  there  are  continuing  skills 
and  social  challenges.  Employment  is  high 
and 
both 
unemployment 
historically  and  compared  to  EU  averages. 
Labour  market  participation,  long-term  and 
youth  unemployment  are  all  on  a  positive  or 
stable path. However, high inactivity and part-
time working persist. Earnings growth remains 

low, 

Executive summary 

modest,  linked  to  weak  productivity.  The 
United  Kingdom  is  focusing  its  efforts  on 
apprenticeships  to  address  the  up-skilling  and 
reskilling needs of most cohorts across all ages. 
Other  routes  to  up-skilling  may  also  have  a 
role. There are challenges related to the supply 
of childcare and social care, which contributes 
female  part-time 
the  high 
to 
employment.  As  a 
result  of  previously 
announced  reforms  and  cutbacks,  in  particular 
to in-work support, social policy outcomes may 
come  under  pressure  in  the  near-to-medium 
term. 

rate  of 

  Both 

investment  and  productivity  are 
relatively  weak.  The  United  Kingdom  is  a 
large,  open  economy  with  a  good  business 
environment, which has contributed to the high 
employment rate and high level of inward FDI. 
Nevertheless,  a  number  of  persistent  structural 
investment,  economic 
problems  weigh  on 
efficiency  and  hence  productivity,  including 
the  restrictive  spatial  planning  system  and 
weaknesses  in  skills.  Private  investment  has 
been  consistently  well  below  the  EU  average, 
and  public  investment  marginally  below.  The 
United  Kingdom’s  low  private  investment  is 
partially related to its specialisation in services. 
The  government  is  putting  a  strong  emphasis 
on  raising  investment  as  part  of  its  strategy  to 
address  the  relatively  low  level  of  labour 
productivity. 

  There  are  significant  shortcomings  in  the 
capacity  and  quality  of 
infrastructure 
networks.  Road  congestion  is  high.  Capacity 
in  parts  of  the  rail  network  is  increasingly 
inadequate  in  the  face  of  rapidly  growing 
demand.  There  is  an  increasingly  urgent  need 
for higher investment in new energy generation 
and supply capacity to address the growing risk 
of  electricity  supply  gaps  emerging.  The 
government's  National  Infrastructure  Plan  sets 
out ambitious plans to drive up the provision of 
infrastructure, the majority of which are reliant 
on  private  funding.  It  is  reorienting  a  tight 
budget 
overall 
towards 
capital 
public 
infrastructure,  particularly 
transport.  While 
some  big  recent  decisions  on  infrastructure 
have been taken, concerns remain over whether 
they  can  be  delivered  in  a  timely  and  cost-
effective way. 

2 

 
 
1.  ECONOMIC SITUATION AND OUTLOOK 

GDP growth and its composition 

Economic  growth  remained  robust  in  2016. 
Growth was 2.0 % in 2016, slightly lower than in 
2015 (2.2 %). The UK economy proved resilient in 
the  second  half  of  2016  with  quarterly  growth  of 
0.6 % recorded in both Q3 and Q4, in line with the 
quarterly  average  since  2015.  The  services  sector 
was the dominant motor of growth in 2016 while, 
on 
in 
the  expenditure  side,  healthy  growth 
domestic  demand  was  the  main  contributor  to 
growth in the first three quarters of the year. 

the 

future  relationship 
Uncertainty  over 
between  the  UK  and  EU 
is  expected  to 
negatively  affect  growth  in  2017  and  2018. 
Growth  is  projected  in  the  Commission's  2017 
winter  forecast  to  moderate  to  1.5 %  in  2017  and 
1.2 % in 2018, driven by largely by a decline in the 
growth  of  private  consumption  by  around  1pp  in 
each  of  2017  and  2018  and  a  fall  in  growth  in 
gross fixed capital formation (GFCF) of around 1½ 
pps. in 2018.  

Graph 1.1:  Contributions to real GDP growth 

services  sector  increased  by  2.8 %  in  2016, 
outstripping  industrial  production,  which  grew  by 
1.1 %, while the construction sector grew by 1.4 % 
and  the  agriculture  sector  declined  by  0.6 %.  The 
composition  of  growth  is  projected  to  become 
more balanced in 2017 and 2018. 

Net exports are expected to pick up in 2017 and 
2018 and to contribute to annual growth for the 
first time since 2011. The substantial depreciation 
of  sterling  in  2016  should,  following  a  lag,  boost 
exports  and  dampen  imports  (see  Section  3.3).  A 
slowing  of  domestic  demand  growth  in  2017  and 
2018 is likely to dampen import growth further. As 
a  result,  net  exports  are  expected  to  contribute 
modestly  to  growth  in  2017  and  substantially  to 
growth  in  2018  (graph  1.2).  This  contribution 
should  mitigate  the  effect  on  the  economy  of  the 
weakness in domestic demand. 

Graph 1.2:  Contribution to growth of net exports & growth 

in exports and imports 

Source: European Commission 

The pattern of growth remains unbalanced. The 
recent  composition  of  growth  has  continued  the 
broader  pattern  of  the  last  few  years.  Strong 
domestic demand in 2016 reflected healthy private 
consumption and a small increase in GFCF (graph 
1.1). However, net exports detracted from growth. 
The  unbalanced  pattern  is  also  reflected  in  the 
composition  of  output  by  sector.  Output  in  the 

Source: European Commission 

in 

Private  consumption  has  been  the  dominant 
motor  of  growth  since  2012  but  is  expected  to 
weaken in 2017 and 2018. It is expected to have 
increased briskly, by 2.8 %, in 2016, supported by 
real  household  disposable 
robust  growth 
income.  Real  household  disposable  income  is, 
however, forecast to stagnate in 2017 and 2018 as 
higher  inflation  following  the  depreciation  of 
sterling erodes real wage growth. Nominal growth 
in  compensation  of  employees  (per  head)  is 
projected to remain broadly unchanged from 2016 
—  at  2.4 %  in  2017  and  2018.  The  household 

3 

-6-4-202460203040506070809101112131415161718pps.Private consumptionPublic consumptionInvestmentInventoriesNet exportsreal GDP growthforecast-1.5-1.0-0.50.00.51.01.52.0-15-10-50510152094969800020406081012141618% yoy% yoyNet exports contribution, to GDP (rhs)Export growth (lhs)Import growth (lhs)forecast 
 
 
 
saving ratio is projected to decline further — from 
5.6 %  in  Q3  2016  to  4.3 %  in  2017  and  3.7 %  in 
2018  (graph  1.3),  its  lowest  annual  rate  since  the 
early  1960s.  The  low  level  of  the  saving  ratio 
limits  households’  ability  to  smooth  consumption 
in the face of low growth in disposable income. As 
a result, private consumption growth is expected to 
fall sharply to 0.9 % by 2018. 

Graph 1.3: 

Private consumption, real household 
disposable income & the household saving 
ratio 

1. Economic situation and outlook 

contributors 

to  growth 

major 
in  GFCF, 
outstripping  that  in  non  residential  construction 
and in ‘other’ investment, in 2014 and 2015 (graph 
1.4). Growth in GFCF is projected to rise to 1.6 % 
in 2017 but decline to 0.2 % in 2018 as businesses 
react  cautiously  to  the  continued  uncertainty  over 
the future relationship between the UK and EU.  

Potential growth 

Weak productivity has detracted from potential 
GDP  growth.  Potential  growth  has  declined 
markedly  since  the  international  economic  and 
financial crisis, driven largely by a sharp fall in the 
contribution  from  productivity  (see  Section  3.5). 
Although  potential  growth  has  picked  up  more 
recently,  it  has  been  driven  predominantly  by 
force  and 
healthy  growth 
the 
employment  over 
than 
productivity (graph 1.5). 

this  period, 

labour 

rather 

in 

Graph 1.5: 

Potential growth & its composition 

Source: European Commission 

Graph 1.4:  Gross fixed capital formation by component 

Source: European Commission 

Inflation 

rose 

steadily 

Inflation 
throughout  2016. 
Inflation  increased  from  -0.1 %  in  the  year  to 
November 2015 to 1.6 % in the year to December 
2016 (graph 1.6). This pick-up reflects strength in 
domestic demand, the stabilisation, and subsequent 
modest  rises, 
in  world  wholesale  oil  prices 
following  previous  falls  and  the  first  effects  from 
the  depreciation  of  sterling.  Core  inflation  in  the 
year to December 2016 was also 1.6 %. 

Source: European Commission 

A period of modest growth in gross fixed capital 
formation (GFCF) growth is in prospect. GFCF 
has  been  supported  by  a  low  cost  of  borrowing, 
healthy  business  profitability,  robust  domestic 
demand  and  an  easing  in  credit  conditions.  Plant 
and  equipment  and  dwelling  investment  were  the 

4 

-4-20246810120506070809101112131415161718%Household saving ratioPrivate consumption (y-o-y)Real household disposable income (y-o-y)forecast6070809010011012013007080910111213141516EquipmentNon-resid. constructionDwellingsConstructionOther2007 = 100-0.50.00.51.01.52.02.53.0040506070809101112131415Rate of change y-o-y (%)Capital Accumulation ContributionTFP ContributionTotal Labour (Hours) ContributionPF Potential Growth 
 
 
 
 
1. Economic situation and outlook 

Graph 1.6: 

Inflation 

Labour market 

The  labour  market  continues  to  perform  well. 
The  employment  rate  for  the  16-64  age  group 
stood at 74.5 % in September-November 2016, and 
well  above  the  recent  low  point  of  73.1 %  in  Q1-
2010.  The  unemployment  rate  has  fallen 
to 
4.8 % (1), from a peak of 8.5 % in late 2011. Long-
term  unemployment  is  low  at  1.4 %  of  the  active 
population  (28.3 %  of  those  unemployed).  The 
labour  force  participation  rate  stood  at  63.6 %  in 
the three months to November 2016, slightly lower 
than recent peaks. 

Graph 1.8: 

Unemployment-vacancies ratio & the labour 
force participation rate 

Source: European Commission 

The  depreciation  of  sterling  is  likely  to  boost 
inflation  in  2017  and  2018.  Inflation  is  expected 
to pick up sharply, from 0.7 % in 2016 to 2.5 % in 
2017  and  2.6 %  in  2018,  exceeding  the  Bank  of 
England’s  2 %  inflation  target  for  the  first  time 
since 2013. This mainly reflects the rise in import 
prices  following  the  depreciation  of  sterling  of 
around  11 %  on  a  trade-weighted  basis  since  23 
June  2016  (graph  1.7).  The  fall  in  the  exchange 
rate will, in time, flow through to producers’ input 
and output prices, and ultimately consumer prices. 

Graph 1.7:  Nominal effective exchange rate 

Source: Office for National Statistics 

The  labour  market  has  proved  flexible  and 
resilient  in  its  ability  to  absorb  additional 
labour  supply  and  such  flexibility  is  projected 
to  continue.  Employment  increased  by  0.9 %  in 
the year to (the three months to) November 2016, 
partly  matched  by  a  rising  labour  force,  and  the 
unemployment-to-vacancies  ratio  is  close  to  a 
record  low  (graph  1.8).  Average  weekly  earnings 
remain  relatively  modest,  rising  by  2.8 %  in  the 
year  to  November  2016.  Although  economic 
growth is projected to slow in 2017 and 2018, the 
to  be 
impact  on  unemployment 
relatively  muted  consistent  with  the  experience 
during  the  international  economic  and  financial 
crisis,  where  much  of  the  negative  domestic 

is  expected 

(1)  The employment rate is calculated for the 16-64 age group 
while the unemployment rate and the participation rates are 
calculated  based  on  all  employed  and  unemployed  people 
over 16. 

5 

Source: European Commission 

-0.50.00.51.01.52.02.53.03.54.04.55.05.5010305070911131517% yoyEuropean Union (28 countries)United Kingdomforecast70809010011012013014007080910111213141516172010= 10062.662.863.063.263.463.663.864.00123456707080910111213141516%%Unemployment-vacancies ratio (lhs)Labour force participation (rhs) 
 
 
 
 
                                                           
demand  shock  was  absorbed  through  adjustments 
to real wage growth in a context of rising inflation. 
The  unemployment  rate  is  expected  to  rise  to 
5.6 % by 2018. 

Social developments 

Inequality  before  taxes  and  transfers  remains 
relatively  high.  Across  most  measures,  overall 
inequality  narrowed  somewhat  between  2008  and 
2013,  before  widening  in  2014  and  2015.  While 
the  Gini  coefficient  (2)  before  taxes  and  social 
transfers  widened  from  2008  to  2015,  the  most 
common  income  ratios  remain  narrower  than  in 
2008  and  are  relatively  close  to  the  EU  average. 
The  consistent  and  substantially  above-average 
gap between mean  and  median  income  in  the  UK 
suggests a concentration of large numbers of low-
earners compared to the EU average. The UK also 
has  disparities  across  age  groups,  nations  and 
regions, as discussed in Section 3.4. 

The tax-benefit system currently performs quite 
well  in  alleviating  inequality.  On  2015  figures, 
the  UK  is  above  the  EU  average  for  inequality 
before  taxes  and  transfers  (Gini  coefficient:  UK 
55.5,  EU  51.8),  but  redistribution  moves  it  much 
closer  to  the  EU  average  after  taxes  and  transfers 
this 
(Gini:  UK  32.4,  EU  31.0).  However, 
redistributive  effect  could  weaken  in  the  near  to 
the  cumulative  effects  of 
medium 
previously  announced 
reforms  and  cutbacks 
continue to be implemented against a backdrop of 
higher  inflation.  In  particular,  as  discussed  in 
Section 3.4 and previous country reports, the new 
Universal  Credit  system  is  less  generous  than  its 
predecessor (Tax Credits) for those in receipt of in-
work benefits. 

term  as 

External position 

The  trade  balance  remains  in  modest  deficit. 
Throughout  the  current  decade,  the  trade  deficit 
has  averaged  around  2 %  of  GDP,  around  ½ pp. 
lower than the average in the 2000s (of 2½ %). In 
the  year  to  Q3-2016,  the  trade  deficit  stood  at 
1.8 %  of  GDP.  As  discussed  in  Section  3.3,  the 

(2)  The  Gini  coefficient  is  a  commonly-used  measure  for 
monitoring  trends  in  income  inequality.  A  coefficient  of 
100  expresses  total  inequality  (meaning  all  the  income  is 
earned  by  one  person)  and  a  coefficient  of  0  expresses 
perfect  equality  (meaning  everyone  earns 
the  same 
income). 

1. Economic situation and outlook 

trade  deficit  has  remained  broadly  constant  at  a 
time  when  the  current  account  deficit  has  risen 
sharply. The UK has a large trade deficit with the 
EU and a modest trade surplus with the rest of the 
world. 

The UK  continues to  run  a very  high deficit  in 
goods. There is a deficit in goods with both the EU 
and the rest of the world (graph 1.9), with half of 
this  overall  deficit  in  goods  accounted  for  by 
‘finished’  manufactured  goods.  There  are  also 
large  deficits  in  trade  in  ‘food,  beverages  and 
tobacco’ and ‘semi manufactured’ goods. 

Graph 1.9:  Composition of the trade balance in goods by 

trading partner 

Source: Office for National Statistics 

There has been a deterioration in the balance of 
trade  on  oil  and  other  fuel  products.  From  a 
surplus  of  around  ½ %  of  GDP  in  2000,  the 
balance of trade in oil and other fuel products has 
deteriorated  steadily  to  reach  a  deficit  of  around 
½ %  of  GDP  in  2015.  The  trend  in  the  UK  is 
noteworthy given the declining reserves of energy 
and  gas  in  the  UK’s  offshore  oil  and  gas 
fields (Wood,  2014)  (3).  Output  of  oil  and  gas 
output has steadily declined, by around two-thirds 
since  2000 (4).  On  the  other  hand,  imports  of  oil 
and other fuel products have risen to around 1½ % 
of  GDP  in  2015  compared  with  around  1 %  of 
GDP  in  2000.  As  a  result,  the  UK  is  increasingly 

(3)  For example, the maximum reserves of oil have fallen from 
1490 cubic tonnes in 2000 to 1060 cubic tonnes in 2014. 
(4)  The  output  of  oil  fell  from  126  to  40  million  tonnes 
between 2000 and 2014, while the output of gas fell from 
108 to 35 billion cubic metres over the same period (ONS). 

6 

-8-7-6-5-4-3-2-100506070809101112131415% of GDPEUExtra EU 
                                                           
 
                                                           
1. Economic situation and outlook 

reliant on imports of oil and other fuel products to 
meet its needs for these products. 

Graph 1.11:  Nominal unit labour costs (all sectors) 

The  UK  continues  to  run  a  substantial  trade 
surplus  in  services,  the  majority  of  which  is 
with  countries  outside  the  EU  (Graph  1.10).  A 
large  surplus 
in  financial  and  pension  and 
insurance services accounts for around half of the 
services surplus. The trade surplus in services with 
the  EU,  which  is  considerably  smaller  than  that 
with the rest of the world, is dominated by a large 
surplus  in  financial  services,  while  there  is  a 
considerable deficit in travel services. 

Graph 1.10:  Composition of the trade balance in services 

by trading partner 

Source: Office for National Statistics 

Developments in export market share have been 
positive  and  unit  labour  costs  subdued.  Despite 
the persistently high trade deficit in goods, export 
market shares in both goods and services increased 
in  2014  and  2015.  This  is  in  sharp  contrast  to 
2000-2013,  when  the  UK’s  overall  and  goods 
export  market  share  fell  in  most  years.  Nominal 
unit labour costs have been subdued in a context of 
muted  growth  in  employee  compensation  (graph 
1.11).  The  sharp  depreciation  of  sterling  in  2016 
(graph 1.7) should boost external competitiveness, 
other factors held constant. 

Source: European Commission 

Monetary policy 

In  August  2016,  the  Bank  of  England  eased 
monetary  policy,  following  the  referendum  on 
EU membership on 23 June 2016. The easing in 
policy included a reduction in the Bank Rate from 
0.5 % to 0.25 %; a new Term Funding Scheme to 
reinforce  the  pass  through  of  the  reduction  in  the 
Bank  Rate,  and  an  increase  in  asset  purchases, 
including  purchases  of  government  bonds  worth 
GBP 60 billion (EUR 73 billion) and purchases of 
up  to  GBP  10  billion  (EUR  12  billion)  of  UK 
corporate  bonds.  The  measures  are  designed  to 
support  growth  and  secure  a  sustainable  return  of 
inflation to its target. 

Financial sector and indebtedness 

After  a  number  of  years  of  decline,  bank 
lending  to  private  (non-financial)  corporations 
(PNFCs)  has  picked  up.  The  stock  of  bank 
(gross) lending to PNFCs increased by 3.6 % (5) in 
the year to December 2016. Loans outstanding for 
large  businesses  increased  by  4.8 %  while  those 
for  SMEs  grew  at  1.6 %.  Growth  in  lending  to 
PNFCs remains slightly below that to households, 
which increased by 4.0 % in the year to December 
2016. Unsecured lending expanded by 10.6 %, and 
secured 
in 
unsecured  lending  throughout  2016  is  likely  to 
have supported consumption growth. 

lending  by  3.1 %.  Brisk  growth 

(5)  Not seasonally adjusted 

7 

01234560506070809101112131415% of GDPEUExtra EU-3-2-101234567010203040506070809101112131415Rate of change y-o-y (%)Inflation (GDP deflator growth)Real Compensation per EmployeeProductivity Contribution (negative sign)Nominal unit labour costULC in Euro Area 
 
 
                                                           
1. Economic situation and outlook 

Graph 1.12:  Private sector indebtedness 

largest in the EU (graph 1.13). Household balance 
sheets are strengthened further once real assets are 
included. In 2015, households’ real housing assets 
were valued at over 300 % of GDP. 

Graph 1.13:  Households’ financial assets & liabilities 2015 

Source: European Commission 

Source: European Commission 

Public finances  

The  budget  deficit 
is  falling  but  remains 
relatively high and the pace of deficit reduction 
has  slowed. According  to  the  Commission's  2017 
winter  forecast,  the  general  government  deficit  is 
projected  to  decline  from  4.0 %  in  2015-16  to 
3.3 % in 2016-2017. The government debt ratio is 
expected  to remain  unchanged  at  87.5 % of  GDP. 
The  slower  decrease  in  the  headline  deficit  is 
mainly  driven  by  a  combination  of  lower-than-
expected  growth  in  revenues  and  higher-than-
planned government consumption. 

In  2017-18,  the  general  government  deficit  is 
projected  to  decrease  to  2.8 %  of  GDP.  This 
includes  policy  decisions  announced  in  the  2016 
Autumn Statement that increase the deficit by GBP 
2.5 billion in 2017-2018. 

sector 

remains 

indebtedness 

Private 
at 
relatively high levels. Private sector indebtedness, 
which has declined from its peak of 190 % of GDP 
in 2009 to 161 % of GDP in 2015, is split broadly 
evenly  between  the  corporate  and  household 
sectors  (graph  1.12).  PNFCs’  financial  liabilities 
(298 %  of  GDP  in  2015)  exceed  financial  assets 
(120 %  of  GDP  in  2015).  However,  corporate 
balance  sheets  are  likely  to  be  considerably 
stronger  once  real  assets  are  included.  Over  the 
current  decade,  balance  sheets  have  strengthened 
due to increased corporate profitability, which has 
risen steadily. 

Taken  as  a  whole,  household  balance  sheets 
remain strong, despite relatively high household 
indebtedness.  In  2015,  household  indebtedness 
stood at 87 % of GDP. After having fallen steadily 
from  a  peak  of  97 %  of  GDP  in  2009,  household 
debt  has  plateaued  in  the  past  three  years.  The 
European  Systemic  Risk  Board  (ESRB)  –  which 
conducted  in  2016  a  forward-looking  EU-wide 
assessment of the real estate market across the EU 
–  issued  a  warning  on  28  November  2016  to  the 
UK  (as  well  as  to  seven other  Member  States)  on 
the  vulnerabilities  of  the  residential  real  estate 
sector,  given  the  high  level  of  indebtedness  of 
households.  While  there  are  pockets  of  risky 
financial  position  of 
lending, 
households  is  strong.  In  2015  households’  gross 
financial  assets,  and  net  financial  assets,  were  the 

the  aggregate 

8 

0204060801001201401601802000203040506070809101112131415% of GDPHouseholdNon financial corporationsPrivate sector050100150200250300350UKNLDKBESEMTCYITFRPTESATDEELFIIELUBGHUHRCZEELVSIPLLTSKRO% of GDPTotal assets of householdsHousehold debt 
 
 
1. Economic situation and outlook 

Table 1.1: 

Key economic, financial & social indicators 

Source: European Commission, ECB 

9 

2004-20082009201020112012201320142015201620172018Real GDP (y-o-y)2.0-4.31.91.51.31.93.12.22.01.51.2Private consumption (y-o-y)2.7-3.20.6-0.51.71.62.22.42.81.90.9Public consumption (y-o-y)2.31.10.20.21.70.32.31.31.00.70.4Gross fixed capital formation (y-o-y)1.8-15.25.01.92.33.26.73.41.01.60.2Exports of goods and services (y-o-y)5.0-8.85.85.80.61.11.56.11.73.52.9Imports of goods and services (y-o-y) 4.0-9.28.20.82.93.42.55.52.83.01.1Output gap1.3-4.7-3.8-3.3-3.0-2.2-0.50.20.60.50.2Potential growth (y-o-y)2.10.70.91.01.01.11.41.51.51.61.5Contribution to GDP growth:Domestic demand (y-o-y)2.1-4.51.20.01.81.62.92.42.21.60.7Inventories (y-o-y)-0.2-0.61.5-0.60.40.60.5-0.4-0.10.00.0Net exports (y-o-y)0.10.4-0.81.4-0.7-0.8-0.40.0-0.30.10.5Contribution to potential GDP growth:Total Labour (hours) (y-o-y)0.50.40.50.60.60.60.70.60.50.50.5Capital accumulation (y-o-y)0.60.30.30.40.40.40.50.50.50.50.5Total factor productivity (y-o-y)1.00.10.10.00.00.00.20.40.50.50.6Current account balance (% of GDP), balance of payments-2.2-3.0-2.7-1.8-3.7-4.4-4.7-4.3...Trade balance (% of GDP), balance of payments-2.7-2.3-2.7-1.7-2.2-2.3-2.0-1.6...Terms of trade of goods and services (y-o-y)-1.01.71.3-1.00.32.21.50.70.0-1.70.1Capital account balance (% of GDP)0.00.00.00.00.00.00.0-0.1...Net international investment position (% of GDP)-5.4-10.6-4.0-5.9-22.4-16.2-17.6-4.6...Net marketable external debt (% of GDP) (1)-28.7-36.9-31.6-33.0-38.5-32.5-25.0-9.6...Gross marketable external debt (% of GDP) (1)300.2342.7352.1363.1344.3312.7299.8271.2...Export performance vs. advanced countries (% change over 5 years)-4.1-13.2-17.5-19.1-11.9-4.1-3.14.90...Export market share, goods and services (y-o-y)-4.90.0-7.3-2.5-1.8-0.82.33.9 c...Net FDI flows (% of GDP)0.9-2.6-0.42.0-1.3-0.4-6.4....Savings rate of households (net saving as percentage of net disposable income)-0.43.85.73.42.70.60.50.2...Private credit flow, consolidated (% of GDP)13.6-7.7-2.8-1.20.53.92.30.8...Private sector debt, consolidated (% of GDP)167.4185.5175.5173.1174.0167.8160.0158.0...of which household debt, consolidated (% of GDP)89.996.993.891.290.087.685.886.1...of which non-financial corporate debt, consolidated (% of GDP)77.488.581.681.883.980.174.171.7...Corporations, net lending (+) or net borrowing (-) (% of GDP)2.04.32.33.32.51.10.9-0.4-1.10.01.6Corporations, gross operating surplus (% of GDP)21.521.220.621.020.621.021.621.120.320.621.6Households, net lending (+) or net borrowing (-) (% of GDP)-0.83.34.52.62.20.20.0-0.6-1.1-2.2-2.6Deflated house price index (y-o-y)4.8-9.73.5-4.8-1.50.36.25.6...Residential investment (% of GDP)3.73.03.13.23.13.23.63.7...GDP deflator (y-o-y)2.71.51.52.01.51.91.60.61.11.92.6Harmonised index of consumer prices (HICP, y-o-y)2.32.23.34.52.82.61.50.00.72.52.6Nominal compensation per employee (y-o-y)4.02.43.21.11.72.10.40.92.32.42.4Labour productivity (real, person employed, y-o-y)1.0-2.81.71.00.20.70.70.4...Unit labour costs (ULC, whole economy, y-o-y)3.05.31.60.11.51.3-0.30.51.61.41.5Real unit labour costs (y-o-y)0.33.70.0-1.90.0-0.6-1.9-0.10.5-0.4-1.0Real effective exchange rate (ULC, y-o-y)-0.4-9.42.6-2.14.0-1.55.36.8-10.9-5.5-0.2Real effective exchange rate (HICP, y-o-y)-1.9-9.50.90.54.3-1.47.05.5-10.6-5.8.Tax rate for a single person earning the average wage (%)26.625.325.525.124.724.023.623.4...Tax rate for a single person earning 50% of the average wage (%)20.7*19.720.118.217.515.915.214.9...Total Financial sector liabilities, non-consolidated (y-o-y)25.8-17.49.010.8-3.0-7.67.1-10.3...Tier 1 ratio (%) (2)...........Return on equity (%) (3)...........Gross non-performing debt (% of total debt instruments and total loans and advances) (4)...........Unemployment rate5.27.67.88.17.97.66.15.34.95.25.6Long-term unemployment rate (% of active population)1.21.92.52.72.72.72.21.6...Youth unemployment rate (% of active population in the same age group)13.619.119.921.321.220.717.014.6...Activity rate (15-64 year-olds)75.575.775.475.576.176.476.776.9...People at risk of poverty or social exclusion (% total population)23.622.023.222.724.124.824.123.5...Persons living in households with very low work intensity (% of total population aged below 60)11.412.713.211.513.013.212.311.9...General government balance (% of GDP)-3.5-10.2-9.6-7.6-8.3-5.7-5.8-4.4-3.4-2.8-2.5Tax-to-GDP ratio (%)35.234.135.135.735.034.834.334.935.435.635.4Structural budget balance (% of GDP)..-7.3-5.7-6.5-4.4-5.4-4.5-3.7-3.1-2.7General government gross debt (% of GDP)42.464.275.781.385.186.288.189.088.688.187.0(1) Sum of portfolio debt instruments, other investment and reserve assets.(2,3) domestic banking groups and stand-alone banks.(4) domestic banking groups and stand-alone banks, EU and non-EU foreign-controlled subsidiaries and EU and non-EU foreign-controlled branches.(*) Indicates BPM5 and/or ESA95forecast 
 
 
 
2.  PROGRESS WITH COUNTRY-SPECIFIC RECOMMENDATIONS 

progress 

The  United  Kingdom’s 
in 
implementing  the  recommendations  addressed 
to it in 2016 (6) has to be seen in a longer-term 
perspective, which started with the introduction 
of the European Semester in 2011. 

The  fiscal  deficit  has  gradually  decreased  but 
remains above 3 % of GDP.  

The UK has announced various policies to raise 
housing supply. Residential construction has risen 
over recent years, due both to the ongoing cyclical 
recovery  from  a  post-crisis  trough  and  to  policy 
action,  including  major  reforms  to  the  planning 
system.  However  the  challenge  is  both  long  term 
and  structural.  To  date,  the  housing  shortage  has 
continued  to  intensify  and  new  housing  supply  is 
still  lower  than  the  growth  in  demand.  House 
prices remain high and their growth has continued 
to  outpace  disposable  income  growth.  Household 
debt remains high but household balance sheets are 
strong  on  aggregate,  while  households  and  the 
broader  economy  appear  resilient  to  short-term 
shocks. 

The government  has set out ambitious plans to 
remedy  shortfalls  in  network  infrastructure  in 
its  National  Infrastructure  Plan.  While  tangible 
progress  to  date  has  been  modest  and  pressure on 
networks builds, the UK is starting to deal with the 
cumulated  effects  of  decades  of  public  under-
investment  in  infrastructure.  The  government  is 
also  taking  steps  to  increase  private  infrastructure 
investment, particularly in energy, and some major 
projects have been approved. 

has 

UK 

received 

evolving 
The 
recommendations  on  labour  market  and  social 
issues.  On  skills  and  apprenticeships,  the  high 
proportion  of  people  obtaining  only  low-level 
qualifications  remains  a  concern,  both  for  labour 
market  needs  and  for  progression  potential  for 
individuals.  Regarding  childcare,  reforms  to  date 
have  been  constant  but  gradual.  A  step-change  is 
likely  with  the  full  roll-out  of  some  initiatives  in 
the  next 
received 
two  years.  The  UK 
recommendations  from  2011  to  2014  related  to 
poverty  and  the  welfare  system,  with  a  particular 
focus on child poverty, which remains quite high. 

the 

tax-benefit 

Although 
currently 
performs  quite  well  in  alleviating  inequality,  this 
may  come  under  pressure  as  a  result  of  planned 
welfare reforms and cutbacks. 

system 

received 

recommendations 

The  UK 
on 
improving  SMEs’  access  to  finance  from  2011 
to  2014.  The  government  implemented  a  number 
of  policies  to  improve  access  to  finance,  in  a 
context of tight credit conditions and low business 
investment.  With  the  continued  recovery  of  the 
economy  and  banking  sector,  and  a  normalisation 
of  financial  conditions,  this issue  and  the  case  for 
government intervention became less pressing and 
the recommendation was dropped in 2015. 

the 

Overall,  the  UK  has  made  some (7)  progress  in 
addressing 
country-specific 
2016 
recommendations (CSRs). The UK currently has 
three CSRs. CSR 1 is not assessed in this country 
report.  There  has  been  some  progress  on  CSR  2. 
An  ongoing  set  of  reforms  should  have  positive 
impacts on housing supply, though these will take 
time  and  may  not  be  sufficient  to  address  the 
persistent  undersupply of  housing.  Decisions  on  a 
number  of  major  transport  and  energy  investment 
projects  were  made  in  2016,  and  the  government 
announced a further prioritisation of public capital 
other 
spending 
infrastructure.  However, 
that 
investment backlogs are on track to be remedied in 
a  timely  and  cost-effective  way.  There  has  also 
been  some  progress  on  CSR  3.  The  UK 
government  has  continued  to  expand  and  reform 
the apprenticeship system. The new Post-16 Skills 
Plan  is  ambitious  in  intention  and  will  require 
coherent,  committed  and  timely  implementation. 
There  is  some  progress  on  improving  childcare 
affordability, quality and full-time availability. 

transport 
it 

is  not  clear 

towards 

and 

(7)  For more details on the level of progress and actions taken 
to address the policy advice in each respective subpart of a 
CSR,  see  the  Overview  Table  in  the  Annex.  This  overall 
assessment  does  not  include  an  assessment  of  compliance 
with the Stability and Growth Pact. 

(6)  For  the  assessment  of  other  reforms  implemented  in  the 

past, see Section 3. 

10 

 
 
                                                           
                                                           
2. Progress with country-specific recommendations 

Table 2.1: 

Assessment of progress with 2016 CSRs 

Source: European Commission 

11 

The United Kingdom Overall assessment of progress: Some progress CSR 1:  Endeavour to correct the excessive deficit in a durable manner by 2016-17. Following the correction of the excessive deficit, achieve a fiscal adjustment of 0.6 % of GDP in 2017-18 towards the minimum medium-term budgetary objective. CSRs related to the Stability and Growth Pact will be assessed in spring once the final data is available.  CSR 2: Address shortfalls in network infrastructure investment, including by delivering the priorities of the National Infrastructure Plan. Take further steps to boost housing supply, including by implementing the reforms of the national planning policy framework. Some progress  Some progress in addressing shortfalls in infrastructure investment.  Some progress on boosting housing supply.  CSR 3: Address skills mismatches and provide for skills progression, including by strengthening the quality of apprenticeships. Further improve the availability of affordable, high-quality, full-time childcare. Some progress  Some progress in addressing skills and apprenticeship issues.  Some progress in improving childcare availability.   
 
 
 
 
2. Progress with country-specific recommendations 

12 

Box 2.1: Contribution of the EU budget to structural change in the United KingdomThe United Kingdom is a beneficiary of significant European Structural and Investment Funds (ESI Funds) amounting to EUR 16.4 billion by 2020. This represents 3% of national public investment (1). Of the EU financing, over 21%, i.e. EUR 1.2.billion, is aimed to be delivered via financial instruments. By 31 December 2016, an estimated EUR 6.9 billion, which represents about 42 % of the total allocation for ESI Funds, have already been allocated to concrete projects. Financing under the European Fund for Strategic Investments, Horizon 2020, the Connecting Europe Facility and other directly managed EU funds is additional to the ESI Funds. By end 2016, the UK has signed agreements for EUR 331 million for projects under the Connecting Europe Facility. The EIB Group approved financing under EFSI amounts to EUR 3.2 billion, which is expected to trigger nearly EUR 21.6 billion in total investments (as of end 2016). All necessary reforms and strategies as required by the ex-ante conditionalities (2) for the ESI funds support were already met before programmes adoption. This ensured timely and effective start of the implementation of the ESI Funds. The UK is already directing considerable domestic resources to address Europe 2020 strategy ambitions. ESI Funds will be helping the UK implement structural reforms in critical and key areas for its future growth throughout the 2014-2020 period. The structural reforms being implemented through ESI Funds are generating broader benefits as they have encouraged and facilitated other public investments, including from national sources and other EU instruments, in particular European Fund for Strategic Investments (EFSI) and Horizon 2020. All relevant CRSs were taken into account when the 2014-2020 programmes were designed. This includes addressing shortfalls in network infrastructure investment; addressing skills mismatches; providing for skills progression and increasing the labour market flexibility. In addition to the identified challenges in CSRs, the Funds address other structural obstacles to growth and competitiveness. These include investing in low-carbon economy, enlarging the coverage of superfast broadband (targeting 100% of households and SMEs throughout the UK by 2023); incentivising innovation and private investments; and supporting and training several thousand of UK enterprises, the latter by financial instruments to an increasing extent. The Commission expects high take-up levels by end users of rolled out superfast broadband throughout the country that would enable e-Commerce and e-Government by SMEs and inhabitants (100% of settlements and SMEs to be covered by 2023), new competitiveness skills in thousands of SMEs after support and training, and several hundred more RTDI results to come from research institute-company cooperation to make British-owned firms more competitive in producing products and services in demand in global markets. Nearly 19 000 more competitive agricultural SMEs are expected as a result of targeted investment under ESI Funds, 12 000 000 rural inhabitants will be covered by local development strategies leading to improved social inclusion and the creation of 8 100 jobs in rural areas.  https://cohesiondata.ec.europa.eu/countries/UK                                                            (1) National public investment is defined as gross capital formation + investment grants + national expenditure on agriculture and fisheries. (2) At the adoption of programmes, Member States are required to comply with a number of ex-ante conditionalities, which aim at improving framework and investment conditions for the majority of areas of public investments. For Members States that do not fulfil all the ex-ante conditionalities by the end 2016, the Commission has the possibility to propose the temporary suspension of all or part of interim payments.  
 
 
 
 
 
3.  REFORM PRIORITIES 

3.1.  PUBLIC FINANCES AND TAXATION 

Taxation policy  

The  tax-to-GDP  ratio  remains  relatively low in 
the UK, despite a slight increase in tax receipts 
in  the  fiscal  year  2015-16.  As  a  percentage  of 
GDP,  tax  revenues  increased  from  32.9 %  to 
33.3 %  between  2014-15  and  2015-16.  The  total 
tax burden was close to 33 % of GDP in 2015-16 
(Table  3.1.1),  well  below  the  GDP-weighted  EU 
average of around 39 % (8). 

Table 3.1.1:  Composition of tax revenues, 2015-2016 

Source: OBR, November 2016 Economic and Fiscal Outlook 

Taxes  on 
labour,  which  are  particularly 
detrimental to growth, are among the lowest in 
the EU. The tax wedge (9) on labour is well below 
the  EU  and  OECD  averages  across  the  income 
scale and across household types. For example, for 
a  single  person  without  children  at  the  average 
wage, 
in  2015, 
tax  wedge  was  30.8 % 
compared  to  an  EU  GDP-weighted  average  of 
42.9 %  and  an  OECD  non-weighted  average  of 
35.5 % (10). 

the 

Corporate  tax  receipts  were  2.3 %  of  GDP  in 
2015-16,  broadly  in  line  with  the  EU  average. 
Following  a  marked  decrease  in  recent  years,  the 
effective  average  tax  rate  at  the  corporate  level 
(non-financial  sector)  stood  at  21.5 %  in  2016, 
close  to  the  EU  average  of  20.9 %  (ZEW,  2016). 
However, as discussed in the 2016 country report, 
the effective marginal tax rate for new investment 

(8)  Data for fiscal years based on OBR, annual data based on 

Eurostat. 

(9)  The  tax  wedge  shows  the  proportional  difference  between 
the costs of a worker to their employer and the employee’s 
net earnings. 

(10)  European Commission Tax and Benefit Indicator database 

based on OECD data. OECD for OECD averages. 

stood  at  24.7 %  in  2016,  above  the  non-weighted 
EU-28 average of 15.7 % and among the highest of 
all  Member  States  (ZEW,  2016).  This  is  largely 
due  to  the  taxation  of  property  and  the  capital 
allowance regime (11). 

Following the conclusions of the UK’s review of 
‘business  rates’ 
the  burden  on 
in  2016, 
taxpayers  in  England  will  be  cut  by  GBP  1.7 
billion  (EUR  2.1  billion,  0.1 %  of  GDP)  as  of 
2017-18 (12). Payments for business rates comprise 
a  substantial  proportion  of  the  total  taxes  paid  by 
companies in the UK, standing at GBP 28.8 billion 
(EUR  35.3  billion)  in  2015-16,  compared  to 
corporation  tax  payments  of  GBP 43.8  billion 
(EUR 53.6 billion). According to the 2016 Budget, 
the  measures  adopted  for  England  entail  cutting 
business  rates  for  all  properties  and  ensuring  that 
the  smallest  businesses  no  longer  pay  this  tax, 
which is not linked to their profitability.  

Revenues  from  VAT  are  relatively  low  in  the 
UK and reduced VAT rates apply to a relatively 
wide  range  of  goods  and  services (13).  In  2015-
2016,  VAT  receipts  accounted  for  slightly  more 
than  one-fifth  of  government  revenues  (Table 
3.1.1).  The  loss  of  potential  revenues  due  to  the 
application of the zero- and reduced-VAT rates is 
estimated to have stood at GBP 48.1 billion (EUR 
in  2015-16  (around  2.5 %  of 
58.9  billion) 
GDP) (UK  Government,  2016).  Furthermore,  the 
VAT  compliance  gap  in  the  UK (14)  has  been 
estimated  at  10 %  in  2014  (corresponding  to 
around  GBP  16  billion  or  around  0.7 %  of  GDP), 
broadly in line with the previous year's figures and 
below the EU average of 15 %. 

In  its  most  recently  published  plans  (HM 
Treasury,  2016),  the  government  announced 
limited  changes  to  the  tax  system.  According  to 

(11)  A  more  in-depth  discussion  of  the  factors  behind  the 

difference can be found in the 2016 country report. 

(12)  Business  rates  refer  to  the  tax  on  non-domestic  property. 
The collection and distributions of business rates is largely 
devolved 
the  UK,  with  Scotland  and  Wales 
administering their own systems. The Scottish Government 
has  set  up  a  review  group  to  make  recommendations  for 
reform in this area. 

in 

(13)  See the 2016 country report for details. 
(14)  This  gap  measures  the  difference  between  the  collected 
VAT and theoretical VAT revenue under the tax law. 

13 

Tax category GBP billion % Revenue  % GDP  Income tax 168.9 26.9 9.0 National insurance contributions  (employers and employees) 114.1 18.2 6.1 Corporation tax 43.8 7 2.3 Property taxes 68.7 10.9 3.6 Capital taxes 10.4 1.7 0.6 VAT 130.5 20.8 6.9 Excise duty 53.1 8.5 2.8 Other taxes 39.1 6 2.1 Total 628.6 100 % 33.3 %   
 
 
 
 
                                                           
 
                                                           
3.1. Public finances and taxation 

Graph 3.1.1:  Debt projections based on probability 

OBR  estimates,  these  tax  measures  will  raise  an 
extra GBP 350 million (EUR 428 million, 0.02 % 
of  GDP)  in  2017-18,  mainly  from  an  increase  in 
the  insurance  premium  in  addition  to  measures 
fighting tax avoidance and evasion. The additional 
impact should be negligible thereafter. 

Long-term sustainability of public finances 

The  high  level  of  general  government  debt 
represents a source of vulnerability for the UK 
economy.  According  to  the  Commission  2017 
winter  forecast,  gross  public  debt  is  expected  to 
have levelled off in 2016 at 88.6 % of GDP and to 
decrease slightly in 2017 and 2018. 

to 

the  Commission’s 

No  substantial  short-term  fiscal  risks  exist,  but 
some  variables  point  to  possible  challenges. 
According 
analysis 
(European  Commission,  2017),  the  overall  short-
term  fiscal  risk  indicator  is  below  the  threshold 
that indicates a risk. This indicator, which is based 
on  a  comprehensive  approach  that  takes  into 
account  both  fiscal  and  macro-financial  variables, 
points  to  no  significant  risks  of  short-term  fiscal 
stress. 

Fiscal risks, however, appear to be higher in the 
medium  term  (15).  The  same  analysis  projects  a 
relatively  high and  increasing  stock  of  debt  at  the 
end  of  the  projection  period  (2027).  Potential 
shocks  to  nominal  growth,  interest  rates  and  the 
structural  primary  balance  could  lead  to  a  debt 
ratio  well  above  90 %  of  GDP  (graphs  3.1.1  and 
3.1.2). To reduce the debt-to-GDP ratio to 60 % of 
GDP  by  2031,  a  cumulative  fiscal  adjustment  of 
3.3 pps.  of  GDP  (relative  to  the  scenario  where 
there  is  no  change  in  fiscal  policy)  would  be 
required over 5 years, i.e. by 2023 (16). 

(15)  This assessment is broadly confirmed by the OBR’s latest 
Fiscal Sustainability Report, published in January 2017. 
(16)  The  S1  indicator  measures  the  required  fiscal  adjustment 
needed over the next 5 years (from the last forecast year) to 
drive debt ratio down to 60 % of GDP in 2031. Thus, it is a 
medium-term sustainability risk indicator. 

Source: European Commission, Debt Sustainability Monitor 
2016 

Graph 3.1.2:  Gross public debt as a % of GDP 

Source: European Commission, Debt Sustainability Monitor 
2016 

According  to  the  Commission’s  S2  indicator 
(17),  the  UK  might  face  medium  fiscal  risks  in 
the  long  term.  The  Commission’s  calculations of 
the long-term sustainability gap show that a fiscal 
adjustment of 3.0 pps. of GDP would be needed in 
order to ensure the sustainability of public finances 
in  the  long  run.  The  gap  is  mainly  due  to  the 

(17)  The  S2  indicator  measures  the  required  upfront  fiscal 
adjustment needed to stabilise public debt over the infinite 
horizon,  taking  full  account  of  future  increased  liabilities 
linked  to  population  ageing.  Thus,  it  is  a  long-term 
sustainability  risk  indicator.  The  indicator  is  calculated 
under the assumption of a no-fiscal policy change scenario. 

14 

6070809010011020142015201620172018201920202021% of GDPp10_p20p20_p40p40_p60p60_p80p80_p90p50gdebt_gdp_DSM7080901001101112131415161718192021222324252627Historical Structural Primary Balance scenarioCombined historical scenarioFiscal Reaction Function scenarioBaseline no-policy change scenarioNo-policy change scenario without ageing costs 
                                                           
 
 
 
                                                           
3.1. Public finances and taxation 

performance  against  fiscal  targets.  Since  2010, 
these targets have been revised a number of times, 
including  in  2016  (see  below).  Such  frequent 
revisions reduce the ability  of economic agents to 
predict the medium-term basis of fiscal policy. 

against 

the  backdrop 

In  the  context  of  the  2016  Autumn  Statement, 
the government updated its Charter for Budget 
Responsibility 
of 
downward revisions in the OBR’s medium-term 
forecast.  In  an  environment  of  subdued  growth 
prospects  and 
revised  official 
substantially 
projections following the UK’s referendum on EU 
membership,  the  new  Charter  abandons  the  three 
the  previous  Charter (18).  The 
targets  of 
government’s commitment to run a budget surplus 
by 2019-2020 is replaced by the intention to return 
to  a  balanced  budget  ‘at  the  earliest  possible  date 
in the next Parliament’, which takes office in 2020. 
To  achieve  this  objective,  the  numerical  target  is 
for  ‘cyclically  adjusted  borrowing’  to  go  below 
2 %  of  GDP  by  2020-21.  In  conjunction  with  the 
changed  budget  path,  the  supplementary  debt 
target  was  revised  from  a  previously  planned 
continuous  reduction  for  the  period  until  2019-
2020 to a first decrease in 2020-2021. 

the  previous 

fiscal 
The  commitment 
in 
is 
framework  to  contain  welfare  spending 
retained,  with  an  updated  definition  for  the 
welfare  cap.  The  new  cap  is  based  on  the  OBR 
forecast  underlying  the  2016  Autumn  Statement 
for  the  benefits  and  tax  credits  and  will  apply  to 
welfare spending in 2021-22. The cap will only be 
breached  if  spending  exceeds  the  cap  plus  a  3 % 
margin at the point of assessment. 

in  advance. 

is  well-planned 

specifying  multi-annual  departmental 
In 
expenditure  limits  (DELs),  UK  government 
spending 
In 
November  2015,  the  government  published  its 
‘Spending  Review’,  which  specifies  DELs  until 
2020-21  for  all  government  departments.  DELs 
only  cover  around  half  of  total  expenditure, 
however,  with  spending  that  is  heavily  influenced 
by  the  business  cycle  falling  under  ‘annually 
its  2016  Autumn 
managed  expenditure’. 
Statement, 
its 
repeated 
commitment to the Spending Review limits. 

In 
government 

the 

(18)  Under  the  new  forecast,  the  government  is  off-track  in 
complying with the three targets in the previous Charter. 

initial 

projected  impact  of  age-related  public  spending 
(2.3 pps.  of  GDP),  of  which  pensions  account  for 
0.9 pp. of GDP and healthcare 1.0 pp. of GDP. The 
position, 
unfavourable 
determined  by  the  structural  primary  balance  and 
the  general  government  debt  level  in  2018  —  the 
final  year  of  the  Commission’s  macroeconomic 
forecast,  also  contributes  0.7 pp.  of  GDP  to  the 
gap. 

budgetary 

Healthcare 

is  currently  under 
The  healthcare  system 
financial  pressure  and,  in  the  medium  to  long 
term,  faces  high  risks  to  sustainability.  Given 
current  rates  of  increasing  demand,  the  National 
Health  Service  (NHS)  has  estimated  a  GBP 
30 billion  (EUR  37  million,  1.6 %  of  GDP)  gap 
between  ‘needs’  and  ‘resources’  in  2020-21 in 
England (NHS, 2014). As a result of this analysis, 
the government has committed to providing GBP 8 
billion  (EUR  10  billion)  of  additional  funding 
allocated  in  real  terms  by  2020-21,  with  NHS 
England  aiming  to  bridge  the  remaining  GBP  22 
billion  (EUR  27  billion)  through  a  range  of 
efficiency  measures.  Healthcare  expenditure  is 
expected  to  increase  by  at  least  1.3  pps.  of  GDP 
between  2013  and  2060,  due  to  the  ageing 
population.  These  projections  are  based  on  the 
assumption  that  half  of  the  future  gains  in  life 
expectancy  are  spent  in  good  health (European 
Commission, 2015). 

Various  measures  are  being  considered  to 
achieve further efficiency gains and to mitigate 
the growth in demand for health services. In the 
recently  published  ‘Joint  Report  on  Health  Care 
and  Long-Term  Care  Systems  and  Fiscal 
Sustainability’,  options  for  the  UK  to  increase 
efficiency in the healthcare sector included further 
strengthening  primary  care  provision,  integrated 
care,  a  comprehensive  workforce  strategy  and 
further  efforts  on  health  promotion  and  disease 
prevention.  These  are  likely  to  provide  benefits 
several  years  following  implementation, however 
(The King’s Fund, 2016). 

Fiscal frameworks 

The UK fiscal framework is solid, helped by the 
role  of  independent  authorities.  The  OBR  was 
set up in May 2010. It produces official economic 
and fiscal forecasts, and assesses the government’s 

15 

 
                                                           
3.2.  FINANCIAL SECTOR AND HOUSING 

3.2.1.  FINANCIAL SECTOR DEVELOPMENTS  

Graph 3.2.2:  Exports of services: revealed comparative 

advantage 

Importance of financial services and banking 

The  UK  is  home  to  the  largest  financial  sector 
in  the  EU  and  one  of  the  largest  in  the  world. 
The  financial  services  sector  accounts  for  around 
8 %  of  UK  GDP  (2014)  and  3 %  of  UK 
employment  (September  2016).  According  to  a 
number of indicators of turnover, the UK accounts 
for  a  high  proportion  of  global  activity  in  various 
types  of  financial  services.  London  is  regarded  as 
one of the main global financial centres. 

Graph 3.2.1:  Financial services exports & imports (% GDP) 

Source: European Commission 

Banks’ balance sheets 

The  banking  sector  has  strengthened 
its 
capitalisation  since  the  financial  crisis.  In  the 
past eight years, major UK banks have raised more 
than GBP 130 billion (EUR 159 billion) of capital. 
The  Tier  1  capital  ratio  of  the  aggregate  UK 
banking  sector  has  increased  by  more  than  400 
basis points since 2010 and the Core Equity Tier 1 
ratio  reached  14.5 %  of  Risk  Weighted  Assets  in 
Q3-2016  (graph  3.2.3).  This  compares  favourably 
to the EU average and to other major EU countries. 
Capital  strength  has  improved  over  time,  partly 
due to increased regulatory requirements. 

In  the  aftermath  of  the  international  financial 
and  economic  crisis,  banks  have  deleveraged 
and  strengthened  the  composition  of  their 
balance sheets. Since end-2008, the total assets of 
the  banking  system  have  declined  by  some  15 %. 
Banks  have  increased  the  share  of  their  domestic 
lending  as  a  proportion  of  total  assets,  while 
reducing  the  share  of  overseas  and  intra-financial 
sector  lending.  The  outstanding  stock  of  overseas 
loans  has  fallen  by  some  20 %  and  intra-financial 
sector  lending  has  fallen  by  more  than  30 %.  The 
quality  of  banks’  assets  has  improved  in  recent 
years  and  the  ratio  of  gross  non-performing  loans 
is one of the lowest in the EU at 2.2 % as of Q3-
2016 (graph 3.2.4). 

Source: Office for National Statistics 

Exports  of  financial  services  are  an  integral 
contributor to the UK trade surplus in services. 
In  2015,  exports  of  financial  services  were  2.7 % 
of  GDP,  or  10 %  of  all  exports.  The  surplus  in 
financial  services  stood  at  2.3 %  of  GDP,  the 
highest of all components of services (graph 3.2.1). 
The  EU  accounts  for  a  little  over  40 %  of  UK 
exports  of  financial  services  and  the  UK  trade 
surplus  in  financial  services  with  the  EU  was 
around  1 %  of  GDP  in  2015.  The  surplus  in 
financial  services  reflects 
the  UK’s  sectoral 
strength  in  financial  services  and  insurance  and 
pension services, which it has retained for at least 
the last ten years (graph 3.2.2) (19). 

(19)  The  bars  represent  the  weight  of  each  sector  in  the  UK’s 
total  exports,  relative  to  the  proportion  of  total  world 
exports that sector represents. 

16 

0.00.51.01.52.02.53.03.50506070809101112131415Financial services exports (%)Financial services imports (%)-0.8-0.6-0.4-0.20.00.20.40.60.8TransportTravelConstructionInsurance and pensionservicesFinancial servicesCharges for the use ofintellectual property n.i.e.Telecommunications,computer, and information…Other business services200520102015 
 
 
                                                           
 
3.2. Financial sector and housing 

Graph 3.2.3:  Bank capitalisation: core equity Tier 1 ratio – 

Recent performance of the banking sector  

Q3 2016 

low 

interest 

Bank  profitability  has  remained  modest  since 
the  crisis.  Banks’  profits  remain  subdued  due  to 
rates,  balance  sheet 
continued 
deleveraging,  declining  trading  income  and,  for 
some  banks,  high  legacy  conduct  and  litigation 
provisions.  In  2015,  banks  booked  a  further  GBP 
15  billion  (EUR  18  billion)  of  provisions  for 
losses,  reducing  pre-tax  profits  by  around  50 %. 
This poses challenges for the capacity of banks to 
strengthen  their  capital  base  organically.  The 
major  banks’  shares  continue  to  trade  around  or 
below 
their  book  value.  Nevertheless,  credit 
growth has recovered since the beginning of 2016 
for all types of borrowers, led by consumer credit 
(see Section 1). 

Source: European Banking Authority 

Macro-prudential regulation 

Graph 3.2.4:  Gross non-performing debt instruments (per 

cent of total, Q3 2016) 

identified  by  the 
Four  banks  have  been 
Financial  Stability  Board  and  the  Bank  of 
England  as  global  systemically 
important 
institutions  (G-SIIs).  As  a  result,  G-SII  buffers 
have  been  applied  to  them  (20).  The  Prudential 
Regulation  Authority  has  also  recently  designated 
important 
16  banks  as  other 
institutions 
retail 
banks,  building  societies  and  subsidiaries  of 
investment  banks,  for  which  buffer  requirements 
have not yet been set. 

including  smaller 

systemically 

(O-SIIs), 

Source: European Central Bank 

Major  UK  banks  also  now  hold  a  significant 
amount of high-quality liquid assets. In order to 
comply  with  new  regulatory  standards,  the  major 
banks’  holdings  of  high-quality  liquid  assets  have 
risen  by  a  factor  of  about  four  since  the  crisis. 
Since  1  October  2015,  UK  banks  have  been 
required by the Prudential Regulation Authority to 
comply  with 
the  Liquidity  Coverage  Ratio 
standard,  a  measure  of  banks’  liquid  assets  as  a 
proportion  of  the  outflows  they  might  face  if 
funding  conditions  became  stressed.  The  UK 
banks’  liquidity  coverage  ratio  is,  in  aggregate, 
118 %, and all banks are above 100 %. 

Following  the  referendum  on  membership  of 
the EU in June 2016, the Bank of England took 
measures  to  preserve  banks’  capacity  to  lend 
domestically.  It  offered  banks  more  than  GBP 
250 billion  (EUR  306  billion)  in  liquidity  plus 
‘substantial’ access to foreign currency to ease any 
squeeze  in  markets.  In  addition,  the  Bank  of 
England recently reduced, in its role of designated 
macro-prudential  authority, 
the  countercyclical 
buffer rate for UK banks from 0.5 % to 0 %. This 
is expected to reduce capital requirements by about 
GBP 5.7 billion (EUR 7.0 billion). 

3.2.2.  HOUSING SECTOR 

Activity 
the  housing  sector  remained 
moderate in 2016, but high house prices and the 

in 

(20)  These  banks  are  HSBC  (2.5 %),  Barclays  (2 %),  Royal 
Bank of Scotland (1 %) and Standard Chartered (1 %). 

17 

89101112131415UKDEFRIT%%EU024681012141618ITFRDEUK%%EU 
 
 
 
                                                           
3.2. Financial sector and housing 

housing  shortage  persist.  New  housing  supply 
continues  to  lag  behind  the  growth  in  demand. 
This shortage of housing contributes to high house 
prices  and  has  significant  social  and  economic 
costs.  A  range  of  policies  to  support  residential 
construction  are  having  positive  effects  but  may 
not  prove  adequate.  Nevertheless,  risks  posed  by 
the  household  sector  to  macroeconomic  stability 
remain low in the short-term. 

evidence  suggests  that  secured  credit  is  generally 
available  and  sufficient  (Bank  of  England,  2016). 
The cost of secured borrowing fell further in 2016 
to  historic  lows,  supported  by  looser  monetary 
policy  (see  Section  1).  New  buyer  enquiries  fell 
steeply in the period around the referendum on EU 
membership, but subsequently recovered. 

Graph 3.2.6:  Housing transactions & mortgage approvals 

Housing affordability and demand 

House  prices  continue  to  rise.  The  growth  of 
house prices continues to outstrip that of incomes, 
with the former growing by a rate of 6.7 % in the 
year to November 2016 (graph 3.2.5). Regionally, 
house  price  growth  ranged  from  3.2 %  in  North 
East England to 10.5 % in the East of England. In 
London, the increase was 8.1 %. Indicators such as 
the  stock-sales  ratio  continue  to  suggest  tight 
2017). 
conditions 
housing  market 
Surveyors’ expectations of price rises over the next 
12  months  strengthened  in  late  2016.  The  OBR 
predicts  annual  national  house  price  growth  to 
average slightly under 5 % between 2016 and 2020 
(OBR, 2016). 

(RICS, 

Graph 3.2.5:  House price growth 

Source: Office for National Statistics 

Housing  transactions  remain  subdued,  despite 
good  credit  conditions.  The  number  of  mortgage 
approvals  was  broadly  flat  throughout  2016  and 
remains  low  by  historical  standards  (graph  3.2.6). 
This partly reflects declining affordability. Survey 

Source: Bank of England 

Pockets  of  relatively  risky  lending  continue  to 
emerge. There was a spike of activity in the buy-
to-let sector before the enactment of changes to the 
taxation of housing announced in the 2016 Budget, 
which  resulted  in  an  increase  in  taxation  of 
landlords’ returns (graph 3.2.6). The proportion of 
loans  advanced  at  both  high  loan-to-value  ratios 
and  high 
to 
increase. 

loan-to-income  ratios  continues 

An  increasing  proportion  of  households  do  not 
have  the  option  of  buying  a  house.  The  ratio  of 
median  house  price  to  median  earnings  reached  a 
new peak of over 7.5 in England in 2015 (DCLG, 
2016a). Houses are least affordable in London and 
the South East of England. The result is that many 
people  are  unable  to  buy  a  house,  even  if  they 
would prefer to, despite the low cost of borrowing. 
The  UK’s  overall  home  ownership  rate  peaked  in 
the early 2000s. In England it fell from 70.9 % in 
2003  to  63.6 %  in  2014-15  overall,  and  from 
58.6 %  to  36.7 %  for  those  aged  25-34 (DCLG, 
2016a).  In  parallel,  the  proportion  of  people  aged 

18 

-20-15-10-50510150708091011121314151617% yoy0510152025303505010015020025030035040045050007080910111213141516in thousandsNumber of property transactions (lhs)Number of mortgage approvals (lhs)Value of approved mortgages (rhs, bn GBP)GBP billions 
 
 
3.2. Financial sector and housing 

additions. On one hand, indicators such as Council 
Tax registrations suggest that official housing data 
may  understate  new  dwellings  by  around  20 % 
(HBF,  2016).  On  the  other  hand,  the  official 
figures  for  annual  demolitions  —  around  10 000 
— seem much too low. 

The  continued  mismatch  between  supply  and 
demand  is  expected  to  place  sustained  upward 
pressure  on  house  prices.  The  government 
projects  that  an  average  of  210 000  additional 
households  will  be  formed  each  year  in  the  25 
years to 2039 (DCLG, 2016c), principally due to a 
rising  population.  This  is  higher  than  the  current 
level  of  new  supply  (see  above).  There  is  already 
considerable  pent-up  demand  from  the  existing 
shortfall in housing supply. This mismatch is most 
acute in regions with faster population growth. 

Barriers to increasing housing supply 

Regulation  of  the  land  market  and  residential 
construction  remains 
strict  and  complex. 
Planning policies place severe limits on the scope 
for  residential  development,  particularly  around 
cities  as  a  result  of  the  presence  of  the  ‘Green 
Belt’.  This  has  contributed 
to  an  overall 
undersupply  of  land  for  development,  driving  the 
price  of  residential  land  up  (Cheshire,  2016)  and 
reducing the size of new dwellings. The process of 
obtaining  planning  permission  for  residential 
developments is often lengthy, uncertain, complex 
and  costly.  Housing  supply  is  consequently  often 
not  responsive  to  house  prices  or  to  growing 
housing  demand,  raising  the  level,  volatility  and 
regional variation of house prices. 

The  reformed  planning  system  is  somewhat 
more  supportive  of  development  but  risks 
remain  to  its  operation  in  practice.  The  use  of 
land  is  guided  by  the  principles  set  out  in  the 
National  Planning  Policy  Framework,  which  has 
been  significantly  reformed  in  recent  years  with 
the  aim  of  facilitating  increased  construction.  In 
England  planning  permission  for  277 000  homes 
was granted in the year to September 2016, a rise 
of  9 %  on  the  year  before,  although  to  date  this 
level  of  planning  permissions  has  not  been 
matched  by 
in 
construction. 

commensurate 

increase 

a 

20-39  living  in private rented  accommodation has 
risen to 45.5 %, from 21.4 % in 2003-04. 

Housing supply 

identified 

The  fundamental  imbalance  between  housing 
supply  and  demand 
in  previous 
country  reports  persists.  Public  concern  over 
housing  is  high,  especially  among  young  adults 
and  people  living  in  regions  with  high  housing 
costs  (Ipsos  Mori,  2016).  High  rents,  high  house 
prices  and  moving  costs  are  barriers  to  labour 
mobility  and  efficient  job  matching.  Private  and 
public 
significant 
difficulties in recruiting in high housing cost areas 
(21).  Potential  commutes,  especially  into  London, 
are often time-consuming and expensive. 

employers 

report 

sector 

Graph 3.2.7:  Housing starts & completions 

Source: European Commission 

New housing starts and completions in England 
show  signs  of  levelling  off.  Annual  new-build 
completions have risen significantly from the post-
crisis  trough,  but  at  141 000  in  Q3-2016  they 
remain  well  below  the  recent  peak  of  184 000  in 
2007.  The  growth  of  both  housing  starts  and 
completions  has  reduced  in  the  last  year  (graph 
3.2.7) (DCLG, 2016a). Conversions from business 
to  residential  use  have  increased  significantly,  to 
30 600 per year in 2015-16 (DCLG, 2016b). There 
is some uncertainty around the level of net housing 

(21)  Two 

thirds  of  respondents 

the  September  2016 
CBI/CBRE London Business Survey cited housing costs as 
a significant problem for recruiting and retaining staff. 

to 

Large  firms  may  not  increase  the  number  of 
houses  they  build  much  further.  The  10  largest 

19 

01020304050600001020304050607080910111213141516thousands quarterlyHousing startsHousing completions 
 
                                                           
builders  now  build  around  60 %  of  new  private 
homes  and  they  have  gradually  increased  their 
volumes  since  the  post-crisis  trough  in  housing 
supply.  However  it  does  not  look  likely  that  they 
can bridge much more of the current gap between 
housing  supply  and  demand  (Policy  Exchange, 
2016). High and volatile land and house prices and 
the  complex  planning  system  favour  a  cautious 
business  model,  focusing  on  profit  margins  and 
holding  a  reserve  of  land  more  than  raising 
volumes. 

There  are  barriers  to  the  entry  and  expansion 
of smaller house-builders. Builders who construct 
fewer  than  500  units  a  year  now  build  only  26 % 
of  new  homes,  down  from  two  thirds  in  the  late 
1980s (FMB,  2016).  Building  firms  that  left  the 
market following the financial crisis have not been 
replaced.  The  high  cost  of  land  and  difficulty  of 
obtaining  planning  permission  puts  a  premium  on 
specialist knowledge, raises the amount of up-front 
capital  needed  to  build  houses,  and  increases 
uncertainty  over  whether  and  when  completed 
homes can be sold. Although credit conditions are 
healthy  in  the  economy  as  a  whole,  construction 
firms  are  still  particularly  likely  to  report  that  a 
lack  of  access  to  finance  limits  building  activity 
(RICS, 2016). 

Graph 3.2.8:  Skills shortages in the construction sector 

3.2. Financial sector and housing 

had  greater  challenges 
in  securing  adequate 
numbers  of  skilled  workers  than  in  gaining  new 
work,  although  skills  shortages  seem  to  have 
moderated in the last year (graph 3.2.8). According 
to the CBI 2016 Education and Skills Survey, the 
balance  of  firms  confident  of  accessing  high-
skilled  construction  employees  in  future  was  a 
record  low  of  -74 %.  Many  construction  workers 
are set to retire in the next decade and the industry 
sees  a  need  to  improve  training  and  increase  the 
number  of  construction  apprenticeships  (Farmer 
Review,  2016).  Strong  housing  demand  should 
help to stimulate this. 

The government’s policy response 

The government has continually emphasised the 
need  to  boost  housing  supply.  As  reported  in 
previous  country  reports,  the  government  has 
adopted  a  number  of  initiatives  to  help  meet  its 
target  for  1  million  homes  to  be  built  by  2020. 
These  reforms  should  have  a  positive  impact  on 
housing  supply  but  may  not  be  sufficient  to 
address  chronic  undersupply  in  the  market.  In 
October  2016,  the  government  announced  plans 
for 
facto’ 
presumption  that  development  will  be  allowed  on 
brownfield  sites.  Despite  these  positive  signs, 
55 % of industry participants still cite the planning 
regime  as  a  barrier  to  building  activity  (RICS, 
2016). In February 2017 the government published 
a housing white paper ‘Fixing our broken housing 
market’ (DCLG, 2017) setting out further changes 
to planning rules and the operation of the planning 
system. 

further  changes 

to  make  a 

‘de 

The  government  is  seeking  to  address  local 
barriers  to  increased  development.  Residential 
planning  is  largely  implemented  at  a  local  level. 
Public employment on planning has fallen sharply 
in 
recent  years (LGIU,  2016)  and  different 
agencies  do  not  always  coordinate  well.  The 
Housing  and  Planning  Act  2016  has  put  in  place 
measures to force local authorities to deliver local 
plans  and  increase  the  likelihood  of  housing-led 
developments  being  permitted.  While  surveys 
show social attitudes are changing in response to a 
growing recognition of the severity of the housing 
crisis,  there  is  often  still  strong  local  public  and 
political opposition to development. 

Targets  for  the  sale  of  public  land  may  prove 
difficult  to  achieve.  While  departments  have 

Source: RICS Newsletter 

The construction sector faces skills shortages. A 
Federation  of  Master  Builders 
survey  of 
construction  SMEs  (FMB,  2016)  found  that  they 

20 

0102030405060708010111213141516% responding "yes"BricklayersSurveyorsOtherPlumbersCarpentersElectriciansPlasterers 
 
3.2. Financial sector and housing 

identified land with the potential to meet two thirds 
of  the  UK’s  target  to  dispose  land  for  160 000 
houses  by  2020,  in  the  first  10  months  of  the 
land  for  8 500  homes  was 
programme  only 
disposed of. The National Audit Office (NAO) has 
questioned  the  results  of  the  2010-15  public  land 
disposal programme and said delivery of the 2020 
target  will  be  challenging  (NAO,  2016).  In 
October 2016 the government announced plans for 
GBP  2  billion  (EUR  2.4  billion)  of  new  public 
borrowing  to  fund  an  Accelerated  Construction 
Scheme,  to  make  public  land  with  planning 
permission available to builders. 

Statement,  the  government  announced  it  would 
spend  GBP  2.3  billion  (EUR  2.8  billion)  on 
building infrastructure — such as roads — related 
to  housing  developments,  and  GBP  1.4  billion 
(EUR  1.7  billion)  under  three  existing  schemes 
(Affordable  Rent,  Shared  Ownership  and  Rent  to 
the  construction  of  40 000 
Buy) 
to  support 
the 
is  welcome  but 
affordable  homes.  This 
budgetary  allocation  is  relatively  small.  Housing 
Associations have also expressed concerns that the 
extension  of  the  Right  to  Buy  scheme  could 
weaken  their  balance  sheets  and  their  capacity  to 
invest in new housing supply. 

The  emphasis  on  demand-focused  policies  is 
declining. Since 2013 the two aspects of the Help 
loans  and  mortgage 
to  Buy  scheme  (equity 
guarantees) have provided support to over 100 000 
people  buying  a  house  with  a  limited  deposit, 
principally  first 
time  buyers.  The  mortgage 
guarantee aspect of Help to Buy was withdrawn at 
the  end  of  2016.  The  equity  loans  part  will 
continue  until  2021.  By  stimulating  housing 
demand,  these  policies  may  have  further  boosted 
house  prices.  Public  spending  on  subsidising 
private  rents  has  risen  substantially  in  the  last 
decade. This reflects rising housing costs but does 
not deliver increased housing supply. 

of 

12 

billion) 

Policy  is  shifting  away  from  a  focus  on  home 
ownership  to  supporting  a  mix  of  tenures.  The 
government  will  provide  up  to  GBP  10  billion 
government-backed 
(EUR 
guarantees  to  build  more  homes  for  rent,  which 
would  encourage  the  growth  of  more  large-scale 
private  landlords.  In  the  2016  Autumn  Statement, 
the  rules  on  grant  funding  were  relaxed  to  allow 
housing providers to deliver the mix of homes for 
ownership or rent that they deem appropriate. 

construction 

Publically-funded  housing 
is 
limited.  The  proportion  of  new  houses  built  by 
local authorities has fallen sharply, from just under 
50 %  in  1969-1970  to  little  more  than  1 %  today. 
This  decline  has  been  only  partly  replaced  by  the 
growth  of  not-for-profit  Housing  Associations.  In 
recent  years,  public  sector  capital  spending  on 
housing  has  continued  to  fall (DCLG,  2016d).  In 
2015-16,  the  construction  of  affordable  housing 
fell  to  a  24-year  low  of  32 100,  compared  to 
66 600  in  2014-15  (ibid.),  partly  reflecting  strong 
cyclicality  and  long  lead  times  in  affordable 
housing  delivery.  In  the  November  2016  Autumn 

The  government  is  seeking  to  resume  a  more 
active role in facilitating an increase in housing 
supply. The government would like to see public-
sector bodies, in particular local authorities, act as 
‘Housing  Delivery  Enablers’  (Elphicke-House, 
2015). This can range from the simple sale of land, 
to the public sector acting as a partner throughout 
the  development  process.  If  public  participation 
can  smooth  the  planning  process  it  could  reduce 
delays and overall development costs. 

Public  bodies  are 
increasingly  seeking  to 
partner  private-sector  builders  to  develop  and 
deliver  residential  developments.  A  growing 
number  of  local  authorities  have  set  up  their  own 
development  companies  to  deliver  new  housing. 
This is happening on a largely decentralised basis, 
using  a  variety  of  models.  The  government  plans 
to directly commission new houses on public land 
for which planning permission is in place. 

Conversions  and  alternative 
construction 
methods can help mitigate the housing shortage. 
Business-to-residential  property  conversions  have 
increased  significantly.  Converting  single  houses 
into  multiple  dwellings  is  often  more  feasible  for 
smaller  builders  than  new  construction.  Modular 
construction  has  scope  to  expand  in  the  UK.  As 
part of its approach to the collaborative economy, 
the  UK  has  established  a  ‘Rent  a  Room  Scheme’ 
permitting  people  to  earn  up  to  GBP  7 500  (EUR 
9 180) per year, tax-free, from renting out a room. 
The UK approach to the collaborative sector in the 
accommodation sector imposes a lighter regulatory 
regime on occasional providers than professionals, 
and the UK aims to establish trust standards in the 
collaborative economy. 

21 

 
3.3.  EXTERNAL ISSUES 

After  recently  reaching  record  highs,  the 
current  account  deficit  is  projected  to  decline. 
In 2016, the current account deficit is projected to 
have  widened  to  5.0 %  of  GDP,  from  4.3 %  of 
GDP in 2015, and it is one of the highest deficits in 
the EU. The current account deficit is projected to 
narrow  in  2017  and  2018.  However,  continued 
projected  current  account  deficits  indicate  that,  if 
other 
the  net 
international  investment  position  (NIIP)  could  be 
expected  to  deteriorate  over  time.  This  may  leave 
the  economy  exposed  to  risks  such  as  a  sudden 
change in the preference of international investors 
and affect external sustainability. 

factors  were  held  constant, 

the primary income balance was discussed in detail 
in the 2016 country report. Those trends are likely 
to have continued in 2016. Since 2011, the balance 
of  income  on  portfolio  investments  has  been 
broadly  constant  at  a  deficit  of  around  1.3 %  of 
GDP on average whereas the balance of income on 
FDI  has  fallen  significantly  from  a  surplus  of 
3.3 %  of  GDP  in  2011  to  0.5 %  of  GDP  in  2015 
(22) (graph 3.3.2). The decline in the surplus in the 
FDI  income  balance  reflects  a  large  fall  in  FDI 
credits  –  from 6.4 %  of  GDP  in  2011  to  3.3 %  of 
GDP  in  2015.  A  modest  fall  in  FDI  debits  of 
0.3 pps.  over  the  same  period  has  slightly  offset 
the impact on the FDI income balance. 

Graph 3.3.1:  Current account balance and its components 

Graph 3.3.2:  Primary income balance and its components 

Source: Office for National Statistics 

Source: Office for National Statistics 

A sharp increase in the primary income deficit 
has  been  the  main  cause  of  the  rise  in  the 
current account deficit since a recent trough in 
2011. The primary income balance was in surplus 
from  2000-2011.  However,  since  2011,  it  has 
moved from a surplus of 1.2 % of GDP to a deficit 
of  1.4 %  of  GDP  in  2015  (graph  3.3.1).  By 
contrast,  the  trade  deficit  has  remained  stable 
throughout  most  of  the  current  decade.  The 
relatively low level of the trade deficit in the face 
of a large increase in the current account deficit is 
unusual in historical perspective. 

A rapid decline in the foreign direct investment 
(FDI) income balance explains the deterioration 
in the primary income balance. The relationship 
between the decline in the FDI income balance and 

The  fall  in  the  FDI  income  balance  largely 
reflects  changes  in  the  relative  rates  of  return 
on  FDI  assets  and  liabilities (23).  Movements  in 
the  relative  stocks  of  FDI  assets  (the  stock  of 
foreign assets held by UK nationals) and liabilities 
(the stock of UK assets held by foreign nationals) 
and  relative  rates  of  return  on  those  stocks  have 
contributed  to  the  movement  in  the  FDI  income 
balance.  In  particular,  the  return  on  the  UK's  FDI 
assets  has  fallen  by  around  3 pps.  between  2011 
and  2015  while  that  paid  on  FDI  liabilities  rose 
the  same  period 
slightly  (by  0.1 pps.)  over 
although the return paid on FDI liabilities is above 
that received on assets in absolute terms. 

(22)  There has also been a significant decline in earnings from 
‘other’  investment,  the  return  on  these  investments  has 
fallen by 0.5 pps. over this period. 

(23)  See the 2016 country report for further details. 

22 

-7-6-5-4-3-2-10123818385878991939597990103050709111315% of GDPNet tradePrimary incomeSecondary incomeCurrent account-4-3-2-101234040506070809101112131415% of GDPEarnings on direct investmentOther primary incomeEarnings on portfolio investmentPrimary income net 
 
 
 
                                                           
3.3. External issues 

Graph 3.3.3:  Net international investment position 

Source: Office for National Statistics 

to 

The  external  position  is  vulnerable  to  negative 
shocks.  Such  shocks  could  include:  a  negative 
shock to exports (for example due to a downturn in 
major  export  markets),  a  rise  in  imports,  or  a  rise 
in  the  rate  of  return  paid  on  external  liabilities 
that  received  on  external  assets. 
relative 
However, as the UK has a floating exchange rate, 
it is likely that the threat to external sustainability 
would  be  diminished  by  a  further  depreciation  of 
sterling. This would act as a stabilising mechanism 
and  lead  to  the  adjustment  in  the  current  account 
deficit required to stabilise the NIIP. In particular, 
a depreciation would likely result in a reduction in 
the  trade  deficit,  as  exports  become  cheaper  (in 
foreign currency terms) and imports become more 
expensive  (in  sterling  terms),  other  factors  held 
constant. Sustainability also depends, crucially, on 
growth prospects over the next few years. 

cyclical 

It is not possible from available data to provide 
a  definitive  explanation  for  the  decline  in  the 
return  on  foreign  FDI  assets  relative  to  that 
paid  on  FDI  liabilities.  The  movement  may 
reflect  predominantly 
factors.  For 
example, the UK is in a more mature position in its 
economic  cycle  vis-à-vis  some  other  major 
destinations for FDI investment and thus generates 
higher  relative  returns.  It  may  also  reflect 
structurally higher returns generated in the UK vis-
à-vis other FDI destinations. Further discussion of 
this issue can be found in the 2016 country report. 

The Net International Investment Position (NIIP) 

The  NIIP  is  close  to  balance  despite  sustained 
current account deficits. The NIIP stood at -5 % 
of GDP in 2015 (graph 3.3.3), less negative than in 
2014  and  around  the  level  at  the beginning  of  the 
current decade. However, over the last decade, the 
NIIP has not deteriorated in the manner that would 
be  implied  by  the  size  of  the  current  account 
deficit. The discrepancy largely reflects the impact 
of ‘valuation effects’. Such valuation effects could 
be  reversed  in  future  years  and  pose  downside 
risks for the NIIP. 

The  sustainability  of 
the  NIIP  could  be 
undermined  by  continued  current  account 
deficits.  Although  the  current  account  deficit  is 
projected  to decline  in  2017  and 2018,  it  is likely 
to  remain  high.  The  rise  in  the  primary  income 
deficit since 2011 reflects, in part, the rise in gross 
liabilities  relative  to  gross  assets.  If  other  factors 
are  held  constant,  continued  current  account 
deficits  would  entail  a  further  deterioration  in  the 
primary  income  deficit  and  consequently  in  the 
NIIP.  There  is  clearly  potential  for  a  ‘vicious 
circle’  to  emerge,  with  a  consequent  threat  to 
external  sustainability.  Such  trends  would  be 
exacerbated  if  the  rate  of  return  on  external 
liabilities  continued  to  exceed  that  on  external 
assets  or  if  the  relative  rates  of  return  were 
themselves  affected  by  the  size  of  the  current 
account  deficit  (for  example,  if  foreign  investors 
demand  a  higher  risk  premium  for  holding  UK 
assets). 

23 

-50-40-30-20-100102091939597990103050709111315% of GDPActual NIIPImplied NIIPCA Balance 
 
3.4.  LABOUR MARKET, EDUCATION AND SOCIAL POLICIES 

Labour market 

employment 

1).  Headline 

There remains untapped potential in the labour 
market.  Against  a  backdrop  of  continuing 
economic growth, the UK labour market continued 
to  perform  well  throughout  2015  and  2016  (see 
Section 
and 
unemployment 
indicators  are  resilient  (graph 
3.4.1), although the picture is more mixed on other 
indicators  and  at  a  disaggregated  level.  A  stable 
share  of  the  labour  force  are  underemployed  (i.e. 
employed  but  would  like  to  work  more  hours), 
seeking  work 
available 
seeking  work  but  not 
(discouraged),  and 
immediately  available 
(graph  3.4.2).  Skills 
mismatches remain an issue, as does the quality of 
some of the jobs available. 

to  work  but  not 

Graph 3.4.1:  Key labour market indicators 

Source: Eurostat 

is  room  for  higher 

labour  market 
There 
participation of women, as well as other diverse 
segments. Inactivity has not changed significantly 
and  the  cohort  of  more  than  nine  million  inactive 
working  age  people  represents  a  substantial 
potential  resource.  For  workers  aged  20-64,  the 
proportion  working  part  time  is  four  times  higher 
among women (39.7 %) than men (9.7 %) and the 
female  part-time  employment  rate  in  the  UK  is 
8.1 pps. higher than the EU average. As discussed 
below, 
female  part-time 
employment that is due to caring responsibilities is 
particularly  high,  and  this  is  linked  to  gaps  in  the 
provision  of  childcare  and  social  care.  While  the 
employment 
is 
relatively high by EU standards, their employment 

low-skilled  workers 

the  proportion  of 

rate  of 

rate (55.9 %) is still nearly 30 pps. lower than that 
of  the  high  skilled  (84.7 %).  The  large  disability 
employment  gap  in  the  UK  (33.7 pps.  vs.  the  EU 
average  of  23.8 pps.  based  on  EU-SILC  2014)  is 
also at odds with positive aggregate labour market 
indicators. 

Graph 3.4.2:  Unemployment rate & potential additional 

labour force 

Source: Eurostat 

The  young  face  particular  challenges.  A  recent 
study  illustrated  the  strong  disparity  in  youth 
unemployment rates in 2015, from a low of 7.9 % 
in Inverness to a high of 27.3 % in Middlesbrough 
and Swansea (EY, 2016). The rate of those not in 
employment,  education  and  training  (NEET  rate) 
continued  to  decline  in  2015,  but  it  is  relatively 
high for inactive young women aged 15-24 (8.5 %) 
compared  to  other  EU  Member  States.  In  this 
context,  the  UK  continues  to  pursue  very  active 
intervention policies with young people. Emphasis 
is  placed  on  conditional  ‘earn  or  learn’  welfare 
policies,  with  little  scope  for  passive  receipt  of 
benefits. 

Wage  growth  is  moderate,  while  productivity 
remains  subdued.  As  described  in  Section  1  and 
graph 1.11, the growth of both nominal wages and 
unit labour costs has remained restrained. A slight 
uptick in unemployment is expected by 2018, as a 
result of weaker economic growth, with real wages 
forecast to stagnate in a context of higher inflation. 
While there has been some recent growth in labour 
productivity, it remains subdued (see Section 3.5). 
This  may  be  partly  linked  to  the  growth  in  work 

24 

7676.57777.57878.57979.58080.5810510152025200120022003200420052006200720082009201020112012201320142015%%UKActivity rate 20-64 (rhs)Unemployment rate 15-74 (lhs)Long-term unemployment rate 15-74 (lhs)Youth unemployment rate 15-24 (lhs)NEET rate 15-24 (lhs)0.02.04.06.08.010.012.014.016.018.020.02008Q12008Q32009Q12009Q32010Q12010Q32011Q12011Q32012Q12012Q32013Q12013Q32014Q12014Q32015Q12015Q32016Q12016Q3% of labour force 15-74UKUnemployment rateAvailable but not seekingUnderemployedSeeking but not available 
 
 
 
3.4. Labour market, education and social policies 

bottom  of  the  wage  distribution  is  likely.  Early 
indications  suggest  employers  have  been  largely 
successful  in  absorbing  or  adapting  to  the  initial 
impact of the National Living Wage, but particular 
challenges  are  anticipated  for  certain  sectors  in 
future.  The  Resolution  Foundation  reports  that 
compression  at  the  bottom  of  the  wage  scale  will 
increase substantially as the National Living Wage 
gradually  rises  (Resolution  Foundation,  2016a).  It 
forecasts  that  about  15 %  of  all  employees  are 
likely  to  be  on  a  minimum  wage  by  2020,  with 
much  higher  proportions  in  certain  regions  and 
occupational  sectors  such  as  hospitality.  As 
highlighted  in  the  2016  country  report,  there  is  a 
particular challenge in the social care sector, where 
employee  pay  is  the  major  cost.  The  Resolution 
Foundation notes that compression of pay presents 
challenges 
for 
workers  in  this  sector  (Resolution  Foundation, 
2016b). 

for  progression  opportunities 

(Department 

A  number  of  policies  have  been  announced  or 
are  being  implemented  to  respond  to  the  skills 
challenges facing the UK. The Independent Panel 
for 
on  Technical  Education 
Education,  2016a)  –  known  as  the  Sainsbury 
Report – is a significant and multi-faceted analysis 
of  the  issue,  including  34  recommendations.  The 
in  July  2016 
Post-16  Skills  Plan,  published 
(Department  for  Education,  2016b),  sets  out  the 
UK  Government’s  response.  In  the  plan  and  the 
accompanying  evidence  paper  (Department  for 
Education,  2016c),  the  government  acknowledges 
that the  UK  is  suffering from  skills shortages  and 
that  these  represent  challenges  to  employers.  It 
indicated 
lack  of  employer 
is  a 
engagement  and  investment  in  education  and 
training;  the  current  technical  education  system  is 
complex  and  opaque;  and  there  is  little  incentive 
for providers to do better. Both documents call for 
more tailoring to individual needs (including adult 
learners),  clear  routes  and  flexible  bridging 
between routes. The Sainsbury Report emphasises 
that the government must retain key strategic – and 
the  very 
some  operational  –  control  over 
education 
technical 
to 
significant 
proposed. The prospect of a full Further Education 
and  Training  Authority  which  could  provide  for 
more  strategic  control,  as  emphasised  in  the 
Sainsbury report, is not currently being considered. 

changes 

there 

that 

that  has  low  or  intermittent  hours,  and  a  shift  to 
low-skilled jobs. As noted in Section 3.1, taxes on 
labour in the UK are among the lowest in the EU, 
thus  eliminating  a  potential  brake  on  employment 
retention, creation and utilisation. 

Skills 

Skills utilisation presents challenges for the UK 
and may contribute to low productivity. Recent 
publications note the high number of graduates in 
jobs  which  may  not  utilise 
their  high 
qualifications.  One  study (CIPD,  2016)  contends 
that  around  60 %  of  graduates  in  the  UK  are 
working  in  non-graduate  jobs.  A  statistical  report 
(ONS,  2016)  notes  that  one-sixth  of  workers  are 
overqualified  for  their  current  position,  and  a 
similar  proportion  are  under-qualified.  There  has 
been  no  new  official  data  on  skills  mismatches 
since the 2016 country report but industry surveys 
by the Confederation of British Industry and other 
bodies  point  to  ongoing  concerns  regarding  skills 
gaps and skills shortages. This is also an issue for 
SMEs (European Commission, 2016a). 

improve 

High expenditure on in-work benefits is related 
to  the  prevalence  of  low  pay.  As  reported  in 
previous  UK  country  reports,  those  entering  the 
workforce  often  face  obstacles  to  increasing  their 
working  hours  and  remuneration,  and  achieving 
career  progression.  Up-skilling  and  reskilling 
labour 
policies 
(see  below)  could 
in-work 
resilience,  decrease  expenditure  on 
benefits, and boost future productivity and growth. 
The  UK’s  policy  response  includes  the  National 
Living  Wage,  a  higher  minimum  wage  rate  that 
applies  to  adults  aged  25  and  over.  A  new  Social 
Justice Strategy, expected to be published in spring 
2017, will aim to assist lifelong progress on merit. 
Additional  policy  levers  include  in-work  support 
and  conditionality  for  those  claiming  Universal 
Credit,  and  apprenticeship  and  other  vocational 
education/training reform. Prime Minister May has 
commissioned 
‘Independent  Review  of 
Employment  Practices  in  the  Modern  Economy’, 
which  is  to  consider  ‘the  implications  of  new 
forms  of  work,  driven  by  digital  platforms,  for 
employee  rights  and  responsibilities,  employer 
freedoms  and  obligations,  and  our  existing 
regulatory framework surrounding employment’. 

an 

The  number  of  low-wage  earners  remains 
substantial  and  further  compression  at  the 

The  Industrial  Strategy  green  paper  published 
in  January  2017  confirmed  that  technical 

25 

 
3.4. Labour market, education and social policies 

scope  to  reflect  differentiation  in  this  report. 
The  UK  government  has  also  expressed  an 
intention  to  devolve  elements  of  skills  policy  and 
operations  within  England.  The  2016  Autumn 
Statement  announced  that  the  adult  education 
budget in London will be devolved from 2019-20. 
The  key  vehicle  for  devolving  skills  management 
in  England  is  planned  to  be  the  Local  Enterprise 
Partnerships. 

Education 

and 

average 

UK  students’  basic  skills  in  science,  maths  and 
reading  are  stable,  high  and  fairly  equitable. 
The 
reading 
science,  maths 
performance  of  15-year-olds  has  remained  stable 
since 2006 (OECD, 2016a). Compared to 2012, the 
proportion of low achievers is unchanged in maths 
(22 %),  slightly  worse  in  reading  (18 %)  and 
science  (17 %),  but  still  above  the  EU  average  in 
all  three  fields.  According  to  PISA  2015,  the 
impact  of  socio-economic  and  migrant  status  on 
performance is rather small. For example, 11 % of 
the  variation  in  student  performance  in  science  is 
attributed to differences in socio-economic status. 

Guided  by  the  principle  that  school  autonomy 
leads  to  higher  standards  for  all  learners,  in 
England  the  government  has  gone  ahead  with 
the  ‘academisation’  of  primary  and  secondary 
schools  (24).  It  is  usually  a  voluntary  process,  but 
schools  which  are  underperforming  will  have  to 
convert  to  academy  status.  In  England,  67 %  of 
secondary  and  22 %  of  primary  schools  have 
converted to academies. The extent of the planned 
structural  changes  has  led  to  concerns  within  the 
teaching  profession,  in  particular  concerning  the 
difficulty  of  assuring  quality  in  large  multi-
academy  trusts  (European  Commission,  2016a), 
and as distracting from real challenges such as the 
supply of teachers (TUC, 2016). 

There  are  mixed  approaches  to  raising  the 
learners  from  disadvantaged 
attainment  of 
backgrounds.  On 
recent 
government policy in England focuses on reducing 

the  one  hand, 

(24)  Academies 

are 

state-funded 

schools  which 

are 
independently  run  with  minimum  involvement  by  local 
authorities  and  set  up  with  the  help  of  outside  sponsors. 
They  are  free  to  set  staff  salary  levels  and  organise  their 
timetable as they see fit and they do not need to follow the 
national curriculum. In return for autonomy, academies are 
subjected to enhanced forms of accountability. 

education  reforms  are  a  key  focus  for  skills 
policy  (HM  Government,  2017).  The  paper 
highlighted  regional  and  sectoral  disparities  in 
skills and opportunity. It also proposed new capital 
funding of GBP 170 million (EUR 208 million) for 
Institutes 
tackle 
for  Technology,  action 
shortages  of  science,  technology,  engineering  and 
exploring  new 
maths 
approaches 
learning. 
Furthermore,  it  identified  a  knowledge  gap  linked 
to the lack of a single authoritative source on skills 
forecasting,  and  proposed  to  analyse  whether  a 
portal  analogous  to  the  higher  education  UCAS 
system could be developed for technical education. 

skills 
to  delivery  of 

(STEM) 

lifelong 

and 

to 

is 

the 

the 

see 

and 

these 

future 

existing 

Institute 

flexibility  of 

reform  will 

the  beginning  of 

the  operations  of 

Apprenticeship 
key 
developments take place from April 2017. Chief 
amongst 
the 
apprenticeship  levy  (see  the  2016  country  report) 
and 
for 
in  England.  As  reported  by 
Apprenticeships 
representative  groups,  employers  have  expressed 
concerns  about 
the  new 
apprenticeship system, whether the digital platform 
will be available immediately when the levy starts, 
and  whether 
non-
apprenticeship  related  training  will  be  recognised 
appropriately.  The  need  to  ensure  high-quality 
apprenticeships should also be taken into account. 
Other  concerns  have  been  expressed  in  a  number 
of  reports,  including  from  the  UK  Parliament’s 
Public  Accounts  Committee.  The  NAO  (NAO, 
2016a) expressed concern that the Department for 
Education  had  not  defined  what  would  constitute 
success  for  the  reformed  system,  including  its 
contribution  to  increased  productivity.  It  also 
echoes the Sainsbury report’s call to clarify where 
strategic  control  responsibility  will  lie  between 
government  and  the  Institute  for  Apprenticeships. 
Issues  highlighted  in  the  2016  country  report  on 
the  characteristics  of  apprenticeships  remain. 
These  include  the  number  of  completions  versus 
the  number  of 
the 
apprenticeships  undertaken,  the  sectors  in  which 
apprenticeships  take  place  and  the  somewhat 
commencing 
atypical 
apprenticeships 
the  UK.  The  Government 
published  its  response  to  the  Committee  on  6th 
February  2017,  accepting 
the  Committee’s 
recommendations. 

age-profile  of 
in 

levels  of 

starts, 

those 

the 

Skills  policy  is  largely  devolved  to  Scotland, 
Northern  Ireland and  Wales,  and there is little 

26 

 
                                                           
3.4. Labour market, education and social policies 

are 

that 

reforms/cutbacks 

indicators,  especially  the  risk  of  poverty  or  social 
exclusion  (graph  3.4.3).  However,  there  is  a  large 
divergence  between 
the  elderly,  working-age 
adults and children (graph 3.4.4). Child poverty is 
worryingly high, particularly in light of the further 
welfare 
to  be 
implemented, which will hit this group harder than 
elderly  welfare  recipients  protected  by  the  ‘triple-
lock’.  A  number  of  think  tanks  have  reported 
concerns  over  intergenerational  fairness,  and  the 
House  of  Commons  Work  and  Pensions  Select 
Committee  called  for  the  scrapping  of  the  ‘triple 
lock’  (House  of  Commons,  2016).  The  risk  of 
poverty or social exclusion (AROPE) (26) for those 
with  disabilities  (33 %)  is  also  relatively  high  by 
EU  standards.  The  13.6  pp.  gap  between  the  rate 
for  those  with  and  without  disabilities  in  the  UK 
was higher than the EU average (8.7 pps.) in 2014. 

Graph 3.4.3:  At-risk-of-poverty rate and its components 

Source: European Commission 

(26)  At-risk-of-poverty  or  social  exclusion  rate  (%  of  total 
population).  People  who  are  at-risk-of  poverty  (AROP) 
and/or  suffering  from  severe  material  deprivation  (SMD) 
and/or  living  in  household  with  zero  or  very  low  work 
intensity (LWI). 

for  every  disadvantaged 

disadvantages  stemming  from  geographical  origin 
(Department  for  Education,  2016d)  and  shifting 
from end grades to assessing educational progress. 
The  Pupil  Premium,  providing  schools  additional 
funds 
is 
delivering cultural change. On the other hand, the 
government  is  expanding  grammar  schools  (new 
grammar  schools  were  banned  in  1998  on  the 
grounds  that  selection  based  on  ability  tests  was 
discriminatory  towards  pupils  from  low  socio-
economic  backgrounds).  Without  compensatory 
measures, the reversal of the ban has the potential 
to create more inequalities in education. 

learner, 

is  booming 

Higher  education 
in  terms  of 
graduate  numbers  and  their  employability. 
Unlike  most  EU  countries,  the  proportion  of 
graduates  among  the  foreign-born  is  higher  than 
among 
the  native-born.  Disadvantaged  young 
people are 2.4 times less likely to enrol than those 
from  advantaged  background,  with  especially  low 
enrolment  among  white  males  from  state  schools 
(UCAS,  2016).  The  employability  of  recent 
graduates (25) rose in 2015, and at 89.7 % it is one 
of  the  highest  in  the  EU.  The  proportion  of  UK-
domiciled  graduates  finding  employment  within  6 
months  of  graduating  increased  from  63.5 %  in 
2012 to 67.3 % in 2015. An exception is computer 
science  graduates,  with  a  relatively  high  10 % 
unemployment rate 6 months after graduation. 

Higher  education  reforms  in  England  aim  to 
open  the  market  further  and  link  funding  to 
teaching quality. England is passing legislation to 
promote more choice and competition and make it 
easier  for  new  providers  to  enter  the  higher 
education  market.  The  new  Teaching  Excellence 
Framework  is  an  ambitious  policy  to  encourage 
quality teaching by measuring the level of teaching 
quality in higher education institutions and linking 
it  to  the  level  of  tuition  fees  that  institutions  may 
charge as of September 2019. 

Social indicators and policies 

Poverty rates remain stable but with disparities 
across  age  segments.  As  noted  in  Section  1,  the 
tax-benefit system currently substantially alleviates 
inequality. At a glance, there has been no dramatic 
movement in some of the common headline social 

(25)  People  aged  20-34  who  left  further/higher  education 

between 1 and 3 years before the reference year. 

27 

05101520253020052006200720082009201020112012201320142015% of populationUKAt-risk-of-poverty-or-social-exclusion rateAt-risk-of-poverty rateSevere material deprivationPeople living in low work intensity households 
                                                           
 
 
                                                           
3.4. Labour market, education and social policies 

Graph 3.4.4:  Risk of poverty (AROPE) by age 

3.7 billion) savings expected to accrue by the same 
period  from  reducing  Universal  Credit  Work 
Allowances.  As  discussed 
the 
forecast  higher  inflation  in  2017  and  2018  will 
squeeze  real  wages  and  also  the  real  value  of 
working age welfare payments. 

in  Section  1, 

to 

indicates 

Universal  Credit  aims  to  both  reduce  workless 
households  and  fully  activate  all  working-age 
adults  within  households.  According 
to  an 
assessment by the Resolution Foundation, the cuts 
in  Universal  Credit  have  made  the  incentives  for 
many potential second earners to enter or increase 
work 
the 
‘far  worse’  when  compared 
predecessor  Tax  Credits  system.  Conversely  the 
analysis 
that  Universal  Credit  still 
addresses  ‘the  very  worst  disincentives  to  enter 
work’ (Resolution Foundation, 2016c). Conditions 
will  apply  to  most  working-age  adults  in  a 
Universal  Credit 
including  ongoing 
claim, 
conditionality  for  those  who  attain  work  but 
remain  in  receipt  of  Universal  Credit.  This  is 
designed  to  assist  and  encourage  claimants  to 
access  higher  working  hours,  higher  wages  or 
both, to reduce dependence on in-work support and 
reduce poverty in families. 

to  a 

further  delay,  with 

The  full  roll-out  of  Universal  Credit  has  been 
full 
subject 
implementation now not expected until 2022. As 
of 8 December 2016, there were 430 000 claimants 
on  Universal  Credit  (some  43 %  of  them  in 
employment).  The  Department  of  Work  and 
Pensions  has  begun 
in-work 
to 
conditionality,  via  a  randomised  control  trial.  The 
ultimate  claim  load  when  fully  rolled  out  is 
expected to number around 7 million households. 

implement 

in  relative 

Notable  gender  divergences  in  overall  earnings 
and  poverty  rates  are  associated  with  gender 
disparities  in  the  labour  market,  including 
inactivity  or  part-time  work.  This  in  turn  is 
associated  with  the  lack  of  affordable  formal 
childcare,  which  remains, 
terms, 
expensive in the UK (see below). Childcare costs, 
lack  of  availability  and  issues  regarding  quality 
can  reduce  female  participation  in  the  labour 
market, whether part- or full-time. The percentage 
of  inactivity  among  working  age  women  that  is 
due  to  looking  after  children  or  incapacitated 
adults  (29.5 %),  and  of  part-time  work  that  is  for 
the same reasons (40.1 %), remained high in 2015. 
This  leads  to  diminished  career  opportunities, 

Source: European Commission 

The  number  of  children  in  poverty  who  live  in 
working  households  is  a  particular  cause  for 
concern.  At  13.4  %,  the  share  of  UK  children 
living  in  jobless  households  remained  one  of  the 
highest  in  the  EU  in  2015,  though  it  has  been 
falling.  The  share  of  children  in  absolute  income 
poverty  (after  housing  costs)  who  live  in  working 
households has increased from 54 % in 2003-04 to 
67 %  in  2014-15  (Institute  for  Fiscal  Studies, 
2016).  

The  cumulative  effect  of  welfare  reforms  and 
cutbacks  will  continue  to  mount  for  a  number 
of  years.  The  Institute  for  Fiscal  Studies  predicts 
that the share of children at risk of poverty (27) will 
rise from 17.8 % in 2015-16 to 25.7 % in 2020-21, 
increasing  the  number  of  children  experiencing 
poverty  by  1.2  million  (ibid.).  In-work  support, 
which  is  crucial  for  the  working  poor,  will  be 
reduced  by  cuts  in  the  levels  of  Universal  Credit 
(which will replace Tax Credits as the vehicle for 
in-work  support)  and  the  intention  to  cap  support 
at  two  children  maximum,  regardless  of  family 
size,  for  new  births  after  April  2017.  The  2016 
Autumn  Statement  introduced  a  decrease  in  the 
taper  rate  at  which  Universal  Credit  is  withdrawn 
once  a  claimant  earns  more  than  the  fixed  Work 
Allowance from 65 % to 63 %, which is projected 
to  cost  the  Exchequer  approximately  GBP  700 
million (EUR 857 million) per year by 2021-2022. 
This compares with the nearly GBP 3 billion (EUR 

(27)  The proportion of children living in absolute poverty, who 
live in a household where at least one adult is working. 

28 

0510152025303520052006200720082009201020112012201320142015% of populationUKChildren (<18y)Working age (18-64)Elderly (65+) 
 
                                                           
3.4. Labour market, education and social policies 

provision.  According  to  a  widely  regarded  2016 
survey  (Family  and  Childcare  Trust,  2016a),  only 
45 %  of  councils 
in  England  had  sufficient 
childcare  for  parents  working  full-time,  a  slight 
improvement  on  the  43 %  in  the  previous  year. 
This was despite the legal obligations imposed by 
the  Childcare  Act  2006  to  ensure  there  is  enough 
those 
childcare 
undertaking 
the 
intention  of  returning  to  work.  In  Scotland,  only 
13 %  of  councils  reported  that  they  had  sufficient 
childcare  for  working  parents,  compared  to  15 % 
last  year  There  was  a  significant  improvement  in 
Wales,  however,  with  40 %  of  councils  reporting 
sufficient provision, compared to 18 % last year. 

training  or  education  with 

for  working  parents 

and 

government 

The  quality  of  childcare  provision  in  the  UK 
can  be  difficult  to  assess,  given  the  varied 
nature of provision. In the area of early childhood 
care  and  education,  there  are  some  metrics  and 
some  concern  has  been  expressed  by  interest 
groups.  The  Family  and  Childcare  Trust  has 
published  a  report  on  quality  of  early-years 
services  which  emphasises  the  importance  of 
resources, including expert practitioners as well as 
continuing  quality  and  professional  development 
for  all  staff  (Family  and  Childcare  Trust,  2016b). 
The 
a 
determination  to  focus  on  quality,  targeting  staff 
qualifications  and  promising 
to  publish  a 
workforce  strategy 
in  2017  (Department  for 
Education, 2016e). The most recent Ofsted annual 
report notes some positive trends in the quality of 
childcare provision, including: 90 % of early-years 
providers are now good or better (a 22 pp. increase 
since  2010);  there  is  no  great  divergence  in  the 
proportion of nurseries judged good or outstanding 
across  the  least  and  most  deprived  areas;  and 
almost  70 %  of  young  children  now  reach  a  good 
level of development by the age of five, compared 
to just over half in 2013 (Ofsted, 2016). 

expressed 

also 

has 

Health sector 

staff 

The  rising  demand  for  healthcare  in  the  UK, 
combined  with  budget  constraints  (see  Section 
3.1)  and  an  ageing  workforce, 
is  causing 
healthcare 
and  unfilled 
vacancies.  In  recent  years,  the  UK  has  had  fewer 
doctors  per  100 000  citizens  compared  to  the  EU 
average  (281  vs  350  in  2014).  Retention  and 
recruitment 
is 
healthcare 
problematic,  and  there  is  considerable  reliance  on 

professionals 

shortages 

of 

lower  pay  and  earnings, 
lower  prospective 
pensions  and  underutilised  human  capital.  At 
20.9 %  in  2014,  the  unadjusted  gender  pay  gap  is 
well above the EU average of 16.7 %. The overall 
gender  earnings  gap  of  45.7 %  is  above  the  EU 
average  of  39.8 %,  and  the  gender  pension  gap  is 
39.5 %. 

Housing  affordability  remains  a  challenge, 
particularly  for  certain  groups.  As  discussed  in 
Section 3.2, the cost of housing is high and rising, 
which is linked to inadequate supply. 12.5 % of the 
UK population spend over 40 % of their income on 
housing,  which  is  above  the  EU  average  and  has 
been  rising.  The  proportion  is  higher  for  city-
dwellers (14.7 %) and young people (22.1 %). 

Childcare provision 

In  2014,  29 %  of  children  under  three  years 
attended  formal  childcare,  although  only  4 % 
did  so  for  more  than  30  hours  per  week.  The 
Childcare  Act  2016  plans  to  double  the  free  part-
time  pre-school  provision  for  eligible  three  and 
four  year  olds  in  England  to  30  hours  per  week 
over  38  weeks  of  the  year  from  September  2017. 
Although  this  goes  some  way  to  improving  the 
availability and affordability of full-time childcare, 
data for 2015 shows that average full-time working 
hours  in  the  UK  were  much  longer  (41.3  per 
week). So the new childcare provision may not be 
compatible with many full-time jobs. Furthermore, 
this measure does not address the low participation 
of  children  under  three  years  in  formal  childcare. 
There are also concerns that the allocated funding 
is not sufficient. 

(Family  and 
The  2016  Childcare  Survey 
Childcare  Trust,  2016a)  found  that  the  cost  of 
sending  a  child  under  two  to  a  nursery  on  a 
part-time  basis  (i.e.  25  hours  per  week)  has 
risen by a fifth over the last five years. Childcare 
costs  are  likely  to  have  a  negative  impact  on 
women’s labour market participation, as they tend 
to be the second earners and therefore returning to 
work  is  not  always  financially  worthwhile.  The 
substantial assistance offered via Universal Credit, 
which  can  cover  up  to  85 %  of  the  costs  of 
childcare,  has 
this 
the  potential 
situation for some low-earners. 

to  alleviate 

In  addition  to  high  childcare  costs,  the  UK  is 
facing  a  challenge  with  regard  to  childcare 

29 

 
3.4. Labour market, education and social policies 

healthcare  staff  who  qualified  outside  the  UK 
(NAO, 2016b; Royal College of Physicians, 2016). 
To mitigate the situation, the administrations in the 
constituent  nations  of  the  UK  have  announced 
plans to increase the training places for nurses and 
doctors.  Action 
to 
improve  staff  retention  and  adjust  the  workforce 
skill  mix,  by  introducing  extended,  advanced  and 
new  roles.  The  impact  of  most  of  these  measures 
will be seen in the medium- to long-term. Until the 
impact  of  these  measures  materialises,  the  health 
services  may  need  to  continue  recruiting  doctors 
and nurses from outside the UK. 

is  also  being  considered 

The  funding  model  for  long-term  care  in 
England  is  unsustainable  and  is  also  putting 
pressure  on  the  NHS.  Fiscal  consolidation  since 
2010  has  resulted  in  cuts  to  funding  for  local 
government  which,  combined  with  demographic 
pressure, impact the provision of social care. This 
also  puts  additional  pressure  on  acute  hospital 
services. Another concern arises over the equitable 
distribution  of  social  care  regionally,  as  local 
authorities  across  the  UK  face  widely  differing 
funding positions. 

Access  to  and  quality  of  mental  health  services 
in  England  have  raised  concerns  (Independent 
in 
Mental  Health  Taskforce  to  the  NHS 
England,  2016).  The  economic  and  social  impact 
of mental ill health is significant, estimated at GBP 
105  billion  (EUR  129  billion)  in  England.  The 
government  has  announced  plans  to  reinforce  the 
provision  of  mental  health  services  for  children 
and  adults.  It  has  introduced  targets  for  timely 
treatment, 
and 
announced  measures  for  improved  support  in 
schools,  the  workplace  and  at  community  care 
level. Furthermore, NHS England has published an 
implementation plan setting out how it will deliver 
the  recommendations  made  by  the  Mental  Health 
Taskforce,  and  in  January  2017  the  government 
formally  accepted  the  recommendations  made  by 
the Taskforce. 

increased 

pledged 

funding 

30 

 
3.5. INVESTMENT AND PRODUCTIVITY 

Investment trends 

low 

The  UK  has  had  relatively 
levels  of 
investment for a long time. The UK has ranked in 
the  bottom  quartile  of  OECD  countries  for  fixed 
capital investment for 48 of the last 55 years (HM 
Government,  2017).  Total  gross  fixed  capital 
formation was 16.9 % of GDP in 2015, one of the 
lowest  levels  in  the  EU.  As  graph  3.5.1  shows, 
since  2000,  private 
investment  has  been 
consistently  significantly  below  the  EU  average, 
while  public 
to  be 
investment  has 
marginally below the EU average. This gap, partly 
related to the UK’s specialisation in services, looks 
set to remain and possibly widen in the near term. 
Box  3.5.1  summarises  UK  investment  trends  and 
sets out the principal barriers to higher investment. 

tended 

Graph 3.5.1:  Public & private investment shares, UK & EU28 

Source: European Commission, 2016 Winter Forecast 

investment 

Business  investment  has  recovered  from  the 
post-crisis  trough  but  is  set  to  soften.  Private 
investment  fell  sharply  during  the  crisis,  from 
15.5 % of GDP in 2007 to 12.2 % of GDP in 2009. 
gradually 
Private 
recovered,  expanding  more  rapidly  than  GDP  in 
the  period  from  2010  to  2015.  After  modest 
growth in 2016, business investment is expected to 
remain  subdued  in  2017  and  2018,  reflecting 
continued uncertainty following the referendum on 
EU membership (see Section 1). 

subsequently 

Overall public capital spending is flat but there 
is  an 
infrastructure 
investment.  UK  public  sector  net  investment 
(PSNI)  increased  gradually  from  less  than  1 %  of 

increasing 

focus  on 

GDP  in  the  late  1990s  to  around  2 %  of  GDP 
before  the  international  economic  and  financial 
crisis (graph 3.5.2). After temporarily expanding to 
over  3 %  of  GDP  during  the  crisis,  as  part  of  a 
fiscal  stimulus  package,  PSNI  has  fallen  back  to 
pre-crisis  levels.  In  the  2016  Autumn  Statement, 
the  government  announced  increases  to  planned 
future infrastructure spending (see graph 3.5.2 and 
Section  3.6).  PSNI  is  now  expected  to  remain 
broadly flat at 1.9-2.0 % of GDP until 2019-2020. 
The government is increasingly focusing  PSNI on 
infrastructure, while reducing the proportion spent 
on  public  services  such  as  education  and 
healthcare. 

Graph 3.5.2:  UK public sector net investment (% of GDP) 

Source: Office for Budget Responsibility 

EU  funding  currently  complements  domestic 
sources.  Box  2.1  discusses  European  Structural 
and Investment Funds (ESIF) investment, which is 
expected  to  reach  up  to  EUR  16.4  billion  (GBP 
13.4  billion)  in  the  UK  by  2020.  The  European 
Investment Bank (EIB) has also taken an important 
role  in  funding  UK  infrastructure.  The  EIB  lent 
EUR  7.77  billion  (GBP  6.35  billion)  to  UK 
projects  in  2015,  of  which  two  thirds  was  for 
infrastructure.  This  represented  an  increase  of 
10.8 % compared to 2014. By December 2016 the 
European  Fund  for  Strategic  Investments  (EFSI) 
had approved projects worth some EUR 3.2 billion 
(GBP 2.6 billion) in EIB financing under the EFSI, 
which  is  expected  to  trigger  total  investment  of 
EUR 21.6 billion (GBP 17.6 billion). The UK has 
been one of the largest recipients of EFSI funds to 
date.  The  government  has  committed  to  making 

31 

04812162000010203040506070809101112131415161718% of GDPUK Private investmentEU28 Private investmentUK Public investmentEU28 Public investmentforecast00.511.522.533.54Latest OBR ForecastPre-Autumn StatementPSNI 
 
 
 
3.5. Investment and productivity 

available  national  resources  equivalent  to  EU 
funding for a period following the UK’s departure 
from the EU. 

financial  crisis.  The  reasons  for  this  trend  were 
analysed in the 2016 country report. 

Graph 3.5.4:  Output per hour, by country 

Graph 3.5.3:  Investment by category in the UK & EU28 

Source: OECD 

Source: European Commission, 2016 Winter Forecast 

The  UK  could  benefit  from  higher  investment 
across  the  economy.  As  discussed  below,  weak 
investment across the economy is one explanation 
for  the  UK’s  low  productivity  growth.  As  graph 
3.5.3  shows,  investment  in  equipment  has  been 
consistently  below  the  EU  average,  which  is 
partially  but  not  fully  explained  by  the  relatively 
low share of manufacturing  in UK GDP. The UK 
also has a relatively high effective marginal rate on 
new  investment  (Section  3.1).  As  set  out  in 
Sections  3.2  and  3.6,  the  government  is  putting  a 
strong emphasis on the need to raise investment in 
dwellings and infrastructure. In the Council's 2016 
recommendations to the UK, CSR2 highlighted the 
particular  need  to  tackle  the  effects  of  persistent 
shortfalls in housing and infrastructure investment 
(see Section 2). 

Productivity 

UK  productivity  is  relatively  low.  Graph  3.5.4 
shows  UK  productivity  relative  to  the  US  and 
other G7 countries. UK workers’ output per hour is 
currently 20-25 % lower than their counterparts in 
the  US,  France  and  Germany,  similar  to  Canada 
and  Italy,  and  higher  than  Japan.  While  the  UK’s 
productivity  gap  relative  to  the  top  performers  is 
longstanding, it has fallen further behind since the 

The  UK  is  a  large,  open  economy  with  a 
generally  good  business  environment.  The  UK 
ranks  7th  in  the  World  Bank’s  ‘ease  of  doing 
business’  index  (World  Bank,  2016).  It  has 
comparatively  low  levels  of  regulation  in  product 
and 
labour  markets,  a  high-quality  public 
administration,  deep  capital  markets,  and  strong 
universities.  These  factors  are  supportive  of 
economic  efficiency  and  contribute  to  the  UK’s 
high  employment  rate.  They  are  also  one  of  the 
reasons  for  the  high  level  of  FDI  in  the  UK  (see 
Section  3.3)  and 
the  high 
productivity pharmaceuticals and financial services 
sectors. 

its  strength 

in 

Nevertheless, a number of persistent structural 
problems  weigh  on  investment,  the  efficient 
allocation  of  resources  and  hence  productivity. 
The  UK  has  the  lowest  capital  stock  of  all  G7 
nations  (HM  Government,  2017).  There  are 
shortcomings  in  infrastructure  (Section  3.6),  the 
workforce  has  significant  gaps  in  basic  and 
technical  skills  (Section  3.4),  the  land  market  is 
very  tightly  regulated  (Section  3.2)  and  there  is 
evidence  that  the  quality  of  management in  UK 
firms  and  the  dissemination  of  technological 
innovations  could  be  improved  (Bloom  et  al., 
2016). The latter contributes to the UK’s long tail 
of  low-performing  firms  (Productivity  Leadership 
Group, 2016). Two-thirds  of UK  employees  work 

32 

0369040506070809101112131415161718% of GDPUK equipmentEU28 equipmentUK otherEU28 otherforecast6065707580859095100105110FranceGermanyUKCanadaItalyJapanUS=10019972002200720112015 
 
 
3.5. Investment and productivity 

negative impact. Several years of low investment 
and  the  substitution  of  labour  for  capital  in  a 
context of strong and responsive labour supply and 
weak wage growth have lowered the UK’s capital 
stock  per worker (Barnett  et  al., 2014).  There has 
also  been  a  shift  in  the  composition  of  the 
economy  towards  business  sectors  with  lower 
productivity.  Since  2011,  shifts  between  sectors 
account  for  half  of  the  slowdown  in  productivity 
growth  (IPPR,  2016).  In  addition,  within  these 
low-wage  sectors,  UK  firms  tend  to  lag  behind 
their European peers in skills, training, adoption of 
consequently 
new 
productivity (ibid.). 

technologies 

and 

in 

2017 

economic 

investment 

(HM  Government, 

The government is focused on the need to boost 
productivity growth but this will be challenging. 
An  Industrial  Strategy  green  paper  published  in 
January 
2017) 
summarised  the  UK’s  growth  and  productivity 
challenges  and  set  out the government’s  approach 
to tackling these and building on the UK’s existing 
strengths.  The  green  paper  is  based  around  a  10 
pillar  strategy  and  emphasises  the  importance  of 
capital, 
long-term 
including  infrastructure,  skills  and  knowledge, 
promoting  a  dynamic  economy  that  encourages 
innovation,  and  measures  to  help  specific  sectors 
and  places.  In  the  2016  Autumn  Statement,  the 
government 
‘National 
Productivity  Investment  Fund’  (NPIF).  This  will 
provide a total of GBP 23 billion (EUR 28 billion) 
of  additional  funding  between  2017-18  and  2021-
22  for  housing,  transport,  digital  communications 
and  R&D.  At  the  same  time,  forecast  weak 
business  investment  growth  in  2017  and  2018 
(Section  1)  is  likely  to  weigh  on  productivity 
growth in the near term. 

announced 

new 

a 

for  firms  whose  productivity  is  below  average 
(McKinsey, 2016). 

Productivity  growth  has  been  weak  since  the 
crisis  and  output  per  hour  remains  at  around 
2008  levels  (Graph  3.5.5).  From  2000  to  2008, 
growth  in  UK  output  per  hour  at  1.7 %  p.a.  was 
higher than the EU average (of 1.2 % p.a.), driven 
largely  by  capital  accumulation.  Productivity  fell 
sharply  in  the  financial  crisis,  as  real  wage 
flexibility  cushioned  the  rise  in  unemployment.  It 
recovered  to  approximately  pre-crisis  levels  by 
2011,  and  since  then  output  per  hour  has  been 
largely stagnant. The post-crisis UK economy has 
been  characterised  by  strong  employment  growth 
in a context of weak real wage growth. 

Graph 3.5.5:  Recent trends in UK productivity & real wages 

Source: ONS and European Commission 

Productivity  is  now  over  15 %  below  its  pre-
crisis  trend.  As  discussed  in  the  2016  country 
report,  there  is  no  single  explanation  for  the 
opening  of  this  ‘productivity  gap’.  Some  of  the 
temporary  factors  that  could  have  been  important 
in  the  immediate  aftermath  of  the  crisis,  such  as 
weak aggregate demand or labour hoarding, should 
no  longer  be  significant  in  an  economy  close  to 
full  employment.  In  2015  and  2016,  productivity 
finally  started  to  grow  modestly,  although  growth 
remains subdued. In Q3-2016, output per hour rose 
by  an  annual  0.9 %  in  the  services  sector  and 
0.8 % in the manufacturing sector. 

However, some persistent supply-side drivers of 
weak  UK  productivity  may  continue  to  exert  a 

33 

8085909510010511011512098000204060810121416Index 2011=100Real wagesOutput per hourTrend of produc-tivity growth  
 
3.5. Investment and productivity 

34 

 Box 3.5.1: Investment challenges and reforms in the United KingdomMacroeconomic perspective Total investment in the UK (measured as gross fixed capital formation) fell significantly during the crisis, with a sharp fall in private investment only partially offset by a temporary increase in public investment. Private investment is significantly below the EU average, although it has recovered robustly from a post-crisis trough. Public investment is marginally below the EU average (see Section 3.5) and there are shortcomings in public infrastructure. Equipment investment is particularly low, partly reflecting the UK’s specialisation in services. Relatively low investment in housing has contributed to the UK’s housing shortage (see Section 3.2). Heightened uncertainty following the EU referendum is expected to weigh on investment in the next couple of years (see Section 3.1). Assessment of barriers to investment and ongoing reforms Regulatory/ administrative burdenTaxationPublic administrationAccess to financePublic procurement /PPPsCooperation btw academia, research and businessJudicial systemFinancing of R&D&IInsolvency frameworkBusiness services / Regulated professionsCompetition and regulatory frameworkRetailEPL & framework for labour contracts ConstructionCSRWages & wage settingDigital Economy / TelecomCSREducation CSREnergyCSRLegend:TransportCSRNo barrier to investment identifiedCSRInvestment barriers that are also subject to a CSRSome progressNo progressSubstantial progressLimited progressFully addressedPublic administration/ Business environmentFinancial Sector / TaxationR&D&ISector specific regulationLabour market/ Education Overall barriers to private investment in the UK are moderate, as confirmed by the European Commission’s assessment. Some reforms have been adopted in the area of spatial planning and technical skills, but effective implementation is challenging and structural problems remain. Main barriers to investment and priority actions underway 1. Spatial planning regulations: Regulation of the land market, particularly of residential construction, is strict and complex (see Section 3.2). The process of obtaining planning permission is often lengthy, complex, uncertain and costly. Limits on the scope for development, particularly around poles of economic growth, have led to an undersupply of housing and very high prices of non-agricultural land. Expensive land and the complex planning system contribute to the tendency for infrastructure projects to take longer and cost more than in other European countries (see Section 3.6). Planning restrictions can also hinder the construction or modernisation of commercial buildings and equipment. Substantial ongoing reforms to the planning system should help to facilitate increased development but may not prove sufficient. 2. Technical skills: While the UK has a strong higher education system, there are weaknesses in both technical and basic skills (see Section 3.4) which contribute to the UK’s weak productivity performance. More specifically, skills shortages are often most acute in occupations linked closely to investment, such as engineers, tradesmen and construction workers. The UK is implementing a programme to expand and reform the apprenticeship system. The government intends to add responsibilities to the new Institute for Apprenticeships by expanding its remit and renaming it the Institute for Apprenticeships and Technical Education from April 2018. This, and wider plans to address skills issues set out in the new Post-16 Skills Plan, are ambitious in intention and will require coherent, committed and timely implementation.  
 
 
 
 
 
3.6. SECTORAL POLICIES 

Infrastructure investment  

Improving  network  infrastructure  is  a  key 
challenge for the UK. In recent years, the UK has 
underspent on infrastructure. In a context of rising 
demand, this has led to significant shortcomings in 
the capacity and quality of the UK’s infrastructure 
networks  (WEF,  2017)  and  contributed  to  low 
productivity (see Section 3.5). As discussed below, 
pressure  on  network  capacity  has  continued  to 
build across multiple sectors (ICE et al., 2016). 

and  Construction Pipeline (IPA, 2016a)  sets  out a 
pipeline  of  over  GBP  500  billion  (EUR  610 
billion)  of  planned  public  and  private  investment 
across the economy, the majority of which is in the 
areas  of  energy  generation,  utilities  and  transport. 
Of this, over GBP 300 billion (EUR 367 billion) is 
expected to be invested by 2021. More than half of 
the  value  of  the  pipeline  requires  private  funding, 
of which 30 % relates to privatised utilities subject 
to economic regulation. 

recent 

decisions 

on 
important 
While 
infrastructure  have  been 
taken,  concerns 
remain regarding their delivery. In 2016, the UK 
took  significant  and  long-awaited  decisions  on 
investment in new airport capacity, high-speed rail 
and  nuclear  power.  Rectifying  the  investment 
backlog, as well as meeting new needs, will remain 
challenging 
in  a  context  of  ongoing  fiscal 
consolidation.  While  many  firms  are  positive  on 
the  government's  infrastructure  policy  approach 
over the last five years, only 27 % are of the view 
that  UK  infrastructure  will  improve  over  the  next 
five years (CBI/AECOM, 2016). 

in 

to 

announced 

The  government  is  reorienting  a  tight  overall 
public  capital  budget  towards  infrastructure, 
particularly  transport  (see  Section  3.5).  The 
network 
additional 
government 
infrastructure  spending 
the  2016  Autumn 
Statement. As part of a new ‘National Productivity 
Investment  Fund’,  the  government  announced 
its  previously  planned  spending 
additions 
between  2017-18  and  2020-21.  This  includes 
money for transport links to connect new housing 
developments, to alleviate road ‘pinch points’, and 
for  digital  communications.  Both  macroeconomic 
and  microeconomic 
evidence 
suggests that, in countries that do not have excess 
capacity, 
spending 
(construction  and  maintenance)  tends  to  have 
particularly  strong  positive  impacts  on  demand  in 
the short term and productivity in the longer term 
(OECD, 2016b). 

(cost-benefit) 

infrastructure 

network 

plans 

improvements 

Ambitious 
to 
for 
infrastructure  are  set  out  in  the  National 
Infrastructure Delivery Plan (NIDP), published 
in  March  2016 
(IPA,  2016a).  The  body 
responsible for monitoring and helping deliver the 
NIDP  is  the  Infrastructure  and  Projects  Authority 
(IPA).  Its  December  2016  National  Infrastructure 

to 

all 

inform 

the  UK; 

regions  of 

The government will be advised by the National 
Infrastructure  Commission  (NIC)  on  major 
long-term  infrastructure  challenges.  The  NIC’s 
goals are to: support sustainable economic growth 
across 
improve 
competitiveness;  and  improve  quality  of  life.  It  is 
an Executive Agency of HM Treasury, rather than 
the fully independent body originally envisaged. In 
October  2016,  the  NIC  launched  a  call  for 
full  National 
its 
evidence 
Infrastructure  Assessment,  which  will  make 
recommendations 
the  government  about 
infrastructure  needs  over  a  30-year  horizon  (NIC, 
2016).  The  NIC  will  publish  a  ‘Vision  and 
Priorities’ document in summer 2017, and the full 
assessment  in  2018.  It  has  been  asked  to  plan  on 
the basis that the government will spend 1.0-1.2 % 
of GDP on  economic  infrastructure between 2020 
and  2050.  This  would  likely  require  a  significant 
proportion  of  investment  needs  to  be  met  through 
user charging. 

first 

to 

in 

is  seeking  to 

long-term 
increase 
The  UK 
investment 
infrastructure  by  pension 
schemes  and  insurers.  In  principle,  there  should 
be  both  strong  supply  and  demand  for  such 
investment.  However,  both  financial  regulations 
and  risk  aversion  can  make  such  bodies  more 
willing to buy existing assets than to invest in the 
construction  phase.  This  is  being  addressed  at  an 
EU  level  by  the  European  Fund  for  Strategic 
Investments 
3.5). 
Domestically,  the  UK  Guarantees  Scheme  has  so 
far  issued  GBP  1.8  billion  (EUR  2.2  billion)  of 
guarantees supporting GBP 4 billion of investment 
across nine projects (IPA, 2016c). The scheme has 
the capacity to provide up to GBP 40 billion (EUR 
49  billion)  of  guarantees  and  has  been  extended 
until  at  least  2026.  Pension  schemes  are  being 
encouraged 
the  Pensions 
Infrastructure  Platform,  though  take-up  has  so  far 
been modest. 

through 

Section 

(EFSI) 

invest 

(see 

to 

35 

 
 
3.6. Sectoral policies 

policy, 

particularly 

There  are  barriers  to  delivering  timely  and 
cost-effective 
infrastructure.  The  NAO  has 
drawn  attention  to  shortcomings  in  the  planning 
and  management  of  major  public  projects  (NAO, 
2016c). Government 
on 
energy,  has  not  always  provided  sufficient 
consistency  or  certainty  to  private  investors.  A 
stop-start approach can also weaken supply chains, 
which tend to be relatively fragmented in the UK. 
Many  of  the  factors  that  constrain  residential 
construction  (see  Section  3.2)  also  apply  to 
infrastructure, 
including  a  complex  planning 
land,  public  and  political 
system,  expensive 
opposition,  and  skills  shortages  (technical  skills 
are  discussed  in  Section  3.4).  The  government’s 
Infrastructure Cost Review found that delivery can 
take  longer  and  cost  more  than  in  other  European 
countries (HM Treasury, 2014). 

Europe 

in  Western 

network  is  increasingly  inadequate  in  the  face  of 
rapidly  growing  demand.  The  number  of  people 
spending more than two hours per day commuting 
has  increased  by  72 %  in  the  last  decade  (TUC, 
2015). The  level  of  public  satisfaction  with  the 
quality  of  transport  infrastructure  is  among  the 
lowest 
(European 
Commission).  As  discussed  in  Sections  3.2  and 
3.5,  this  can  hamper  economic  efficiency  and 
growth. UK transport policy has traditionally been 
quite 
Transport 
Commission,  2015)  and  the  different  levels  of 
government,  sectoral  regulators  and  operating 
companies  do  not  always  collaborate  effectively. 
Both  business  and  the  government  consider  it  a 
priority 
interconnections  between 
different transport modes (CBI/AECOM, 2016). 

(Independent 

fragmented 

improve 

to 

to  oversee 

The  UK  is  taking  steps  to  facilitate  smoother 
project  delivery.  Industry  and  potential  investors 
should  get  greater  clarity  from  the  structures  that 
have  been  established 
long-term 
infrastructure  need  assessment  and  planning,  as 
well  as  more  practical  assistance  with  project 
financing and delivery. At the same time, there has 
been progress in speeding up planning approval for 
major  infrastructure  projects  (IPA,  2016a).  In 
the  IPA  will  report  on  how 
summer  2017 
government and industry can improve the quality, 
cost and performance of UK infrastructure. 

The government is promoting Private Finance 2 
(PF2),  a  revised  approach  to  involving  private 
finance  in  the  delivery  of  public  infrastructure 
and  services.  In  early  2017  the  government  will 
identify a pipeline of public sector projects which 
could be delivered through PF2. The challenge will 
be  to  avoid  the  shortcomings  of  previous  public-
private  partnerships,  including  questionable  value 
for money (NAO, 2011). 

Transport infrastructure 

There  are  issues  with  the  capacity  and  quality 
of transport networks. Relative to population, the 
UK’s  road  and  rail  networks  are  less  dense  than 
the EU average (European Commission, 2016c). In 
terms of higher capacity routes — motorways and 
electrified rail — the UK has fallen further behind 
the  EU  average  since  the  1990s  (ibid.).  Urban 
areas and the connections between them have high 
road  congestion.  Capacity  in  parts  of  the  rail 

Historically, there have been low rates of public 
investment  in  transport  infrastructure.  Over 
85 %  of  transport  investment  is  publicly  funded 
(IPA,  2016b).  Between  1995  and  2013,  UK 
transport  infrastructure  investment  was  0.6-0.8 % 
of  GDP,  compared  to  an  average  of  0.9-1.0 %  of 
GDP across the OECD. 

Reliable, rapid and affordable public transport 
is  critical  for  the  viability  of  mass  commuting. 
Investment in public transport within, and around, 
major  cities  can  ease  travel  to,  and  around,  those 
cities.  For  London  in  particular,  efficient  and 
affordable  public  transport  can  help  people  and 
businesses  manage  the  scarcity  and  high  price  of 
property in and around that city (see Section 3.2). 
In  2014,  26 %  of  morning  peak  trains  arriving  in 
London were over capacity (ICE et al., 2016). The 
government,  at  both  central  and  local  levels,  has 
been significantly reducing financial support to the 
day-to-day  delivery  of  public  transport  services. 
For  example,  there  was  a  12.3 %  annual  decrease 
in  subsidised  bus  mileage  in  England  outside 
London  in  2015-16  (DfT,  2016),  and  rail  and  bus 
fares have been rising faster than wages.  

Road transport 

is  a  significant  problem 
Road  congestion 
(28). 
(INRIX, 
government 
2016a) 
acknowledges that, over recent decades, the quality 

The 

(28)  INRIX  found  more  than  20,300  "traffic  hotspots"  in  UK 
cities,  many  more  than  in  Germany  (8,517),  Italy  (5,069), 
Spain (2,335 traffic hotspots) and France (1,844). 

36 

 
                                                           
3.6. Sectoral policies 

and  Road’s  five-yearly  assessments  of  Network 
Rail,  the  not-for-profit  public  body  that  runs  and 
maintains the rail infrastructure. 

to 

the 

Upgrades 
existing  network  are 
progressing but with some delays. Network Rail 
has  a  total  budget  of  GBP  38  billion  (EUR 
47 billion)  over  2015-19  (called  ‘Control  Period 
5’), including GBP 15 billion (EUR 18 billion) of 
enhancements.  Following  a  review,  a  number  of 
that  were  assessed  as  not 
planned  projects 
affordable 
allocated 
or  deliverable  within 
resources  have  been  delayed  until  after  2019, 
including  the  electrification  of  the  Great  Western 
Line.  The  NAO  has  identified  problems  with  rail 
programme  management  and  planning  (NAO, 
2016e). Partly  in  response  to  this,  in  December 
2016  the  government  announced  plans  to  better 
integrate  track  maintenance  and  the  running  of 
passenger rail services. 

The  full  route  for  a  new  high-speed  rail  link 
from  London  to  Northern  England  will  go 
ahead.  Construction  of  the  first  phase  of  ‘High 
Speed  2’  between  London  and  Birmingham  will 
start  in  2017,  and  the  government  has  confirmed 
its  preferred  route  for  the  later  second  phase  to 
Manchester and Leeds. This high speed link should 
alleviate  the  growth  of  congestion  on  routes 
between  major  cities.  When  ‘Crossrail’,  a  new 
underground rail link linking east and west London 
and  the  surrounding  area,  opens  in  2018  it  will 
increase  London’s  rail  capacity  by  10 %  and  help 
ease  congestion  for  commuters.  Demand 
is 
growing rapidly and the business case for another 
potential new rail link — ‘Crossrail 2’ — is being 
developed. 

Aviation 

The  government  has  provisionally  approved  a 
third  runway  at  Heathrow,  after  much  delay. 
No  additional  runway  capacity  has  been  built  in 
the  south-east  of  England  for  several  decades  and 
London’s  main  airports,  Heathrow  and  Gatwick, 
currently operate at or close to capacity. Additional 
capacity  is  needed  if  London  is  to  maintain  its 
status  as  an  international  aviation  hub  and  meet 
growing  domestic  demand.  On  25  October  2016, 
the government announced the decision to build a 
third  runway  at  Heathrow,  but  there  remain  a 
number  of  further  steps  before  this  project  gains 
final approval. 

of 
that 
the  road  network  has  declined  and 
congestion and air quality are significant problems 
in  some  areas  (IPA,  2016a).  London  is  one  of 
Europe’s  most  congested  cities  and  this  situation 
has  been  getting  worse  (INRIX,  2016b).  Poor  or 
missing  links  between  some  cities  limit  the 
development  of  close  economic  interconnections 
(IPA,  2016a).  This  is  partly  a  legacy  of  a 
prolonged  period  of  under-investment  that  started 
in the 1990s (Commission Services). 

sets  out  planned 

The management and funding of the motorway 
and main road networks have been reformed. A 
new publicly-owned company, Highways England, 
was  set  up  in  2015  to  manage  the  strategic  roads 
network  (motorways  and  main  roads).  The  first 
Road Investment Strategy, published in December 
2014, 
improvement  and 
maintenance  work  from  2015  to  2020,  with 
guaranteed  funding  of  GBP  15  billion  (EUR  18 
for 
billion) 
Transport  (DfT)  has  commissioned  studies  to 
inform the second Roads Investment Strategy (DfT 
et al., 2016). By 2020-21 the UK will create a new 
Roads  Fund,  using  revenues  from  Vehicle  Excise 
Duty  to  support  ongoing  investment  in  the  major 
road network. 

(IPA,  2016a).  The  Department 

Central  funding  is  being  increased  but  cuts  to 
local funding threaten maintenance. In the 2016 
Autumn  Statement, the government announced an 
additional  GBP  1.3  billion  (EUR  1.6  billion)  of 
spending  on  road  improvements.  This  is  targeted 
mostly  at  repairs  and  reducing  bottlenecks,  rather 
than  the  construction  of  new  roads.  At  the  same 
time,  the  ongoing  squeeze  on  local  authority 
budgets  could  threaten  the  maintenance  of  local 
(NAO,  2016d).  Adequate 
and  minor 
maintenance can provide high value for money and 
prevent  the  need  for  more  expensive  remedial 
work (Audit Commission, 2011). 

roads 

Rail transport 

Demand  for  both  passenger  and  freight  rail 
increased  rapidly.  Passenger 
services  has 
numbers  are  rising  at  4 %  a  year  and  rail  freight 
has  increased  by  34 %  in  the  last  20  years.  UK 
railways are now one of the most intensively used 
in Europe (DfT, 2015). The DfT is responsible for 
designing  and  procuring  rail  franchise  services.  It 
also  sets  out  medium-term  plans  for  the  railways, 
which form part of the basis for the Office of Rail 

37 

 
3.6. Sectoral policies 

Telecommunications networks 

There  is  a  large  gap  in  superfast  broadband 
availability  between  urban  and  rural  areas. 
Superfast  broadband  —  speeds  of  30  Mbps  and 
higher  —  is  now  available  in  89 %  of  UK  homes 
and 80 % of SME businesses, with take-up of only 
31 %  (copper-based  technologies  in  the  access 
network  limit  the  performance  of  the  service) 
(Ofcom,  2016).  Superfast  broadband  coverage  in 
rural  areas  is  59 %.  This,  together  with  low 
superfast 
the 
competitiveness  of  rural  small  businesses  and 
farmers.  In  the  2016  Autumn  Statement  the 
government 
billion 
committed  GBP 
(EUR 1.35 billion)  to  support  the  expansion  of 
full-fibre networks. The ERDF is also currently co-
investing  in  the  rollout  of  the  high-speed  fibre 
network  to  areas  not  covered  by  commercial 
operators (see Box 2.1). 

broadband 

take-up, 

affects 

1.1 

Energy infrastructure 

Substantial  investment  is  needed  to  gradually 
change 
increase 
the  energy  supply  mix, 
efficiency,  and  reduce  emissions.  The  UK  faces 
an  energy  ‘trilemma’  in  balancing  security  of 
supply, environmental objectives and affordability. 
The  government  puts  the  need  for  investment  in 
generation  and  supply  infrastructure  at  over  GBP 
100  billion  (EUR  122  billion)  in  the  next  15 
years (HM Government, 2016). The complexity of 
energy  regulation  and  pricing  can  make  it  more 
difficult  for  the  market  to  respond  effectively  to 
the  need  for  future  generating  capacity.  The 
government, 
in 
facilitating  most  new  investment  in  generating 
capacity, including through consumer-funded price 
guarantees  (Helm,  2016).  Currently  only  9 %  of 
infrastructure 
satisfied  with 
government  policy  to  boost  energy  investment 
(CBI/AECOM, 2016). 

therefore,  has  a  major  role 

providers 

are 

There  is  a  growing  risk  of  electricity  supply 
gaps  emerging.  Graph  3.6.1  shows  the  UK’s 
current  generating  capacity  mix.  A  substantial 
number  of  ageing  coal  and  nuclear  stations  are 
closing  due  to  obsolescence  and  environmental 
requirements,  and  gas  generators  have  been 
squeezed  by  low  wholesale  prices.  In  2014,  the 
capacity margin decreased to 5 % after accounting 
for  derating  (ICE  et  al.,  2016).  Over  the  last 
decade,  both  electricity  demand  and  generating 

in 

in 

capacity  have  fallen,  but  demand  is  expected  to 
increase  again 
the  future  (National  Grid, 
2016). Since  2010,  a  total  of  20  Gigawatts  (GW) 
of  new  electricity  generation  capacity  has  been 
constructed 
(IPA,  2016b). The 
government  estimates  that  95  GW  is  needed 
between  now  and  2035  (NAO,  2016f). There  are 
growing  concerns  that  a  serious  shortage  of 
capacity  could  emerge  by  winter  2020  and  this 
could  be  exacerbated  by  the  phasing  out  of 
unabated coal (BEIS, 2016a). 

the  UK 

Graph 3.6.1:  Generation capacity (winter 2016/17) 

Source: National Grid winter outlook report 2016 

Investors  need  confidence  to  commit  to  long-
term  investment  in  new  generating  capacity. 
Wholesale  electricity  prices  have  been  low  in 
recent  years.  Higher  energy  prices  during  periods 
of  tight  capacity  margins  can  deliver  a  signal  to 
invest. Market participants may still be hesitant to 
build new capacity due to uncertainty about future 
market  developments,  such  as  the  impact  on  their 
investment  of  the  increasing  market  share  of 
renewable  energy  and  potentially  extreme  price 
volatility (European Commission, 2016d). 

new 

government 

Recent  changes  to  policy  on  renewables  have 
raised  some  concerns  with  potential  investors. 
renewable 
supports 
The 
generation through Contracts for Difference, which 
give  revenue  stability  to  investors  in  specified 
technologies. It has terminated schemes to support 
solar  power  and  carbon  capture  and  storage.  It  is 
also ending public subsidies for new onshore wind, 
while  providing  support  for  offshore  wind,  which 

38 

01020304050607080CapacityGWNuclearHydroWindCoalBiomassGasPumped storage 
 
3.6. Sectoral policies 

investigation into the functioning of the electricity 
and  gas,  wholesale  and  retail  markets  (CMA, 
2016).  It  found  that  customers  have  been  paying 
GBP 1.4 billion (EUR 1.7 billion) a year more than 
they would in a fully competitive market. 70 % of 
domestic customers of the six largest suppliers are 
still  on  an  expensive  ‘default’  standard  variable 
tariff.  These  suppliers  still  dominate  the  market, 
though the combined market share of new entrants 
has  risen  to  around  13 %  for  both  electricity  and 
gas  —  the  highest  level  since  liberalisation  in  the 
1990s. The authority proposed a set of measures to 
improve  competition  and  in  the  2016  Autumn 
Statement  the  government  announced  it  would 
look  carefully  at  whether  the  retail  energy market 
is functioning fairly for all consumers. 

Climate, energy and environment 

The UK is currently on track to meet its Europe 
2020  target  for  greenhouse  gas  emissions  that 
are  not  covered  by  the  EU  Emissions  Trading 
Scheme  (ETS).  According  to  initial  data (29),  in 
2015  UK  greenhouse  gas  emissions  were  16 % 
lower  than  2005  levels.  Projections  based  on 
existing  measures  indicate  that  emissions  from 
non-ETS  sectors  will  be  19 %  below  2005  levels 
by  2020,  over-achieving  the  16 %  Europe  2020 
target. 

Final energy consumption rose slightly in 2015, 
reversing  the  previous  downward  trend,  and  a 
fall  in  emissions  in  the  energy  sector  has  not 
been  matched  in  transport  (see  Annex  A). 
Recent  changes  in  the  fuel  mix  for  electricity 
generation,  with  less  use  of  coal,  are  responsible 
for a significant decrease in CO2 emissions in the 
energy  supply  sector.  Similar  reductions  are, 
however,  not  materialising  for  transport  carbon 
emissions,  which  have  been  rising.  The  increased 
transport 
the  2016 
Autumn  Statement  included  spending  and  tax 
incentives 
the  use  of  ultra-low 
emissions  vehicles  (ULEV)  in  public  and  private 
transport. 

investment  announced 

to  promote 

in 

At 8.2 %  in  2015, the UK  is still  some  distance 
off  its  2020  renewable  energy  target  of  15 %. 
Even  though  it  is  above  its  indicative  national 
trajectory,  and  the  cost  of  deploying  individual 
technologies  is  falling  (as  detailed  above),  the 

(29)  EEA, European Commission. 

is significantly more expensive (IPA, 2016a). The 
UK’s  participation  in  the  new  Northern  Seas 
Countries  initiative  may  help  facilitate  the  further 
cost-effective  deployment  of  offshore  renewable 
energy and the required transmission infrastructure 
whilst minimising environmental impacts. 

introduced 

The  UK  has  introduced  a  capacity  market  for 
electricity.  To  ensure  secure  electricity  supplies, 
the  government  has 
the  capacity 
market,  which  pays  providers  (including  demand 
reduction  and 
interconnectors,  as  well  as 
generators) in return for a commitment to maintain 
system  reliability  when  needed.  The  level  of  this 
payment  is  determined  through  a  yearly  auction. 
The December 2016 auction for 2020/21 cleared at 
similar  prices  to  earlier  auctions  and  attracted 
significant  amounts  of  new  build  small-scale 
generating  capacity.  A  separate  auction 
for 
delivery  in  2017-18  concluded  in  early  February 
2017.  There  has  been  some  criticism  of  whether 
the capacity market has provided value for money 
and  done  enough  to  promote  decarbonisation  and 
the  use  of  alternatives  such  as  storage  (Orme, 
2016).  In  March  2016,  the  government  consulted 
on detailed changes to the capacity market (BEIS, 
2017b).  

A new nuclear power plant — Hinkley Point C 
—  will  diversify  the  energy  mix.  In  September 
2016, contracts were signed with EDF for the new 
GBP 18 billion (EUR 22 billion) plant, which will 
provide  7 %  of  the  UK’s  electricity  needs.  Risks 
remain  with  regards  to  the  timely  delivery  of  the 
project,  including  legal  challenges,  financing,  and 
the supply-chain challenges of delivering the UK’s 
first new nuclear plant in a generation. 

Enhancing the UK’s congested interconnections 
between  generators  and  consumers  would  help 
to  maintain  security  of  supply.  New  sources  of 
electricity  generation  need  to  be  connected  to 
major  markets.  Five  projects  have  received  initial 
regulatory  approval,  which  could  provide  6.7 GW 
of  new  transmission  capacity  by  the  early  2020s. 
introduce 
The  government 
competition 
the  provision  of  connections 
between offshore wind generation and the grid. 

seeking 

in 

to 

is 

The  UK  is  taking  action  to  deliver  more 
effective  competition 
the  retail  energy 
market.  In  June  2016,  the  Competition  and 
Markets  Authority  released  the  results  of  an 

in 

39 

 
                                                           
3.6. Sectoral policies 

(see above) can help support R&D, particularly in 
manufacturing. 

scientific 

public-private 

Building stronger science-business linkages can 
ensure  that  the  excellent  output  of  the  public 
research base translates into the creation of new 
firms  focusing  on  high-tech  activities.  The  UK 
ranks above the EU average in terms of the amount 
of 
co-publications, 
although  the  number  of  these  publications  has 
fallen  since  2010.  The  amount  of  public  research 
financed by the private sector is well below the EU 
average.  The  UK’s  Catapult  Centres  aim  to  be 
world-leading  facilities  for  connecting  businesses 
with the research and academic communities. The 
creation of UK Research and Innovation, bringing 
together  the  Research  Councils,  Innovate  UK  and 
the science and innovation functions of the Higher 
Education  Funding  Council  for  England,  can  help 
improve  the  rationale  and  complementarity  of 
different government schemes. 

Public procurement 

fairly 

is  also 

transparent 

The  UK  public  procurement  system  is  one  of 
the most efficient in the EU. The professionalism 
and  efficiency  of  the  system  are  quite  high  at 
central government level. The UK has a high take-
up  of  e-procurement  (31 %)  and  its  procurement 
system 
(European 
Commission, 2016f). The government has pledged 
to  increase  the  proportion  of  goods  and  services 
purchased  from  SMEs  from  its  current  27 %  to 
33 %. The NAO considers that, although there has 
been clear progress in removing barriers to SMEs' 
access to public procurement, further efforts could 
be  made 
towards 
(NAO,  2016h).  A  move 
centralised procurement, and aggregating demand, 
enabled 
to  achieve  reported 
savings  of  over  GBP  500  million  (EUR  612 
million) in 2015-16 (CCS, 2016). At same time, a 
recent  report  identified  potential  savings  of  up  to 
GBP  700  million  (EUR  857  million)  a  year  in 
National  Health  Service  procurement  (Carter, 
2016). 

the  government 

ending  of  subsidies  for  new  onshore  wind  could 
hamper  the  prospects  for  increasing  renewable 
electricity  generation  in  the  most  cost-effective 
way (NAO, 2016e). 

The UK’s environmental performance is among 
the  best  as  regards  resource  efficiency.  The 
intensity of waste generation has fallen relative to 
the  EU  average,  but  air  quality  continues  to  give 
cause for concern. 

Research, development and innovation 

Public R&D investment is flat and remains low 
by  EU  standards,  though  domestic  funding  is 
set to rise. Underinvestment risks jeopardising the 
UK’s  scientific  excellence  and  impact  its  long-
term economic growth potential. Public investment 
in R&D has been stagnant in recent years, having 
declined  from  its  2009  peak  (0.63 %  of  GDP)  to 
0.55 %  of  GDP,  lower  than  in  most  EU  Member 
States.  This  has  not  so  far  diminished  the  UK’s 
scientific  excellence,  which  continues  to  rank 
highly  in  the  EU  context,  but  there  could  be  a 
impact.  The  2016  Autumn  Statement 
lagged 
announced  an  increase  in  the  annual  science 
budget  of  GBP  2  billion  (EUR  2.4  billion)  by 
2020-21,  linked  to  a  new  Industrial  Strategy 
challenge fund. The UK’s research and innovation 
system faces uncertainty as a result of the decision 
to  withdraw  from  the  EU.  HM  Treasury  has 
committed 
for  UK 
participants in Horizon 2020 projects bid for while 
the UK remains in the EU, as well as the EUR 1.4 
billion  (GBP  1.14  billion)  to  be  co-invested  in 
RTDI  projects  through  the  European  Regional 
Development Fund (ERDF) by 2020 (see Box 2.1). 

to  underwrite 

funding 

Private R&D investment has been increasing in 
recent years but remains below the EU average. 
Private  R&D  investment  was  1.12 %  of  GDP  in 
2015,  compared  to  an  EU  average  of  1.3 %.  The 
UK  is  also  below  the  EU  average  for  in-house 
innovation  by  SMEs  and  patent  applications 
(European  Innovation  Scoreboard,  2016).  This 
reflects, to a certain extent, the UK’s specialisation 
in services. Manufacturing is slightly over 10 % of 
UK  GDP,  one  of  the  lowest  shares  in  the  EU. 
Knowledge-intensive  services  made  up  45.5 %  of 
the  UK  economy  in  2014,  higher  than  the  EU 
average,  and  the  UK  performs  well  in  exporting 
them 
(European  Commission,  2016e).  The 
proposed  new  Industrial  Strategy  Challenge  Fund 

40 

 
ANNEX A 

Overview Table 

Commitments 

2016 Country-specific recommendations (CSRs) 

CSR 1:   

Endeavour  to  correct  the  excessive  deficit  in  a 
durable manner by 2016-17. Following the correction 
of the excessive deficit, achieve a fiscal adjustment of 
0.6 %  of  GDP  in  2017-18  towards  the  minimum 
medium-term budgetary objective. 

CSR 2:  

shortfalls 

Address 
infrastructure 
investment,  including  by  delivering  the  priorities  of 
the National Infrastructure Plan.  

network 

in 

Take further steps to boost housing supply, including 
by implementing the reforms of the national planning 
policy framework. 

Summary assessment (30) 

CSRs related to compliance with the Stability 
and  Growth  Pact  will  be  assessed  in  spring 
once the final data is available. 

The  United  Kingdom  has  made  some 
progress in addressing CSR 2: 

Some  progress  in  addressing  shortfalls  in 
infrastructure  investment.  In  the  November 
2016 Autumn Statement the UK announced a 
further prioritisation of public capital spending 
towards  transport  and  other  infrastructure.  A 
number  of  major 
transport  and  energy 
investment decisions have been made in 2016. 
However it is not clear that the conditions are 
fully  in  place  to  secure  the  large  amount  of 
private  funding  that  the  UK  is  relying  on  to 
remedy  investment  backlogs  in  a  timely  and 
cost-effective way. 

Some  progress  on  boosting  housing  supply. 
The government continues to treat housing as 
a  top  policy  priority.  An  ongoing  set  of 
reforms  should  have  positive  impacts  on 
housing  supply,  though  these  will  take  time 
and  may  not  be  sufficient  to  address  the 

(30)  The following categories are used to assess progress in implementing the 2016 country-specific recommendations: 
No progress: The Member State has not credibly announced nor adopted any measures  to address the CSR. Below a number of 
non-exhaustive typical situations  that could be covered under this, to be interpreted on a case by case basis taking into account 
country-specific conditions: 

•  no  legal,  administrative,  or  budgetary  measures  have  been  announced  in  the  National  Reform  Programme  or  in  other  official 
communication  to  the  national  Parliament  /  relevant  parliamentary  committees,  the  European  Commission,  or  announced  in 
public (e.g. in a press statement, information on government's website);  
• no non-legislative acts have been presented by the governing or legislator body;   
•  the  Member  State  has  taken  initial  steps  in  addressing  the  CSR,  such  as  commissioning  a  study  or  setting  up  a  study  group  to 
analyse possible measures that would need to be taken (unless the CSR explicitly asks for orientations or exploratory actions), 
while clearly-specified measure(s) to address the CSR has not been proposed. 

Limited progress: The Member State has: 
• announced certain measures  but these only address the CSR to a limited extent;    
and/or 
• presented legislative acts in the governing or legislator body but these have not been adopted yet and substantial non-legislative 

further work is needed before the CSR will be implemented;  

• presented non-legislative acts, yet with no further follow-up in terms of implementation which is needed to address the CSR. 
Some progress: The Member State has adopted measures that partly address the CSR  
and/or the Member State has adopted measures that address the CSR, but a fair amount of work is still needed to fully  address the 
CSR  as  only  a  few  of  the  adopted  measures  have  been  implemented.  For  instance:  adopted  by  national  parliament;  by 
ministerial decision; but no implementing decisions are in place. 

Substantial progress: The Member State has adopted measures that go a long way in addressing the CSR and most of which have 

been implemented. 

Full implementation: The Member State has implemented all measures needed to address the CSR appropriately. 

41 

 
 
 
 
 
 
 
                                                           
CSR 3:  

Address  skills  mismatches  and  provide  for  skills 
progression, including by strengthening the quality of 
apprenticeships. 

Further  improve  the  availability  of  affordable,  high-
quality, full-time childcare. 

Europe 2020 (national targets and progress) 

Employment rate target set in the 2016 NRP: None 

R&D target set in the 2016 NRP: None 

A. Overview Table 

chronic undersupply of housing. 

The  United  Kingdom  has  made  some 
progress in addressing CSR 3: 

and 

with 

implementation 

Some  progress 
in  addressing  skills  and 
apprenticeship  issues.  The  government  has 
of 
continued 
apprenticeship 
reform, 
expansion 
including  the  April  2017  advent  of  both  the 
Apprenticeship  levy  and  the  Institute  for 
Apprenticeships.  Wider  reform  which  will 
contribute to addressing skills mismatches and 
progression issues is demonstrated in the new 
Post-16  Skills  Plan,  which  is  ambitious  in 
intention and will require coherent, committed 
and timely implementation. 

in 

Some  progress 
improving  childcare 
availability albeit more  mixed progress in the 
three  different  elements  of  affordability, 
quality  and  full-time  availability.  A  pilot  of 
the  expansion  of  the  doubling  of  the  free 
childcare offer to three and four year olds has 
commenced,  with  full  roll-out  foreseen  for 
September  2017.  However, 
supply-side 
concerns, 
the  concerns  of 
providers, appear to require further progress. 

in  particular 

76.8 %  of  the  population  aged  20-64  was 
employed in 2015. 

R&D  intensity  rose  to  1.7 %  in  2015.  Public 
R&D  intensity  was  0.55 %,  business  R&D 
intensity  was  1.12 %  and  Private  non-for 
profit R&D, 0.03 %. 

The UK is below the EU average of 2.03 % in 
terms  of  R&D  intensity.  EU  average  public 
R&D intensity was of 0.71 %, business R&D, 
1.3 % and private non-for-profit, 0.02 %. 

Greenhouse gas (GHG) emissions target: 

2020 target: -16 % 

National  Greenhouse  gas  (GHG)  emissions  target:     
-16 %  in  2020  compared  to  2005  (in  non-ETS 
sectors) 

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). 

42 

 
 
 
 
 
 
 
A. Overview Table 

Non-ETS 2015 target: -10 % 

to  preliminary  estimates, 

According 
the 
change in non-ETS greenhouse gas emissions 
between  2005  and  2015  was  -16 %,  therefore 
the target is expected to be achieved. 

At  8.2%  in  2015 (31), the  UK  is  still  some 
distance  from  its  2020  target  of  15 %,  even 
though  it  is  above  its  indicative  national 
trajectory.  There  are  concerns  that  the  recent 
changes  in  the  support  framework  may  have 
impacted  the  prospects  for  developing  the 
most  cost  effective  forms  of  renewable 
electricity generation. 

With  a  4.9 %  share  of  RES  in  transport  in 
2014,  the  UK  is  almost  halfway  towards  the 
binding  10 % 
to  be 
achieved by 2020. 

transport 

target 

in 

The UK is now 3.1 % above its 2020 primary 
energy  consumption  target  and  0.9 %  above 
its 2020 final energy consumption target. The 
UK  has  to  increase  its  effort  to  cut  primary 
and final energy consumption by the required 
levels. 

The indicator on early school leavers recorded 
a  4.1 pps  reduction  over  a  five  year  period, 
from 14.9 % in 2011 to 10.8 % in 2015, which 
is below the EU average of 11.0 %. 

The tertiary attainment rate of 30-34 year olds 
reached  47.9 %  in  2015,  a  small  increase  on 
the 2014 rate of 47.7 %.  This is significantly 
above the EU average of 38.7 %. 

2020 Renewable energy target: 15 % 

2020 Share of renewables in transport: 

2020 Energy Efficiency Target: 

129.2 million tonnes of oil equivalent (Mtoe) for final 
energy consumption corresponding to 177.6 Mtoe for 
primary energy consumption. 

Early school leaving target in the 2016 NRP: None 

Tertiary education target in the 2016 NRP: None 

Target  on  the  reduction  of  population  at  risk  of 
poverty  or  social  exclusion  in  number  of  persons  in 
the 2016 NRP: None 

The 'at risk of poverty or social exclusion rate' 
stood  at  23.5 %  in  2015,  a  decrease  from  the 
2014 figure of 24.1 %. 

(31)  Renewable energy shares for 2015 are approximations and not official data, reflecting the available data (04.10.2016). See the 
the  2016  Report  on  Renewable 

in  Realisation  of 

Öko-Institut  Report:  Study  on  Technical  Assistance 
Energy, http://ec.europa.eu/energy/en/studies.  

43 

 
 
 
 
 
                                                           
ANNEX B 

MIP Scoreboard 

Table B.1: 

The MIP scoreboard 

Figures highlighted are those falling outside the limit established in the European Commission’s Alert Mechanism Report. For 
real effective exchange rate and unit labour costs, the first limit applies to eurozone members. 
Source: European Commission, Eurostat and Directorate General for Economic and Financial Affairs (for real effective 
exchange rate), and International Monetary Fund. 

44 

Thresholds201020112012201320142015Current account balance, (% of GDP) 3 year average-4%/6%-3.1-2.5-2.7-3.3-4.2-4.8-35%-4.0-5.9-22.4-16.2-17.6-14.4Real effective exchange rate - 42 trading partners, HICP deflator3 years % change±5% & ±11% -20.4-8.35.83.410.011.3Export market share - % of world exports5 years % change-6%-23.5-25.6-20.7-12.0-9.91.0Nominal unit labour cost index (2010=100)3 years % change9% & 12% 9.17.03.22.92.61.76%3.5-4.8-1.50.36.25.714%-2.7-1.20.53.92.32.5133%175.5173.1174.0167.8160.0157.860%76.081.685.186.288.189.1Unemployment rate3 year average10%7.07.87.97.97.26.316.5%8.310.9-2.9-6.94.7-7.8-0.2%-0.1-0.30.41.01.20.80.5%1.21.30.80.2-0.5-1.12%5.66.32.10.8-4.3-6.6Activity rate - % of total population aged 15-64 (3 years change in p.p)Long-term unemployment rate - % of active population aged 15-74 (3 years change in p.p)Youth unemployment rate - % of active population aged 15-24 (3 years change in p.p)External imbalances and competitivenessNew employment indicatorsNet international investment position (% of GDP)Deflated house prices (% y-o-y change)Total financial sector liabilities (% y-o-y change)Private sector credit flow as % of GDP, consolidatedPrivate sector debt as % of GDP, consolidatedGeneral government sector debt as % of GDPInternal imbalances 
 
 
 
 
 
ANNEX C 

Standard Tables 

Table C.1: 

Financial market indicators 

1) Latest data Q2 2016. 
2) Quarterly values are not annualised. 
* Measured in basis points. 
Source: European Commission (long-term interest rates); World Bank (gross external debt); Eurostat (private debt); ECB (all 
other indicators). 

45 

201120122013201420152016Total assets of the banking sector (% of GDP)518.7462.7434.3398.0363.0391.5Share of assets of the five largest banks (% of total assets)43.542.843.738.636.8-Foreign ownership of banking system (% of total assets)48.246.044.348.248.9-Financial soundness indicators:1)              - non-performing loans (% of total loans)2.22.01.8-2.11.9              - capital adequacy ratio (%)15.717.119.3-19.519.6              - return on equity (%)2)4.21.92.23.83.22.3Bank loans to the private sector (year-on-year % change)-1.52.9-4.71.97.6-11.5Lending for house purchase (year-on-year % change)3.94.4-0.89.79.6-13.7Loan to deposit ratio104.0102.699.396.196.894.2Central Bank liquidity as % of liabilities------Private debt (% of GDP)173.1174.0167.8160.0157.8-Gross external debt (% of GDP)1) - public27.726.525.926.528.130.9    - private125.4124.7122.7127.0105.5107.2Long-term interest rate spread versus Bund (basis points)*26.124.945.797.7129.8110.0Credit default swap spreads for sovereign securities (5-year)*64.851.234.921.818.432.7 
 
 
 
 
 
C. Standard Tables 

Table C.2: 

Labour market & social indicators — I 

1) The unemployed persons are all those who were not employed but had actively sought work and were ready to begin 
working immediately or within 2 weeks.       
2) Long-term unemployed are those who have been unemployed for at least 12 months.       
3) Not in education employment or training.       
4) Average of first three quarters of 2016. Data for total unemployment and youth unemployment rates are seasonally 
adjusted. 
Source: European Commission (EU Labour Force Survey). 

46 

201120122013201420152016 4Employment rate(% of population aged 20-64)73.574.174.876.276.877.5Employment growth (% change from previous year)0.51.11.22.41.81.6Employment rate of women(% of female population aged 20-64)67.868.469.370.671.372.0Employment rate of men (% of male population aged 20-64)79.380.080.481.982.583.1Employment rate of older workers (% of population aged 55-64)56.758.159.861.062.263.3Part-time employment (% of total employment, aged 15-64)25.525.925.625.325.125.2Fixed-term employment (% of employees with a fixed term contract, aged 15-64)6.06.26.16.36.16.0Transitions from temporary to permanent employment51.052.562.757.8::Unemployment rate1 (% active population, age group 15-74)8.17.97.66.15.34.9Long-term unemployment rate2 (% of labour force)2.72.72.72.21.61.3Youth unemployment rate (% active population aged 15-24)21.321.220.717.014.613.2Youth NEET3 rate (% of population aged 15-24)14.213.913.211.911.1:Early leavers from education and training (% of pop. aged 18-24 with at most lower sec. educ. and not in further education or training)14.913.412.411.810.8:Tertiary educational attainment (% of population aged 30-34 having successfully completed tertiary education)45.546.947.447.747.9:Formal childcare (30 hours or over; % of population aged less than 3 years)5.03.04.04.0:: 
 
 
 
 
C. Standard Tables 

Table C.3: 

Labour market & social indicators — II 

1) People at risk of poverty or social exclusion: individuals who are at risk of poverty and/or suffering from severe material 
deprivation and/or living in households with zero or very low work intensity.       
2) At-risk-of-poverty rate: proportion of people with an equivalised disposable income below 60 % of the national equivalised 
median income.        
3) Proportion of people who experience at least four of the following forms of deprivation: not being able to afford to i) pay 
their rent or utility bills, ii) keep their home adequately warm, iii) face unexpected expenses, iv) eat meat, fish or a protein 
equivalent every second day, v) enjoy a week of holiday away from home once a year, vi) have a car, vii) have a washing 
machine, viii) have a colour TV, or ix) have a telephone.       
4) People living in households with very low work intensity: proportion of people aged 0-59 living in households where the 
adults (excluding dependent children) worked less than 20 % of their total work-time potential in the previous 12 months.       
5) For EE, CY, MT, SI and SK, thresholds in nominal values in euros; harmonised index of consumer prices = 100 in 2006 (2007 
survey refers to 2006 incomes). 
Source: For expenditure on welfare benefits ESSPROS; for social inclusion EU-SILC. 

47 

Expenditure on social protection benefits (% of GDP)201020112012201320142015Sickness/healthcare8.38.88.88.78.6:Disability2.01.91.81.71.5:Old age and survivors11.811.912.212.111.7:Family/children3.23.13.12.92.8:Unemployment0.70.70.70.60.5:Housing1.41.41.51.41.4:Social exclusion n.e.c.1.00.90.80.70.7:Total28.328.728.928.127.2:of which: means-tested benefits4.34.24.23.83.4:Social inclusion indicators201020112012201320142015People at risk of poverty or social exclusion1 (% of total population)23.222.724.124.824.123.5Children at risk of poverty or social exclusion  (% of people aged 0-17)29.726.931.232.631.230.3At-risk-of-poverty  rate2 (% of total population)17.116.216.015.916.816.7Severe material deprivation rate3  (% of total population)4.85.17.88.37.46.1Proportion of people living in low work intensity households4 (% of people aged 0-59)13.211.513.013.212.311.9In-work at-risk-of-poverty rate (% of persons employed)6.87.99.08.48.78.2Impact of social transfers (excluding pensions) on reducing poverty44.846.946.147.242.942.8Poverty thresholds, expressed in national currency at constant prices5812379757977792080548095Gross disposable income (households; growth %)3.11.44.12.23.24.0Inequality of income distribution (S80/S20 income quintile share ratio)5.45.35.04.65.15.2GINI coefficient before taxes and transfers54.254.655.054.353.6:GINI coefficient after taxes and transfers32.933.031.330.231.6: 
 
 
 
 
C. Standard Tables 

Table C.4: 

Product market performance & policy indicators 

1) The methodologies, including the assumptions, for this indicator are shown in detail at : 
http://www.doingbusiness.org/methodology.        
2) Average of the answer to question Q7B_a. '[Bank loan]: If you applied and tried to negotiate for this type of financing over 
the past six months, what was the outcome?'. Answers were scored as follows: zero if received everything, one if received 
most of it, two if only received a limited part of it, three if refused or rejected and treated as missing values if the application is 
still pending or if the outcome is not known.       
3) Percentage population aged 15-64 having completed tertiary education.       
4) Percentage population aged 20-24 having attained at least upper secondary education.       
5) Index: 0 = not regulated; 6 = most regulated. The methodologies of the OECD product market regulation indicators are 
shown in detail at :  http://www.oecd.org/competition/reform/indicatorsofproductmarketregulationhomepage.htm       
6) Aggregate OECD indicators of regulation in energy, transport and communications.       
Source: European Commission; World Bank — Doing Business (for enforcing contracts and time to start a business); OECD (for 
the product market regulation indicators); SAFE (for outcome of small firms applications for bank loans). 

48 

Performance indicators201020112012201320142015Labour productivity (real, per person employed, year-on-year % change)Labour productivity in industry3.48-1.91-3.78-1.801.540.17Labour productivity in construction14.042.94-7.12-0.412.622.43Labour productivity in market services2.480.19-0.330.280.572.04Unit labour costs (ULC) (whole economy, year-on-year % change)ULC in industry-0.623.384.484.55-0.242.19ULC in construction-7.460.879.452.12-3.72-1.26ULC in market services0.24-0.710.052.37-0.91-0.23Business environment201020112012201320142015Time needed to enforce contracts1 (days)399.0399.0437.0437.0437.0437.0Time needed to start a business1 (days)11.511.511.511.56.04.5Outcome of applications by SMEs for bank loans2na1.12na0.760.570.35Research and innovation201020112012201320142015R&D intensity1.681.681.611.661.681.70Total public expenditure on education as % of GDP, for all levels of education combined6.155.986.10nananaNumber of science & technology people employed as % of total employment455151525353Population having completed tertiary education3323335363738Young people with upper secondary education4818082838486Trade balance of high technology products as % of GDP-1.23-0.65-0.88-0.96-1.15-1.13Product and service markets and competition200320082013OECD product market regulation (PMR)5, overallna1.211.08OECD PMR5, retail2.152.181.79OECD PMR5, professional services0.960.820.82OECD PMR5, network industries61.300.980.79 
 
 
 
 
C. Standard Tables 

Table C.5:  Green growth 

All macro intensity indicators are expressed as a ratio of a physical quantity to GDP (in 2005 prices). 
          Energy intensity: gross inland energy consumption (in kgoe) divided by GDP (in EUR). 
          Carbon intensity: greenhouse gas emissions (in kg CO2 equivalents) divided by GDP (in EUR). 
          Resource intensity: domestic material consumption (in kg) divided by GDP (in EUR). 
          Waste intensity: waste (in kg) divided by GDP (in EUR). 
Energy balance of trade: the balance of energy exports and imports, expressed as % of GDP. 
Weighting of energy in HICP: the proportion of 'energy' items in the consumption basket used for the construction of the HICP. 
Difference between energy price change and inflation: energy component of HICP, and total HICP inflation (annual % 
change). 
Real unit energy cost: real energy costs as a percentage of total value added for the economy. 
Environmental taxes over labour taxes and GDP: from European Commission's database, ‘Taxation trends in the European 
Union’. 
Industry energy intensity: final energy consumption of industry (in kgoe) divided by gross value added of industry (in 2005 EUR).  
Real unit energy costs for manufacturing industry excluding refining  real costs as a percentage of value added for  
manufacturing sectors. 
Share of energy-intensive industries in the economy: share of gross value added of the energy-intensive industries in GDP 
Electricity and gas prices for medium-sized industrial users: consumption band 500–20 00MWh and 10 000–100 000 GJ; figures 
excl. VAT. 
Recycling rate of municipal waste: ratio of recycled and composted municipal waste to total municipal waste 
Public R&D for energy or for the environment: government spending on R&D for these categories as % of GDP 
Proportion of GHG emissions covered by EU Emissions Trading System (ETS) (excluding aviation): based on greenhouse gas 
emissions (excl. land use, land use change and forestry) as reported by Member States to the European Environment Agency. 
Transport energy intensity: final energy consumption of transport activity (kgoe) divided by transport industry gross value added 
(in 2005 EUR). 
Transport carbon intensity: GHG emissions in transport activity divided by gross value added of the transport sector 
Energy import dependency: net energy imports divided by gross inland energy consumption incl. consumption of international 
bunker fuels. 
Aggregated supplier concentration index:  covers oil, gas and coal. Smaller values indicate larger diversification and hence 
lower risk. 
Diversification of the energy mix: Herfindahl index over natural gas, total petrol products, nuclear heat, renewable energies and 
solid fuels. 
* European Commission and European Environment Agency. 
Source: European Commission (Eurostat), unless indicated otherwise. 

49 

Green growth performance201020112012201320142015MacroeconomicEnergy intensity kgoe / €0.120.110.110.100.100.09Carbon intensity kg / €0.300.270.270.260.24-Resource intensity (reciprocal of resource productivity)kg / €0.280.280.270.260.260.26Waste intensity kg / €0.12-0.11-0.11-Energy balance of trade % GDP-0.4-1.0-1.1-0.9-0.7-Weighting of energy in HICP%8.808.7010.208.808.007.60Difference between energy price change and inflation %-6.15.45.24.62.9-3.3Real unit of energy cost% of value added9.39.910.010.010.0-Ratio of environmental taxes to labour taxesratio0.180.180.190.190.20-Environmental taxes% GDP2.52.52.52.52.5-Sectoral Industry energy intensity kgoe / € 0.100.090.100.100.100.09Real unit energy cost for manufacturing industry excl. refining% of value added11.210.911.111.110.9-Share of energy-intensive industries in the economy% GDP7.006.596.266.085.935.92Electricity prices for medium-sized industrial users€ / kWh0.100.100.120.120.130.15Gas prices for medium-sized industrial users€ / kWh0.020.030.030.040.040.04Public R&D for energy % GDP0.000.010.010.010.010.01Public R&D for environmental protection% GDP0.020.020.020.020.010.01Municipal waste recycling rate%40.242.042.643.343.743.5Share of GHG emissions covered by ETS*%39.239.239.839.437.934.8Transport energy intensitykgoe / €0.720.700.700.690.660.66Transport carbon intensitykg / €1.641.581.581.551.49-Security of energy supplyEnergy import dependency%28.236.042.246.345.537.4Aggregated supplier concentration indexHHI2.24.95.25.86.3-Diversification of energy mixHHI0.300.280.270.260.27- 
 
 
 
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