COMMISSION STAFF WORKING DOCUMENT Country Report United Kingdom 2018 Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP 2018 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
Date: 2018-03-07
Institutions: European Commission, Secretariat-General
Subjects: United Kingdom, economic situation, education, investment, labour market, macroeconomics, public finance, social policy, structural adjustment, tax system

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 7.3.2018 SWD(2018) 226 final  COMMISSION STAFF WORKING DOCUMENT Country Report United Kingdom 2018 Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP 2018 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(2018) 120 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.  Labour market, education and social policies 

3.4.   Investment 

3.5.   Sectoral policies 

Annex A: Overview Table 

Annex B: MIP Scoreboard 

Annex C: Standard Tables 

References 

LIST OF TABLES 

Table 1.1: 

Key economic and financial indicators - United Kingdom 

Table 2.1: 

Assessment of progress with 2017 CSRs 

Table 3.1.1:  Composition of tax revenues, 2016-2017 

Table B.1: 

The MIP scoreboard for United Kingdom (AMR 2018) 

Table C.1: 

Financial market indicators 

Table C.2: 

Headline Social Scoreboard indicators 

Table C.3: 

Labour market, education and social indicators 

Table C.4: 

Social inclusion and health indicators 

Table C.5: 

Product market performance and policy indicators 

Table C.6: 

Green growth 

LIST OF GRAPHS 

Graph 1.1: 
Graph 1.2: 

Real GDP growth 

Private consumption and wages 

1 

4 

12 

16 

16 

19 

25 

32 

38 

44 

47 

48 

54 

11 

14 

16 

47 

48 

49 

50 

51 

52 

53 

4 
4 

 
 
 
 
 
Potential GDP growth 

Labour market indicators 

Current account balance 

Real households saving ratio 

Net exports’ contribution to GDP growth 

Inflation and the nominal effective exchange rate (NEER) 

Unemployment rate and potential additional labour force 

Graph 1.3: 
Graph 1.4: 
Graph 1.5: 
Graph 1.6: 
Graph 1.7: 
Graph 1.8: 
Graph 1.9: 
Graph 1.10:  Net international investment position 
Graph 1.11:  Consumer credit growth 
Graph 2.1:  Overall multiannual implementation of 2011-2017 CSRs to date 
Graph 3.1.1:  Debt projections based on probability 
Graph 3.1.2:  Gross public debt as a % of GDP 
Graph 3.2.1:  Financing of non-financial corporates (NFCs) 
Graph 3.2.2: 
Graph 3.2.3:  Return on equity (%): domestic banking groups and stand-alone banks (2016 Q4) 
Graph 3.2.4:  Real house price growth (Q1-2007 to Q2-2017) 
Graph 3.2.5:  Quarterly housing starts and completions (England) (2002-2017) 
Graph 3.2.6:  House building in England by tenure (1969-2017) 
Graph 3.3.1:  At-risk-of-poverty-or-social-exclusion rate and its components 
Graph 3.3.2:  At-risk-of-poverty-or-social-exclusion rate, age groups 
Graph 3.3.3: 
Graph 3.4.1: 
Graph 3.4.2:  Equipment and dwellings investment share in the UK and the EU-27 
Graph 3.4.3:  Recent trends in UK labour productivity and real wages 
Graph 3.4.4:  Regional disparities in nominal labour productivity 
Graph 3.5.1:  Projected electricity generation by source 

Tier 1 ratio (%): domestic banking groups and stand-alone banks (2016 Q4) 

Investment shares in G7 nations, quarterly data 

In-work-poverty rate, groups 

LIST OF BOXES 

Box 2.1: Tangible results delivered through EU support to structural change in the UK 

Box 3.3.2: European Pillar of Social Rights in the United Kingdom 

Box 3.4.3: Policy highlights:  Making infrastructure policy more coherent and long term 

Box 3.4.4: Investment challenges and reforms in the United Kingdom 

4 
5 
5 
6 
6 
7 
8 
8 
9 
12 
17 
18 
19 
19 
20 
21 
22 
23 
29 
29 
30 
32 
32 
35 
36 
40 

15 

26 

33 

37 

 
 
 
 
 
EXECUTIVE SUMMARY 

has  many 

The UK has scope to raise stagnant productivity 
by 
increasing  both  public  and  private 
investment. Unemployment is at a record low and 
strengths.  However,  
the  UK 
productivity  is  weak  due  to  deep-rooted  policy 
challenges  including  low  investment  and  skills 
gaps.  The  UK  could  boost  potential  growth 
through  more  radical  action  to  enable  sufficient 
housebuilding  in  areas  of  high  demand  and  by 
delivering  on  its  objectives  to  raise  the  quality  of 
technical  education  and 
transport 
networks (1). 

to  upgrade 

Growth  is  expected  to  be  subdued  in  2018  and 
2019.  The  slight  slowdown  in  growth  to  1.8 %  in 
2017 was driven primarily by private consumption, 
as  higher  consumer  price  inflation  squeezed  real 
household incomes. The uncertainty around Brexit 
continues  to  weigh  on  business  investment,  while 
the  depreciation  of  sterling  in  2016  has  produced 
only  a  modest  boost  to  net  exports.  Based  on  a 
purely  technical  assumption  of  the  status  quo  in 
terms of trading relations between the UK and the 
rest of the EU, growth is expected to slow further 
to  1.4 %  in  2018  and  1.1 %  in  2019.  Private 
consumption 
are 
projected  to  remain  subdued,  with  net  export 
growth  easing  off,  in  line  with  developments  in 
export  markets.  Risks  to  the  baseline  forecast  are 
large and predominantly to the downside. 

and  business 

investment 

Consumer prices rose sharply in 2017 following 
sterling.  The 
the  2016  depreciation  of 
Harmonised Index of Consumer Prices measure of 
inflation  reached  3.0 %  in  December  2017,  and 
inflation 
the  Bank  of 
England’s  target.  Inflation  is  expected  to  remain 
elevated in 2018, before easing in 2019. 

is  significantly  above 

The headline labour market picture is positive. 
The employment rate (20-64) remained at a record 
level  of  78.2 %  in  Q3-2017,  while  at  4.2 % 
unemployment is at its lowest level since 1975. 

(1)  This  report assesses  the  UK’s  economy  in  the  light  of the 
European Commission’s Annual Growth Survey published 
on 22 November 2017. In the survey, the Commission calls 
on  EU  Member  States  to  implement  reforms  to  make  the 
European  economy  more  productive, 
resilient  and 
inclusive.  In  so  doing,  Member  States  should  focus  their 
efforts  on  the  three  elements  of  the  virtuous  triangle  of 
economic  policy  —  boosting 
investment,  pursuing 
structural reforms and ensuring responsible fiscal policies. 

1 

The  large  current  account  deficit  continues  to 
pose  external  financing  risks.  The  current 
account deficit widened to a record 5.9 % of GDP 
in  2016,  and  remains  elevated.  However,  the 
composition of the deficit tempers risks associated 
with  sizeable  external  financing  needs.  The  UK’s 
Net 
Investment  Position  has 
improved due to valuation effects linked to the fall 
in sterling. However, to date the net trade response 
to  weaker  sterling  has  been  disappointing.  A 
persistently  big  deficit  in  trade  in  goods  is  offset 
largely but not fully by net service exports. 

International 

Private-sector debt remains high, and consumer 
credit  growth  has  been  elevated  since  early 
2016.  Following  the  financial  crisis,  UK  banks 
have  reduced  debt  and  strengthened  their  balance 
sheets. The level of non-performing loans is quite 
low,  although  bank  profitability  remains  weak. 
Lending  to  non-financial  firms  grew  modestly  in 
2017, as did lending to households that is secured 
on dwellings. Consumer credit grew more rapidly, 
alongside  a  fall  in  the  household  saving  ratio. 
Although  household  debt  remains  high,  debt 
service  costs  currently  remain  low.  Signs  of  a 
moderation in house price growth should slow the 
growth of mortgage debt. 

the 

2017 

investment.  The  government 

Overall,  the  UK  has  made  some  progress  in 
addressing 
country-specific 
recommendations. There has been some progress 
on  housing 
is 
implementing a range of policies to boost housing 
supply. It announced further measures in the 2017 
Autumn  Budget,  including  additional  moves  to 
make  the  planning  system  more  supportive  of 
residential  development.  The  upward  trend  in 
annual  housing  completions  continued  in  2017, 
although  new  supply  continues  to  fall  short  of 
estimated  housing  need  and  many  barriers  to 
housebuilding  remain.  There  has  been  some 
progress on skills and apprenticeships. The number 
of  apprenticeship  starts  apparently  dropped  in  the 
the 
second  half  of  2017,  coinciding  with 
introduction  of 
levy.  The 
quality  of  apprenticeships  (measured  by  the  level 
of  qualification)  appears  to  be  improving,  albeit 
from  a  low  base.  Other  routes  for  progression  in 
work are at a very early stage but backed by a clear 
political impetus. It is important that the ambitious 
intentions and plans are swiftly implemented. 

the  apprenticeship 

 
 
                                                           
Executive summary 

  Labour  market  entry  is  easy  for  most 
people, but progression is difficult for some. 
Youth  and  long  term  unemployment  are  low 
and  stable.  However,  some  cohorts  have  a 
higher  propensity  to  be  stuck  in  low-wage, 
low-hours  and/or  low-progression  jobs.  Many 
new  skills  initiatives  are  targeting  the  flow  of 
new  entrants  to  the  labour  market.  but  a  large 
share  of  the  current  work  force  is  either  low-
their 
skilled  or 
qualifications.  Apprenticeship 
is 
underway but more focused on quantity targets 
than  quality.  Other  upskilling  and 
rather 
reskilling  opportunities  require  strengthening. 
The National Retraining Scheme to reskill and 
upskill those who already have completed full-
time education, including those in work, could 
improve  their  future  prospects  but  is  yet  to  be 
implemented. 

jobs  not  matching 

reform 

in 

  There  are 
care-  and  poverty-related 
challenges 
families. 
for  working-age 
Pressures  on  childcare  and  social  care  supply 
can affect female full-time employment. Other 
for 
social  policy  outcomes,  particularly 
working-age  families  who  receive  in-work 
benefits,  will  be  hit  by  previously  announced 
cutbacks  and  reforms  now  being  implemented 
in a context of heightened inflation. 

to 

  Productivity is low and stagnant, due partly 
to  low  investment.  The  UK  is  an  open 
economy  with  a  high  employment  rate  and 
many  positive 
its  business 
aspects 
environment.  However,  labour  productivity  is 
significantly  lower  than  in  other  developed 
economies, and no higher than it was a decade 
ago.  Large  parts  of  the  economy  perform 
comparatively  poorly  on  the  main  drivers  of 
productivity  —  skills,  investment  and  the 
adoption  and 
implementation  of  efficient 
business processes. Private investment remains 
well  below  the  EU  average,  particularly  in 
equipment,  and  there  remain  impediments  to 
the efficient allocation of capital and labour. 

  The UK has a significant challenge to deliver 
a  modern  network  infrastructure  that  can 
meet future demand. The UK's road, rail and 
aviation networks have significant and growing 
capacity 
an 
increasingly urgent need for higher investment 

pressures.  There 

also 

is 

Regarding progress in reaching the national targets 
under  the  Europe  2020  strategy,  the  UK  is 
performing  well  on  greenhouse  gas  emissions.  It 
has made good progress on renewable energy and 
energy  efficiency  However, 
faces 
challenges in achieving the 2020 targets. 

the  UK 

The  UK  performs adequately  on the  indicators 
of 
the 
the  Social  Scoreboard  supporting 
European Pillar of Social Rights. The post-crisis 
economic recovery has translated into a significant 
improvement in employment outcomes, bringing a 
large number of people back into the labour market 
and  employment.  However,  there  is  untapped 
potential  with  high  inactivity  rates  among  certain 
groups.  Many  women  work  part  time.  Projections 
suggest  that  recent  social  reforms  risk  increasing 
in-work poverty and poverty among children. 

Key structural issues analysed in this report, which 
point to particular challenges for the UK, are: 

reduction 

  High general government debt is a source of 
vulnerability.  The  deficit  fell  to  2.3 %  in 
is 
2016-2017,  although  deficit 
expected to stall temporarily in 2017-2018. The 
debt-to-GDP ratio is expected to remain above 
80 %  and  could  increase  if  potential  shocks  to 
the  economy  materialise.  The  UK  faces 
medium fiscal risks in the long term, linked to 
the projected impact of age-related spending on 
pensions, health and long term care. 

  Housing  costs  are  high  and  housing  supply 
still  lags  growth  in  demand.  While  house 
price  growth  has  slowed  in  recent  quarters, 
affordability  has  continued  to  decline  due  to 
low  wage  growth.  Home  ownership  has  fallen 
significantly  among  younger  age  cohorts  in 
recent  years, 
intergenerational 
increasing 
inequality. A cyclical recovery and government 
policy reforms have contributed to a continued 
pick  up  in  residential  construction.  However, 
new  housing  supply  remains 
insufficient, 
particularly  in  areas  of  high  demand.  The 
government recognises the problem and has set 
ambitious  objectives  to  increase  supply  in  the 
coming  years.  At 
the 
government  has  reaffirmed  its  commitment  to 
limiting development around urban centres. 

same 

time, 

the 

2 

 
 
stable 

a  more 

in new energy generation and supply capacity. 
The  government  has  created  two  agencies  to 
provide 
long-term 
framework for infrastructure investment and is 
increasing  public 
investment. 
Annual investment from the public and private 
sector needs to grow substantially over the next 
decade to deliver all the projects planned. 

infrastructure 

and 

Executive summary 

3 

 
 
1.  ECONOMIC SITUATION AND OUTLOOK 

2017  from  a  negative  0.8 %  in  Q1-2017.  This 
indicates  that  households  spent  more  than  they 
earned in income during Q1-2017.  

Graph 1.2: 

Private consumption and wages 

GDP growth and its composition 

The  pace  of  quarterly  economic  growth  in  the 
UK  has  slowed  since  the  start  of  2017.  Annual 
GDP  growth  had  already  slowed  from  2.3 %  in 
2015 to 1.9 % in 2016 (Graph 1.1). Since the start 
of  2017,  the  pace  of  quarterly  growth  slowed 
significantly, from 0.7 % quarter-on-quarter in Q4-
2016 to an average of 0.4 % in 2017. 

Graph 1.1: 

Real GDP growth 

Source: Office for National Statistics 

Graph 1.3: 

Real households saving ratio 

Source: Office for National Statistics & European Commission 

This  slowdown  in  growth  has  been  driven 
primarily  by  a  decline  in  private  consumption 
growth, which fell to an average of 0.2 % quarter-
on-quarter in the first three quarters of 2017. This 
was  mainly  due  to  the  squeeze  on  real  disposable 
incomes  as  nominal  wage  growth  fell  below 
consumer  price  inflation  (Graph  1.2).  Consumer 
prices  have  risen  sharply  in  2017  following  the 
2016 depreciation of sterling.  

Households have to date smoothed consumption 
by reducing their savings. The headline (national 
accounts)  households  saving  ratio (2)  fell  from 
8.2 % (of disposable income) in Q1-2016 to a near 
record  low  of  5.2 %  in  Q3-2017  (Graph  1.3). 
When measured on a cash basis (3) the households 
saving  ratio  recovered  to  a  modest  1.4  %  in  Q3-

(2)  Excluding non-profit institutions serving households. 
(3)  This  removes  imputed  transactions  resulting  in  a  measure 
of gross saving that reflects households’ saving (excluding 
pension contributions) in the respective quarter or year. 

4 

Source: Office for National Statistics 

Private  consumption  growth  is  expected  to 
remain  subdued  over  the  2018-2019  forecast 
horizon.  In  2018,  modest  growth  in  nominal 
wages  is  projected  to  be  outpaced  by  elevated 
consumer price inflation. Nonetheless, households 
are expected to smooth consumption by continuing 
to  reduce  savings  in  2018.  In  2019,  despite  lower 
projected inflation, private consumption growth is 

-6-5-4-3-2-1012345030507091113151719pps.Private consumptionPublic consumptionInvestmentInventoriesNet exportsreal GDP growthforecast-6-4-20246030405060708091011121314151617% y/yNominal wagesInflationPrivate consumption-4-202468101214030405060708091011121314151617%, quarterly dataHouseholds savings ratio (National accounts)Households savings ratio (cash basis) 
 
 
                                                           
 
 
 
1. Economic situation and outlook 

expected to be constrained by a marginal rebound 
in the households saving ratio. 

The  impact  of  the  depreciation  of  sterling  in 
2016  and  buoyant  external  demand  has 
provided  a  boost  to  net  exports.  Net  exports 
actually  made  a  negative  0.8  pps.  contribution  to 
GDP growth in 2016 (Graph 1.4). Service exports 
provided the only positive contribution to net trade 
in 2016, with financial services making the largest 
contribution  to  the  increase  in  the  services  trade 
surplus.  In  the  first  3  quarters  of  2017,  supported 
by the previous depreciation of sterling and robust 
export market growth, net exports have on average 
contributed  0.9 pps.  to  year-on-year  growth.  Net 
trade  is  therefore  expected  to  make  a  positive 
contribution to growth in 2017, which is expected 
to  partially  offset  the  impact  of  weaker  domestic 
demand.  Over  the  forecast  horizon,  net  export 
growth  is  forecast  to  grow  in  line  with  growth 
projections in export markets as the boost from the 
previous sterling depreciation fades.  

Graph 1.4:  Net exports’ contribution to GDP growth 

quo in terms of trading relations between the EU27 
and  the  UK. This  is for  forecasting purposes  only 
and  has  no  bearing  on  the  talks  underway  in  the 
context of the Article 50 process. However, as this 
purely  technical  assumption  implies  a  relatively 
benign  scenario,  the  risks  to  the  2019  baseline 
forecast  are 
the 
downside 

large  and  predominantly 

to 

Potential growth 

labour  productivity  since 

Weak  productivity  growth  continues  to  weigh 
on  potential  GDP  growth.  In  line  with  the 
stagnation  of 
the 
economic  downturn,  potential  GDP  growth  has 
remained  relatively  subdued  compared  to  the  pre-
crisis  period  (Graph  1.5).  While  the  contribution 
from  total  factor  productivity  (TFP)  increased 
slightly  from  2014  to  2016,  most  of  the  modest 
increase in potential output since the downturn has 
been due to a growing labour force. 

Graph 1.5: 

Potential GDP growth 

Source: Office for National Statistics 

GDP  growth  is  expected  to  remain  subdued 
over  the  forecast  horizon,  slowing  gradually  to 
1.4 %  in  2018  and  1.1 %  in  2019.  As  discussed 
previously,  alongside  the  moderating  contribution 
of net exports, consumption growth is projected to 
be modest, in line with weak real wage growth and 
diminishing 
confidence,  while 
uncertainty  is  expected  to  continue  to  weigh  on 
business  investment.  The  projections  for  2019  are 
based  on  a  purely  technical  assumption  of  status 

consumer 

Source: European Commission 

Inflation 

Consumer prices rose sharply in 2017 following 
the  2016  depreciation  of  sterling  (Graph  1.6). 
The harmonised index of consumer prices measure 
of  inflation  stood  at  3.0 %  in  December  2017. 
After  peaking  in  2017,  inflation  is  expected  to 
remain  elevated  in  2018  at  2.7 %.  In  2019, 
inflation  is  projected  to  ease  to  2.0 %,  matching 

5 

-4-3-2-1012340304050607080910111213141516ppsExports of goodsExports of servicesImports of goodsImports of servicesNet exports-0.50.00.51.01.52.02.53.0040506070809101112131415161718192021% y-o-yCapital Accumulation ContributionTFP ContributionTotal Labour (Hours) ContributionPF Potential Growth 
 
 
the Bank of England’s inflation target of 2 %. 

Labour market 

Headline  labour  market  figures  continued  to 
strengthen  amid  slowing  economic  growth 
(Graph  1.7).  In  2016,  activity  (20-64)  (81 %), 
long-term  unemployment  (15-74),  (1.3 %)  youth 
unemployment  (15-24)  (13 %)  and  the  rate  of 
youth  not  in  employment,  education  or  training 
(NEET) (15-24) (10.9 %) were all on an improving 
or 
and 
unemployment (15-64) rates in Q3-2017 at 78.2 % 
and  4.2 %  respectively  continued  this  positive 
trend.  The  activity  rate  is  on  a  long-term  positive 
path.  Strong  employment  growth  together  with 
modest  economic  growth  continued  the  trend  of 
weak  productivity  growth  since  the  2008  crisis 
(see Section 3.4).   

stable  path.  Employment 

(20-64) 

Graph 1.6: 

Inflation and the nominal effective exchange 
rate (NEER) 

Source: European Commission 

The  decrease 
in  unemployment  masks 
remaining  labour  market  reserves  (Graph  1.8). 
While  unemployment  is  now  below  pre-crisis 
levels,  the  share  of  underemployed  part-time 
workers in the active population (i.e. workers who 
would  like  to  work  full  time  but  cannot  find  full-
time  work)  is  still  higher  than  before  the  crisis 
(4.5 % of the labour force in Q3-2017 as compared 
to  3.9 %  in  Q1-2008).  Other  broad  indices  of 
labour  market  reserves  have  also  shown  a  less 
steep  decline 
rate 
(European  Commission  2017a).  These  suggest 

the  unemployment 

than 

1. Economic situation and outlook 

there is still untapped labour market potential (see 
Section 3.3). 

Net  migration  to  the  UK  continues  but  has 
fallen from recent highs. Net migration to the UK 
was estimated at + 230,000 to the year ending June 
2017,  down  from  +336,000  a  year  earlier.  EU 
citizens  accounted  for  three  quarters  of  the  fall  in 
net migration. 

Graph 1.7: 

Labour market indicators 

Source: Eurostat 

Despite  the  labour  market  recovery,  wage 
growth  has  remained  moderate  and  below  the 
rate of inflation. After rising moderately to 2.4 % 
in  2016,  nominal  wage  growth  eased  in  2017. 
Weak  nominal  wage  growth  alongside  elevated 
consumer price inflation has meant that real wage 
growth  turned  negative,  to  -0.4 %  year-on-year  in 
Q3-2017. Nominal wage growth is expected to be 
around  2.1  %  in  2017,  below  the  projection  for 
consumer  price  inflation  of  2.7 %,  resulting  in 
negative real wage growth for the year as a whole. 

weak 

include 

Factors  explaining  modest  nominal  wage 
growth 
productivity 
developments,  as  well  as  composition  effects  as 
low-wage  jobs  are  added  to  the  economy. 
According  to  Bank  of  England  estimates,  the 
sectoral,  occupational  and  skills  composition  of 
employment  growth  may  reduce  wage  growth  by 
about 0.7 pps. in 2017 (Bank of England, 2017). 

Self-employment  has  also  played  an  important 
role  in  employment  creation  in  the  recovery. 

6 

809010011012013014001234560304050607080910111213141516172010=100% y/yHICP (lhs)NEER (rhs)76.57777.57878.57979.58080.58181.505101520250304050607080910111213141516%%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) 
 
 
Since Q1-2009, self-employment has increased by 
about  one  million  and  accounts  for  36 %  of  total 
employment  growth  to  Q3-2017.  Self-employed 
persons  now  account  for  around  15 %  of  the 
workforce.  However,  as  discussed  in  Section  3.3, 
some self-employed persons tend to be less secure 
and less well paid than regular employees. 

Graph 1.8: 

Unemployment rate and potential additional 
labour force 

Source: Eurostat 

Social developments 

Income  inequality  remains  level  with  the  EU 
average. After having increased in recent years, in 
2016  the  share  of  income  of  the  richest  20 %  of 
households  was  5.1  times  greater  than  that  of  the 
poorest  20 %,  which  was  slightly  below  the  EU 
average,  (European  Commission,  2017a).  Since 
2010,  growth  in  GDP  has  outpaced  growth  in 
household  disposable 
the 
inclusiveness  of  the  recovery,  even  as  the  tax 
benefit 
its  above-average 
performance  in  reducing  inequality  in  disposable 
incomes. 

income,  weakening 

system  continues 

uneven 

Wealth inequality is high. The recent house price 
increases exacerbate inequality which results from 
housing 
ownership 
the 
assets (Resolution  Foundation,  2017a).  This 
reverses  a  pre-crisis 
trend  of  falling  wealth 
inequality  due  to  broadening  home  ownership. 
Rent  increases  are  also  having  an  effect,  as  the 
median income of tenants was just 69 % of that of 
owners, one of the lowest ratios in the EU. 

of 

1. Economic situation and outlook 

External position 

of 

GDP 

terms, 
considerably 

The  large  current  account  deficit  continues  to 
pose  external 
financing  risks.  The  deficit 
widened  to  5.9 %  of  GDP  in  2016,  the  largest 
deficit  on  record  (Graph1.9).  In  Q3-2017,  the 
current  account  deficit  stood  at  4.5  %  of  GDP, 
which  implies  sizeable  external  financing  needs. 
in 
-3.3% 
at 
Furthermore, 
the  current  account 
cyclically-adjusted 
deficit 
the 
below 
remains 
country-specific  ‘norm’  of  0%  suggested  by 
fundamentals(4).  However;  the  composition of  the 
financing  of  the  deficit  mitigates  some  of  these 
risks.  The  deterioration  since  2011,  the  last  year 
the current account deficit was below 3 % of GDP, 
has been largely driven by a decline in the primary 
income  balance,  which  fell  to  -2.6 %  of  GDP  in 
2016.  This  is  because  UK  earnings  on  assets 
abroad  have  fallen  relative  to  the  earnings  on 
foreign  investments  in  the  UK.  Nonetheless,  the 
net  trade  response  to  sterling’s  depreciation  in 
2016  has  been  disappointing  as  there  was  a 
widening in the trade deficit to 2.1 % of GDP, the 
largest  trade  deficit  of  the  post-crisis  period. 
However, the trade deficit has been broadly stable, 
standing  at  around  2 %  since  2012,  and  has 
improved compared to the pre-crisis period. 

Despite  the  widening  in  the  current  account 
deficit, the net international investment position 
narrowed  substantially.  The  UK’s  negative  net 
international  investment  position  improved  from  -
18.4 % of GDP in 2015 to -1.1 % of GDP in 2016 
(Graph  1.10).  This  was  a  result  of  total  assets 
(EUR  1.55 
increasing  by  GBP 1.36 
triillion) 
(EUR  12.48 
to  GBP 10.94 
trillion), the highest value of assets (in GBP) held 
in  5  years.  The  change  in  the  value  of  assets 
reflects  both  an  accumulation  of  net  assets,  but 
also, the 2016 fall of the sterling exchange rate to 
an  eight-year  low.  In  2016  the  decline  in  the 
nominal  effective  exchange  rate  by  13 %  from 
2015  led  to  a  higher  valuation  of  the  stocks  held 
abroad when converted back into sterling. 

trillion 
trillion 

(4)  The  current  account  'norm'  benchmark  is  derived  from 
regressions  capturing  the  main  fundamental  determinants 
of  the  saving-investment  balance  (e.g.  demographics, 
resources),  as  well  as  policy  factors  and  global  financial 
conditions.  See  also  European  Commission,  2017, 
'Empirical  current  account  benchmarks:  modelling  the 
impact  of  demographic  variables',  LIME  Working  Group, 
24 April 2017. 

7 

02468101214161820080910111213141516% of labour force 15-74UKUnemployment rateAvailable but not seekingUnderemployedSeeking but not available 
 
                                                           
1. Economic situation and outlook 

sustainably  to  the  target.  The  MPC  decision  also 
stated  that  future  increases  in  Bank  Rate  are 
expected  to  be  at  a  gradual  pace  and  to  a  limited 
extent. 

Financial sector and debt 

Following  the  financial  crisis  UK  banks  have 
deleveraged  and  strengthened  their  balance 
sheets.  The  total  assets  of  the  banking  system 
declined by some 18 % between the peak recorded 
at the end of 2008 and the end of 2015, but started 
to  grow  again  afterwards.  As  of  September  2017, 
total assets had recovered most of the decline and 
were  only  5 %  below  their  2008  peak.  The  repair 
of the banks’ balance sheets involved a change in 
their  structure  as  well.  Banks  have  increased  the 
share of their domestic lending and domestic assets 
as  a  share of  total  assets  while  reducing  the  share 
of overseas and intra-financial sector liabilities. 

since 

the 
Credit  growth  has  recovered 
beginning  of  2016 
for  all  categories  of 
borrowers,  led  by  consumer  credit  growth. 
Lending  to  households  grew  by  4.1  %  year-on-
year. while lending secured on dwellings grew by 
3.3 %  (Graph  1.11).  Alongside  the  fall  in  the 
households  saving  ratio  and  despite  a  slight 
in  November,  unsecured  consumer 
slowdown 
credit continued to grow rapidly at 9.1 % year-on-
year in November. 

The  rapid  rise  in  credit  growth  prompted  the 
Prudential  Regulation  Authority  and 
the 
Financial  Conduct  Authority  to  bring  forward 
the  assessment  of  stressed  losses  on  consumer 
credit  lending  in  the  Bank  of  England’s  2017 
the  Bank’s 
annual  stress  test.  Additionally, 
Financial Policy Committee, decided in November 
2017 to raise the UK countercyclical capital buffer 
the  rate  deemed 
rate  from  0.5 % 
to  1 %, 
risk 
appropriate 
environment. 
the 
Committee’s  assessment  that  apart  from  the  risks 
related  to  Brexit,  domestic  risks  are  at  a  standard 
level  overall  and  that  while  debt  levels  are  high, 
overall credit growth is only a little above nominal 
GDP growth, and debt-servicing costs are low. 

standard  domestic 
reflects 

a 
This 

decision 

in 

Graph 1.9:  Current account balance 

Source: Office for National Statistics & European Commission 

Graph 1.10:  Net international investment position 

Source: Office for National Statistics & European Commission 

Monetary policy 

In  November  2017,  the  Bank  of  England 
tightened monetary policy. The Bank’s Monetary 
Policy  Committee  (MPC)  voted  to  increase  Bank 
Rate  by  0.25  percentage  points,  to  0.5 %.  The 
MPC  also  voted  to  maintain  the  stock  of  sterling 
non-financial 
investment-grade  corporate  bond 
purchases  at  GBP  10  billion  (EUR  11.4  billion) 
and to maintain the stock of UK government bond 
purchases  at  GBP  435  billion  (EUR  496  billion). 
In  its  decision  summary,  the  MPC  stated  that  it 
was  appropriate  to  tighten  modestly  the  stance  of 
monetary  policy  in  order  to  return  inflation 

8 

-12-10-8-6-4-2024604050607080910111213141516%GDPGoodsServicesPrimary incomeSecondary incomeCAB-60-40-200204060030405060708091011121314151617*% of GDPNet portfolio investment, equity and investment fund shares/unitsNet portfolio investment, debt securitiesOther investment (net)Net direct investmentNet financial derivatives and employee stock optionsNet Int'l investment position (NIIP) 
 
 
 
Graph 1.11:  Consumer credit growth 

Source: Bank of England 

this 

improvement, 
threshold  and 

Despite stabilising over recent years, household 
debt  remains  high.  After  having  fallen  steadily 
from  a  peak  of  96 %  of  GDP  in  2009,  household 
debt  has  broadly  stabilised  in  the  past  4  years.  In 
2016  household  debt  stood  at  86 %  of  GDP. 
the  Commission’s 
Despite 
fundamentals-based 
prudential 
benchmarks  for  household  debt  suggest 
that 
household  indebtedness  still  presents  financial 
stability  risks.  Furthermore,  the  Commission’s 
household  debt  sustainability  indicators  (S1  and 
S2)  suggest  that  the  near  record  low  households 
saving  ratio  should  increase  to  make  debt  levels 
sustainable  over  both  the  medium  and  long  term 
(5).  Given  the  high  level  of  indebtedness  of 
households, the European Systemic Risk Board — 
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 EU countries) 
on  the  vulnerabilities  of  the  residential  real  estate 
sector.  The  Board  subsequently  concluded  that 

(5)  Fundamentals-based  benchmarks 

are  derived 

the  probability  of  a  banking  crisis 

from 
regressions  capturing  the  main  determinants  of  credit 
growth and taking into account a given initial stock of debt. 
Prudential  thresholds  represent  the  debt  threshold  beyond 
is  high, 
which 
minimising the probability of missed crisis and that of false 
alerts.  Debt  sustainability  indicators  correspond  to  the 
permanent  adjustment  in  the  savings  rate  to  (i)  reach  the 
fundamental benchmark for debt within 15 years (S1) and 
(ii)  ensure  that  net  financial  liabilities  are  eventually 
reimbursed  (S2).  See  also  European  Commission  (2017), 
“Benchmarks for the assessment of private debt” Note for 
the Economic Policy Committee. 

1. Economic situation and outlook 

while  there  are  pockets  of  risky  lending,  as 
highlighted  by  the  growth  in  unsecured  credit, 
vulnerabilities  related  to  the  real  estate  sector 
appear to have reduced. The easing of house price 
growth  in  2017,  as  well  as  internal  European 
Commission forecasts, point to subdued real house 
price growth during 2017-2019. As the moderation 
in  house  price  growth  is  expected  to  occur 
alongside a lower level of mortgage approvals, this 
should  slow  the  pace  of  the  build-up  in  mortgage 
debt. 

Growth  in  credit  for  non-financial  corporates 
was  2.1 %  year-on-year  as  of  December  2017. 
The  slight  increase  was  driven  by  credit  to  large 
businesses,  which  grew  by  3.0 %  in  November,. 
Over  the  same  period,  credit  growth  to  small  and 
medium-sized  enterprises  dropped  marginally,  to 
0.4 %  in  October  to  0.4 %  in  November.  Helped 
by the increase in the quality of banks’ assets and 
the  stock  of  loans,  the  ratio  of  gross  non-
performing-loans  improved  and  was  one  of  the 
lowest in the EU at 1.8 % as of the end of 2016. 

Public finances 

The  budget  deficit  has  declined  quite 
substantially  in  recent  years,  although  it  is 
expected to increase slightly in the current fiscal 
year  (to  the  end  of  March  2018).  The  general 
government  deficit  fell  to  2.3 %  of  GDP  in  2016-
2017,  below  the  reference  value  of  3 %  of  GDP 
contained  in  the  Treaty  on  the  Functioning  of  the 
EU. This represented a substantial fall compared to 
a  deficit  of  4 %  of  GDP  in  2015-2016  and  was 
partly  due  to  some  revenue  windfalls,  such  as 
exceptionally  high  self-declared  personal  income 
taxes ahead of a change to dividend taxation at the 
start  of  the  current  fiscal  year.  The  reversal  of 
these windfall revenues is expected to give rise to 
a small increase in the deficit in the current fiscal 
year,  with  the  Commission  2017  autumn  forecast 
projecting  an  increase  to  2.5 %  of  GDP.  The 
deficit  is  then  expected  to  resume  its  declining 
trend  and  is  projected  to  fall  to  1.3 %  of  GDP  in 
is 
2019-2020.  The  structural  budget  balance 
expected to fall from 2.9 % of GDP in 2017-2018 
to 1.4 % of GDP in 2019-2020. 

The  measures  announced  as  part  of  the  2017 
Autumn  Budget  (HM  Treasury  (2017a)  will 
slow the expected pace of fiscal consolidation in 
the  coming  years.  A  majority  of  the  measures 

9 

-10-50510152025030405060708091011121314151617% y/ysecuredunsecuredcredit cardexcl credit card 
 
                                                           
1. Economic situation and outlook 

related 

announced by the Chancellor of the Exchequer on 
22  November  2017 
to  government 
expenditure,  with  the  introduction  of  a  number  of 
new  expenditure  items  and  a  slowing  of  the  pace 
of planned reductions in existing items. While the 
Office  for  Budget  Responsibility  (OBR)  still 
expects  the  UK  government  to  meet  its  fiscal 
targets  (see  Section  3.1),  it  projects  the  nominal 
general  government  deficit  to  be  higher  across  its 
forecast  period,  compared  to  its  March  2017 
forecast.  For  example,  the  OBR  now  expects  the 
deficit  to  stand  at  1.8 %  of  GDP  in  2019-2020, 
compared to 1.1 % of GDP in its previous forecast. 
While some of this increase is due to data revisions 
and  changes 
the  OBR’s  macroeconomic 
forecast,  most  of  it  is  due  to  the  additional 
measures announced in the 2017 Autumn Budget, 
such as additional spending on the National Health 
for  measures 
Service  or 
ownership.
designed 

increased 
to 

funding 

home 

boost 

in 

to 

to 

further 

The general government debt remains at a high 
level,  reaching  86.8 %  of  GDP  in  2016-2017. 
According 
the  Commission  2017  autumn 
forecast, the debt-to-GDP ratio is expected to have 
peaked in 2016-2017 and to fall gradually over the 
remainder  of  the  forecast  period.  However,  this 
forecast  does  not  take  account  of  the  measures 
announced in the 2017 Autumn Budget, which are 
expected 
the  general 
government  deficit  and  debt  in  the  coming  years. 
According to the OBR’s latest economic and fiscal 
outlook  (OBR,  2017a),  which  takes  into  account 
these  budget  measures,  the  debt-to-GDP  ratio  is 
now expected to peak at 87.4 % of GDP in 2019-
2020  before  starting  to  decline  gradually.  High 
levels  of  public  debt  pose  macroeconomic  risks, 
the  economy’s  shock 
such  as  by  reducing 
absorption  capacity  or  increasing  its  exposure  to 
unexpected changes in market sentiment. 

increase 

10 

 
1. Economic situation and outlook 

Table 1.1: 

Key economic and financial indicators - United Kingdom 

(1)  NIIP excluding direct investment and portfolio equity shares . 
(2) Domestic banking groups and stand-alone banks, EU and non-EU foreign-controlled subsidiaries and EU and non-EU 
foreign-controlled branches. 
Source: Eurostat and ECB as of 30 Jan 2018, where available; European Commission for forecast figures (Winter forecast 2018 
for real GDP and HICP, Autumn forecast 2017 otherwise) 

11 

2004-072008-122013-1420152016201720182019Real GDP (y-o-y)2.60.02.62.31.91.81.41.1Potential growth (y-o-y)2.31.01.21.51.41.51.41.4Private consumption (y-o-y)2.6-0.41.92.62.9...Public consumption (y-o-y)2.31.01.30.60.8...Gross fixed capital formation (y-o-y)3.8-2.35.22.81.8...Exports of goods and services (y-o-y)6.00.71.75.02.3...Imports of goods and services (y-o-y) 5.60.03.85.14.8...Contribution to GDP growth:Domestic demand (y-o-y)2.8-0.52.42.22.4...Inventories (y-o-y)-0.10.00.20.1-0.1...Net exports (y-o-y)0.00.2-0.7-0.1-0.8...Contribution to potential GDP growth:Total Labour (hours) (y-o-y)0.50.50.70.80.70.60.60.5Capital accumulation (y-o-y)0.60.40.50.60.50.60.50.5Total factor productivity (y-o-y)1.20.10.10.20.20.30.30.4Output gap1.6-3.0-1.40.30.60.60.40.2Unemployment rate5.17.46.85.34.84.54.74.8GDP deflator (y-o-y)2.71.91.80.52.02.32.11.7Harmonised index of consumer prices (HICP, y-o-y)2.03.32.00.00.72.72.72.0Nominal compensation per employee (y-o-y)4.91.81.61.13.32.12.22.5Labour productivity (real, person employed, y-o-y)1.5-0.30.80.60.5...Unit labour costs (ULC, whole economy, y-o-y)3.32.00.90.42.71.51.51.8Real unit labour costs (y-o-y)0.60.1-0.90.00.7-0.7-0.70.1Real effective exchange rate (ULC, y-o-y)3.2-4.22.36.7-9.8-5.02.40.3Real effective exchange rate (HICP, y-o-y)0.8-3.62.75.5-10.6-5.13.3.Savings rate of households (net saving as percentage of net disposable income)3.25.13.64.32.0...Private credit flow, consolidated (% of GDP)15.82.36.93.511.5...Private sector debt, consolidated (% of GDP)174.3185.4170.2164.7170.2...of which household debt, consolidated (% of GDP)87.892.886.085.486.1...of which non-financial corporate debt, consolidated (% of GDP)86.592.584.179.184.0...Gross non-performing debt (% of total debt instruments and total loans and advances) (2).1.91.8.1.6...Corporations, net lending (+) or net borrowing (-) (% of GDP)-1.30.3-2.3-4.0-3.3-1.9-1.3-1.6Corporations, gross operating surplus (% of GDP)21.221.321.621.521.322.723.523.5Households, net lending (+) or net borrowing (-) (% of GDP)1.54.02.43.01.0-0.6-1.0-0.7Deflated house price index (y-o-y)8.1-4.33.15.35.5...Residential investment (% of GDP)3.93.23.43.63.7...Current account balance (% of GDP), balance of payments-2.8-3.8-5.4-5.2-5.8-5.1-4.6-4.4Trade balance (% of GDP), balance of payments-2.5-2.2-2.0-1.7-2.1...Terms of trade of goods and services (y-o-y)-0.3-0.11.80.91.40.80.50.5Capital account balance (% of GDP)0.00.0-0.1-0.1-0.1...Net international investment position (% of GDP)-5.4-10.9-20.4-18.4-4.4...Net marketable external debt (% of GDP) (1)-25.4-27.0-14.0-10.90.9...Gross marketable external debt (% of GDP) (1)357.7546.6434.0392.0418.3...Export performance vs. advanced countries (% change over 5 years)-1.6-15.1-4.23.7-1.6...Export market share, goods and services (y-o-y)-3.5-4.61.34.1-4.7...Net FDI flows (% of GDP)0.20.3-3.1.....General government balance (% of GDP)-2.9-8.1-5.4-4.3-2.9-2.1-1.9-1.5Structural budget balance (% of GDP).-6.2-4.6-4.4-3.3-2.5-2.2-1.6General government gross debt (% of GDP)40.371.186.588.288.286.585.284.1Tax-to-GDP ratio (%)34.835.034.234.435.035.334.934.9Tax rate for a single person earning the average wage (%)26.925.323.823.423.3...Tax rate for a single person earning 50% of the average wage (%)20.819.115.614.814.7...forecast 
 
 
 
2.  PROGRESS WITH COUNTRY-SPECIFIC RECOMMENDATIONS 

the 

with 

assessment 

implementing 

introduction  of 

the  multi-annual 

the 
Progress 
recommendations  addressed  to  the  UK 
in 
2017 (6)  has  to  be  seen  in  a  longer  term 
the 
perspective  since 
European  Semester  in  2011.  The  UK  has 
undertaken several reforms since then. Looking 
at 
of  CSR 
implementation,  85  %  of  CSRs  addressed  to  the 
UK have recorded ‘some progress’. A further 9 %, 
covering  access  to  finance  and  fiscal  policy, 
achieved  ‘substantial’  progress.  The  other  6 %  of 
CSRs recorded only ‘limited’ progress (see Graph 
2.1).  Labour  market,  housing  and  infrastructure 
CSRs have tended to record some progress. While 
the government has put in place a range of relevant 
policies,  these  are  all  deep  rooted  and  long-
standing  policy  challenges  requiring  sustained 
reform  efforts.  It  is  also  not  clear  how  successful 
current  policy  will  be.  There  has  been  more 
variation  in  the  assessment  of  fiscal  CSRs  over 
time  as  the  pace  of  ongoing  fiscal  consolidation 
has fluctuated, as have trends in public investment. 

Graph 2.1:  Overall multiannual implementation of 2011-

2017 CSRs to date 

(1) The overall assessment of the country-specific 
recommendations related to fiscal policy exclude 
compliance with the Stability and Growth pact. 
(2) 2011-2012: Different CSR assessment categories 
(3) The multiannual CSR assessment looks at the 
implementation since the CSRs were first adopted until the 
March 2018 Country Report. 

Source: European Commission 

The  fiscal  deficit  has  gradually  decreased  to 

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

past, see in particular Section 3. 

below  3 %  of  GDP.  The  UK  has  left  the 
Excessive  Deficit  Procedure  of  the  Stability  and 
Growth Pact. 

to 

the  planning 

The  UK  has  announced  a  range  of  policy 
measures to increase housing supply. Residential 
construction and net additions to the housing stock 
have risen since the start of the decade, due both to 
an  ongoing  cyclical  recovery  from  a  post-crisis 
trough  and  to  policy  action,  including  major 
reforms 
system.  Housing 
affordability has continued to deteriorate, however, 
despite  a  recent  slowdown  in  house  price  growth. 
The  ongoing  deterioration  in  affordability,  which 
has been particularly acute in major urban centres, 
underlines  the  long-term  and  structural  challenges 
that exist in the housing market. These challenges 
are  nevertheless  recognised  by  the  government, 
which  has  set 
the  ambitious  goal  of 
increasing annual housing supply to 300 000 units 
by  the  mid-2020s.  Household  debt  remains  high 
but  household  balance  sheets  are  strong  on 
aggregate,  while  households  and  the  broader 
economy appear resilient to short-term shocks. 

itself 

has 

UK 

received 

implications  for 

The 
evolving 
recommendations  on  labour  market  and  social 
issues. On skills and apprenticeships, there remain 
concerns  about  the  quality  and/or  qualification 
level  of  actions  undertaken,  given  both  labour 
market  needs  and 
the 
the 
progression potential for individuals already in the 
workforce.  On  childcare,  reforms  to  date  have 
been  constant  but  gradual.  The  full  roll-out  of 
some  initiatives  is  now  underway.  There  is  some 
dissatisfaction  from  both  providers  and  service 
users,  but progress  can be  seen.  The  UK  received 
recommendations  from  2011  to  2014  on  poverty 
and the welfare system, with a particular focus on 
child poverty, which remains quite high. Although 
the  tax  benefit  system  currently  performs  quite 
well in alleviating inequality, this will come under 
pressure  as  previously  announced  cutbacks  and 
freezes  are  rolled  out  against  a  background  of 
increased inflation. 

received 

recommendations 

The  UK 
on 
infrastructure  in  2012  to  2014,  and  again  in 
2016. The government has set out ambitious plans 
to remedy shortfalls in network infrastructure in its 
National 
Infrastructure  Delivery  Plan.  While 
tangible  progress  to  date  has  been  modest  and 

12 

Limited Progress6%Some Progress85%Substantial Progress9% 
 
 
                                                           
2. Progress with country-specific recommendations 

These  measures  are  likely  to  have  contributed  to 
higher annual housing completions in recent years, 
although  new  supply  of  housing  continues  to  fall 
short  of  demand,  particularly  in  major  urban 
centres.  There  has  also  been  some  progress  on 
CSR  3  on  skills.  Skills  challenges  remain  and  are 
multi-faceted.  The  Apprenticeship  Levy, 
the 
Institute  of  Apprenticeships,  and  other  measures 
either  announced  or  begun  —  such  as  Technical 
Education  reforms  and  the  National  Retraining 
Scheme  —  offer  scope  for  lifelong  learning 
progression  assistance  for  those  ‘stuck’  in  low-
wage, entry-level jobs. 

European  Structural  and  Investment  Funds 
(ESIF)  are  important  in  supporting  inclusive 
growth  and  convergence  in  the  UK.  Box  2.1 
discusses  ESIF  investment,  which  funds  projects 
including  investment  in  transport  and  broadband 
networks,  support  to  SME  competitiveness,  skills 
development and lifelong learning. 

of 

public 

pressure  on  networks  is  building,  the  UK  is 
starting  to  deal  with  the  cumulated  effects  of 
decades 
in 
infrastructure. The government is also taking steps 
to 
investment, 
particularly  in  energy,  and  some  major  projects 
have been approved. 

under-investment 

increase  private 

infrastructure 

the 

2017 

The  UK  has  made  some (7)  progress 
in 
addressing 
country-specific 
recommendations (CSRs). The UK currently has 
three  CSRs.  The  fiscal  CSR  1  is  not  assessed  in 
this country report. There has been some progress 
on  CSR  2,  which  relates  to  housing  supply.  The 
government  is  implementing  a  wide-range  of 
measures  to  boost  housing  supply  and  announced 
further  measures  in  its  2017  Autumn  Budget. 

(7)  For information 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. 

13 

 
                                                           
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2. Progress with country-specific recommendations 

Table 2.1: 

Assessment of progress with 2017 CSRs 

Source: European Commission 

14 

The United Kingdom Overall assessment of progress with 2017 CSRs: Some progress CSR 1:  Pursue a substantial fiscal effort in 2018-19 in line with the requirements of the preventive arm of the Stability and Growth Pact, taking into account the need to strengthen the ongoing recovery and to ensure the sustainability of the United Kingdom’s public finances. CSRs related to the Stability and Growth Pact will be assessed in spring once the final data is available.  CSR 2: Take further steps to boost housing supply, including through reforms to planning rules and their implementation. Some progress in boosting housing supply.  CSR 3: Address skills mismatches and provide for skills progression, including by continuing to strengthen the quality of apprenticeships and providing for other funded “Further Education” progression routes. Some progress in addressing skills and apprenticeship issues.   
 
 
 
 
 
 
 
 
2. Progress with country-specific recommendations 

Box 2.1: Tangible results delivered through EU support to structural change in the UK 

The  UK  is  a  beneficiary  of  significant  European  Structural  and  Investment  Funds  (ESI  Funds) 
support and can receive up to EUR 16.3 billion (GBP 14.3 billion) by 2020. This represents around 3 % 
of  annual  public  investment (1)  from  2014-2018.  By  31  December  2017,  an  estimated  EUR 10.23  billion 
(GBP 8.97 billion)  (62.8 %  of  the  total)  had  been  allocated  to  projects  on  the  ground.  Currently,  171 000 
enterprises receive support which is expected to create 44 000 new jobs, broadband access is being extended 
to a further 128 160 households, and projects are being implemented to reduce greenhouse gas emissions by 
169 406  tonnes  of  CO2  equivalent  a year.  Of  the  total  EU  financing,  20 %  is  to  be  delivered  via  financial 
instruments, up from 9 % in 2007-2013.  

ESI  Funds  help  address 
implement  country-specific 
structural  policy  challenges  and 
recommendations.  The  actions  financed  include:  promoting  R&D  in  the  private  sector  and  SME 
competitiveness; increasing the share of energy from renewables through low carbon solutions and transport 
and smart cities; and contributing to the [mitigation of climate change impacts] though sustainable land use 
and  the  management  of  flood  and  coastal  erosion  risks.  Infrastructure  investment  is  being  made  in  less 
developed regions, including in the TEN-T and broadband networks. The UK is using ESI funding to reduce 
inactivity among young people and long-term welfare benefit recipients and to improve training and skills, 
including  through  apprenticeship  schemes.  It  is  also  investing  in  education  and  lifelong  learning,  and 
promoting social inclusion by fighting poverty and discrimination.  

Take  up  of  the  European  Fund  for  Strategic  Investments  (EFSI)  in  the  UK  is  progressing.  As  of 
December  2017,  the  total  volume  of  financing  operations  approved  under  the  EFSI  was  EUR 2.6 billion 
(GBP 2.3 billion),  of  which  the  energy  sector  accounts  for  EUR 2  billion  (GBP 1.75 billion).  This  is 
expected  to  trigger  total  private  and  public  investment  of  EUR 18.8 billion  (GBP 16.5 billion).  Within  the 
total,  20  projects  involving  the  UK  have  been  approved  so  far  under  the  Infrastructure  and  Innovation 
Window  (including  11  multi-country  projects),  amounting  to  EUR  2.1  billion  (GBP 1.84 billion)  in  EIB 
financing under the EFSI. This is expected to trigger about EUR 15 billion (GBP 13.1 billion) in investment. 
Under  the  SME  Window,  12  agreements  with  financial  intermediaries  have  been  approved.  European 
Investment  Fund financing  enabled  by the EFSI  amounts  to  EUR 489 million (GBP 429  billion),  which is 
expected to mobilise around EUR 3.8 billion (GBP 3.3 billion) in total investment and benefit close to 3 000 
smaller companies or start-ups. 

Allocations  under  Horizon  2020,  the  Connecting  Europe  Facility  and  other  directly  managed  EU 
funds  are  additional  to  the  ESI  Funds.  By  the  end  of  2017,  the  UK  had  signed  agreements  for 
EUR 348 million (GBP 305 million) for projects under the Connecting Europe Facility.  

(1)  Public investment is defined as gross fixed capital formation + investment grants + national expenditure on agriculture 

and fisheries. 

15 

 
 
3.  REFORM PRIORITIES 

3.1.  PUBLIC FINANCES AND TAXATION 

Taxation policy  

Despite an increase in the tax burden in recent 
years,  the  UK’s  tax-to-GDP  ratio  remains  well 
below the EU average. Tax receipts increased by 
7 %  in  the  2016-2017  financial  year,  bringing  the 
total  tax  burden  to  34.4 %  of  GDP  (Table  3.1.1), 
below the GDP-weighted EU average of 39 %. 

Table 3.1.1:  Composition of tax revenues, 2016-2017 

Source: Autumn Budget 2017 

Personal  income  tax  revenues  increased  by 
4.9 %  in  2016-2017  and  continue  to  make  the 
largest  contribution  to  tax  revenues.  Around  a 
quarter  of  the  increase  reflected  stronger  income 
tax  revenues  on  bonuses  in  the  financial  and 
business  services  sectors.  Windfall 
revenues 
related to dividend taxation also contributed to the 
increase.  The  tax  burden  on  labour  is  among  the 
lowest  in  the  EU  across  the  income  scale.  At 
28.6 %  of  the  average  wage  for  a  two-earner 
couple  with  two  children,  the  UK  has  the  third 
lowest tax wedge in the EU (37.1 %) (8). 

large 

increases 

there  were 

Although 
in 
corporate tax revenue across the main sectors, a 
significant  proportion  of  this  can  be  attributed 
to  a  change  in  the  basis  of  accounting  for 
corporate  income  tax.  As  discussed  in  previous 
country  reports,  some  elements  of  the  tax  system 
may create disincentives for corporate investment. 
The effective marginal tax rate for new investment 
stood  at  24.7  %  in  2016,  above  the  non-weighted 
EU average of 15.7 % and among the highest of all 

(8)  The  tax  wedge  shows  the  proportional  difference  between 
the costs of a worker to their employer and the employee’s 
net  earnings.  Data  are 
the  European 
Commission Tax and Benefit Indicator database. 

taken 

from 

EU countries (ZEW, 2016). This is largely due to 
property taxation and the capital allowance regime. 
Recurring  taxes  levied  on  business  property  are 
higher  than  elsewhere  in  the  OECD  and  could 
represent a barrier to investment (IFS, 2014). 

The  UK  has  moved  to  a  more  territorial 
corporate  tax  system  in  recent  years  and  has 
introduced  measures  to  protect  the  tax  base 
from aggressive tax planning and avoidance. In 
line  with  the  OECD  Base  Erosion  Profit  Shifting 
Action  Plan  (2013)  as  well  as  the  ATADs9,  these 
measures  include:  (i)  restrictions  on  interest  for 
corporate tax deductibility; (ii) extending the scope 
of  withholding  tax  on  royalties  paid  abroad;  and 
(iii)  the  introduction  of  hybrid  mismatch  rules, 
which counteract cross-border situations where, for 
example, the same expenditures are tax deductible 
in both jurisdictions. In 2016, the UK also changed 
its  Patent  Box  scheme  (a  tax  incentive  regime  in 
relation  to  income  from  intellectual  property)  to 
comply with international tax avoidance rules (HM 
Revenue & Customs, 2015). As agreed in the Code 
of  Conduct  Group  for  Business  Taxation,  the 
Patent  Box  was  aligned  to  the  modified  “nexus 
approach”,  which  limits  the  application  of  the  tax 
incentive 
incurred  relevant 
expenditures,  such  as  R&D.  While  the  economic 
evidence for the effectiveness of patent boxes as a 
means  to  encourage  R&D  remains  weak  (CPB, 
2014), they may be used as a tax competition tool. 
(Alstadsæter  et.  al,  2017).  The  provisions  of  the 
Anti-Tax  Avoidance  Directives  (ATADs)  will 
have to be transposed into national law by the end 
of 2018 and 2019. It will be important to assess to 
what  extent  the  transposition  of  the  ATADs  will 
limit  the  scope  for  aggressive  tax  planning  in  the 
United Kingdom. 

taxpayers 

that 

to 

The  tax-exemption  of  dividends  received  from 
abroad  and  lack  of  a  withholding  tax  on 
dividends paid are considered features that may 
in 
be  used  by 
aggressive  tax  planning.  In  a  recent  study  (van’t 
Riet  and  Lejour,  2017),,  the  UK  was  ranked  first 
among 108 jurisdictions in the world having a tax 
regime  that  companies  could  potentially  use  for 
facilitating the routing of untaxed dividends. Since 

international  companies 

(9) Council Directive 2016/1164 of 12 July 2016 

16 

Tax category GBP billion % Revenue  % GDP  Personal income tax 177.2 26.3 9 National insurance contributions  (employers and employees) 125.9 18.7 6.4 Corporation tax 54.1 8 2.8 Property taxes 71.7 10.7 3.7 Capital taxes 12.1 1.8 0.6 VAT 135.4 20.1 7 Excise duty 53.5 8 2.7 Other taxes 42.8 6.4 2.2 Total 672.7 100 34.4   
 
 
 
 
                                                           
                                                           
3.1. Public finances and taxation 

should  have  known)  that  the  supplier  should  be 
registered for VAT purposes in the UK. 

Long-term sustainability of public finances 

While the high level of general government debt 
represents a source of vulnerability for the UK 
economy,  no  substantial  short-term  fiscal  risks 
exist  at  the  current  time.  According  to  the 
Commission  2017  autumn 
forecast,  general 
government  debt  is  expected  to  have  peaked  at 
86.8 %  of  GDP  in  2016-2017  before  falling  over 
the forecast period, although this forecast does not 
take  account  of  measures  announced  in  the  2017 
Autumn  Budget.  The  Commission’s  short-term 
fiscal  risk 
is  based  on  a 
comprehensive approach that takes both fiscal and 
macro-financial  variables  into  account,  remains 
below the threshold that indicates a risk. 

indicator,  which 

Graph 3.1.1:  Debt projections based on probability 

Source: European Commission, Debt Sustainability Monitor 2017 

The debt-to-GDP ratio is expected to remain at 
a  high  level  in  the  medium  term  and  could 
increase  further  if  potential  shocks  were  to  hit 
the  UK  economy.  In  a  baseline  scenario,  general 
government  debt  is  expected  to  remain  at  around 
80 %  of  GDP  at  the  end  of  the  Commission’s 
projection  period  (2028).  Potential  shocks  to 
nominal  growth,  interest  rates  or  the  structural 
primary  balance  pose  risks  to  this  scenario.  As 
shown 
the 
materialisation of such shocks could cause general 
government  debt  to  rise  above  90 %  of  GDP.  In 
order  to  reduce  the  debt-to-GDP  ratio  to  60 %  of 
GDP by 2032, a cumulative fiscal effort of 2.1 pps. 
of GDP (relative to a scenario in which there is no 

in  Graphs  3.1.1 

and  3.1.2, 

2009,  the  UK  has  effectively  exempted  dividend 
income (10)  received  by  UK  companies  from 
abroad  to  UK  tax  although  the  exemption  does 
provisions. 
include 
Furthermore, the UK does not impose withholding 
tax on dividends paid by companies in the UK. 

anti-avoidance 

some 

chargeable 

With one of the stated aim being to improve its 
tax  competitiveness,  the  UK  reformed 
its 
controlled  foreign  companies  rules  in  2013  (11). 
This  allows  international  companies  to  exempt 
certain 
financing 
operations  of  their  non-UK  subsidiaries.  The 
Commission  has  recently  announced  an  in-depth 
investigation into the controlled foreign companies 
rules to see if the scheme allows multinationals to 
pay  less  UK  tax,  in  breach  of  EU  State  Aid  rules 
(European Commission, 2017b). ).  

profits 

from 

While the UK is in line with the EU average on 
VAT  compliance (12),  the  government 
loses 
potential revenues by using reduced VAT rates. 
At 17.2 %, the actionable VAT Policy Gap, due to 
exemptions and reduced rates, was higher than the 
EU  average  (16.4 %)  in  2015 (13) (14).  Foregone 
revenues  due  to  reduced  VAT  rates  are  estimated 
to  have  been  2.5 %  of  GDP  in  2016-2017  (UK 
Government,  2018).  In  addition  to  its  standard 
20 %  VAT  rate,  the  UK  applies  a  reduced  rate  of 
5 %, along with a super-reduced rate of 0 % (15). 

The  UK  is  taking  a  number  of  measures  to 
address VAT fraud in e-commerce. For example, 
online  marketplaces  will  become  liable  for  any 
unpaid VAT of a UK business arising from supply 
of  goods  in  the  UK  via  that  marketplace.  These 
rules  will  also  extend  to  online  marketplaces  for 
non-UK suppliers, when the marketplace knew (or 

(10)  Dividend  income  received  by  the  UK  in  2016  was 

EUR 67 billion (source: Eurostat). 

(11)  The controlled foreign companies (CFC) regime in the UK 
is  a  set  of  anti-avoidance  measures  established  to  prevent 
UK  group  companies  shifting  income  into  low  tax 
jurisdictions to avoid being subject to UK corporation tax.  
(12)  The VAT gap (as a % of the total VAT liability) was in line 
with the EU median (10.9 %) in 2015 (CASE, 2017).  

(13)  See CASE (2017).  
(14)  The  UK  Treasury  estimates  the  VAT  gap  to  have  been 

9.8 % of GDP in 2015-2016. 

(15)  The  zero  rate  applies  to  a  broad  range  of  goods  and 
services including many foodstuffs, books, pharmaceutical 
products,  water  supply,  passenger 
the 
construction  of  new  dwellings.  The  5 %  rate  applies, 
among  others,  to  domestic  fuel  and  power,  energy-saving 
materials and certain residential renovations.  

transport  and 

17 

6570758085909520152016201720182019202020212022(% of GDP)p10_p20p20_p40p40_p60p60_p80p80_p90p50gdebt_gdp_DSM 
                                                           
 
3.1. Public finances and taxation 

change  to  fiscal  policy)  would  be  required  during 
the  5-year  period  following  the  final  year  of  the 
Commission’s forecast, i.e. by 2024 (16). 

Graph 3.1.2:  Gross public debt as a % of GDP 

Source: European Commission, Debt Sustainability Monitor 2017 

The  UK  faces  medium  fiscal  risks  in  the  long 
term.  The  Commission’s  long-term  sustainability 
gap  indicator  (the  S2  indicator (17))  shows  that  an 
upfront fiscal adjustment of 3.4 pps. of GDP would 
be needed to ensure the long-term sustainability of 
public finances. This is due to the projected impact 
of age-related public spending (contribution of 3.4 
pps.  of  GDP),  with  the  initial  budgetary  position 
(determined by the structural primary balance and 
debt  level  in  the  final  year  of  the  Commission’s 
forecast)  having  a  slightly  positive  contribution 
(0.1  pps.  of  GDP).  Of  the  contribution  of  age-
related  spending,  1.4  pps.  and  1.1  pps.  of  GDP 
relate to pensions and healthcare, respectively. 

Healthcare 

The  healthcare  system  remains  under  financial 
pressure  and  spending  in  this  area  contributes  to 
long-term  risks  to  the  sustainability  of  public 
finances.  In  its  2017  Autumn  Budget  and  further 

(16)  This  is  based  on  the  S1  indicator,  a  medium-term 
sustainability  risk  indicator  that  measures  the  required 
fiscal  adjustment  needed  over  a  five-year  period  (directly 
following  the  last  forecast  year)  to  bring  the  debt-to-GDP 
ratio to 60 % of GDP in 2032.  

(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.  In  other  words,  it  is  a  long-
term  fiscal  sustainability  risk  indicator.  It  is  calculated 
under  the  assumption  that  there  is  no  change  in  fiscal 
policy.  

announcements since, the government increased its 
allocation  of  current  and  capital  spending  to  the 
National Health Service (NHS) in England for the 
coming years. According to NHS England (2018), 
this will contribute to real-term revenue growth of 
2.4 % 
in  2018-2019.  However,  adjusted  for 
population  growth  and  ageing,  revenues  are 
expected  to  be  1.4 %  higher  (in  real  terms)  in 
2018-2019 and to fall by 0.8 % in 2019-2020. This 
follows an extended period of low revenue growth, 
with the Institute for Fiscal Studies estimating that 
revenues  grew  by  1.1 %  per  year  in  real  terms 
between  2009-2010  and  2015-2016,  compared  to 
an  historical  average  of  4.1 %.  This  has 
contributed  to  increased  pressure  on  healthcare 
services  (see  Section  3.3)  and  a  corresponding 
decline  in  performance  against  key  access  targets 
(National Audit Office, 2018). As discussed above, 
expenditure on health care is expected to give rise 
to a fiscal sustainability challenge in the long term. 

Fiscal frameworks 

In the 2017 Autumn Budget, the UK confirmed 
the  fiscal  rules  adopted  in  the  2016  Autumn 
Statement.  In  contrast,  the  UK  changed  its  fiscal 
rules  every  year  between  2014  and  2016. 
According  to  the  OBR  (2017b),  the  government 
has a greater than 50 % chance of meeting its fiscal 
targets,  which  include  a  structural  deficit  below 
2 %  of  GDP  by  2020-2021.  This  is  despite  an 
announced  slowing  of 
fiscal 
consolidation and takes account of planned further 
cuts  in  real  spending  on  public  services  (in  per 
capita terms). The OBR highlighted that the recent 
decision  by  the  Office  for  National  Statistics  to 
reclassify English housing associations outside the 
public  sector,  thus  reducing  public-sector  debt, 
contributed to its positive assessment. 

the  pace  of 

In its 2017 fiscal risks report, the OBR analysed 
a  number  of  downside  risks  that  could  lead  to 
the  UK  not  complying  with  its  fiscal  rules.  The 
report  noted  that  even  small  changes  to  estimated 
potential GDP growth can have significant adverse 
effects  on  public  finances  over  time.  On  the 
revenue  side,  it  identified  the  emergence  of 
evasion-related 
tax  shortfalls  and  a  possible 
slowdown  in  the  growth  of  tax  bases  as  specific 
budgetary risks. Spending pressures in the areas of 
welfare  and  health/social  care  were  identified  as 
the main risks on the expenditure side. 

18 

606570758085909510010511020122013201420152016201720182019202020212022202320242025202620272028% of GDPBaseline no-policy change scenarioNo-policy change scenario without ageing costsHistorical structural primary balance scenarioCombined historical scenarioFiscal reaction function scenario 
 
                                                           
3.2.  FINANCIAL SECTOR AND HOUSING 

3.2.1.  FINANCIAL SECTOR DEVELOPMENTS  

Importance of financial services and banking 

The  UK  is  one  of  the  world’s  leading  financial 
centres,  with  the  sector's  assets  representing 
around 10  times  the  country’s GDP.  The  sector 
total  assets 
is  dominated  by  banks,  whose 
accounted  for  380 %  of  GDP  at  end-2016.  Given 
its  large  size,  improving  the  financial  sector’s 
resilience  since  the  financial  crisis  has  been 
important  for  both 
the  domestic  and  global 
economies.  

Graph 3.2.1:  Financing of non-financial corporates (NFCs) 

Source: European Central Bank, AMECO 

Despite  the  large  size  of  the  banking  sector, 
non-financial  corporates  are  less  reliant  on 
bank credit than the EU average. At the end of 
2016, loans from monetary financial institutions to 
non-financial  corporates  were  around  20 %  of 
GDP,  around  half  the  EU  average  (Graph  3.2.1). 
By contrast, listed shares represented around 75 % 
of GDP, approximately 20 pps. higher than the EU 
average.  Venture  capital  financing  plays  a  more 
significant  role 
in  other  EU  countries, 
standing at 3.3 % of GDP in 2015 (compared to an 
EU  average  of  2.4 %).  This  financing  mix  makes 
UK  companies  less  vulnerable  to  changes  in  the 
availability of bank credit related to the economic 
cycle. Bank credit to domestic households is more 
substantial, at about 65 % of GDP at end-2016. Its 
strong  growth  in  recent  years  poses  some  risks  to 
financial stability (see below).  

than 

requirements.  The 
risk-weighted  assets 

UK  banks  have  continued  to  strengthen  their 
capital  positions.  The  banking  sector’s  aggregate 
Tier  1  capital  ratio  (i.e.  the  ratio  of  core  equity 
capital to total risk-weighted assets) has increased 
by  more  than  600 bps  since  2010,  partly  due  to 
ratio 
increased 
regulatory 
reached  16.7 %  of 
in 
September  2017,  comparing  favourably  to  other 
large  EU  countries  (Graph  3.2.2).  In  2017,  the 
Bank  of  England’s  Financial  Policy  Committee 
strengthened 
of  mortgage 
affordability 
the  minimum 
leverage  requirement  (i.e.  the  ratio  of  core  equity 
capital and total consolidated assets). This follows 
previous  measures  to  prevent  excessive  growth  in 
the  number  of  highly-indebted  households  with 
mortgage loans. 

application 
raised 

the 
tests  and 

Graph 3.2.2:  Tier 1 ratio (%): domestic banking groups and 

stand-alone banks (2016 Q4) 

Source: European Central Bank 

Nevertheless,  bank  profitability  remains  weak 
and  may  pose  a  risk  to  the  resilience  of  the 
sector.  Although  weak  profitability  is  also  a 
problem  for  EU  banks  in  general,  UK  banks’ 
profitability  has  continued  to  underperform  both 
relative  to  historic  levels  and  the  EU  average 
(Graph 3.2.3). Profitability was harmed by one-off 
factors  in  2016,  such  as  misconduct  (18)  and 
restructuring  costs,  but  improved  in  the  first 

(18)  Significant  misconduct 

costs 

(GBP 

billion, 
EUR 76.4 billion)  were  provisioned  for  or  paid  by  UK 
banks during the period 2011 to 2016. Misconduct related 
to  the  mis-selling  of  various  financial  products,  such  as 
payment  protection  insurance,  interest-rate  hedging  and 
endowment mortgages. 

67 

19 

01020304050607080Listed shares; 2016Debt securities; 2016MFI loans; 2016Gross operating surplus:corporations; 2016Venture capital; 2015UKEU% of GDP% of GDP02468101214161820NLUKDEFRESIT%%EUEA 
 
 
 
                                                           
quarter  of  2017.  Nevertheless,  weak  profitability 
poses a potential challenge for the capacity of the 
sector  to  strengthen  its  capital  base  via  retained 
earnings.  

The  UK  financial  sector  is  facing  important 
challenges  related  to  Brexit  and  in  particular  the 
fact  that  the  UK  will  become  a  third  country  in 
March  2019.  This  may  have  a  significant  impact 
on  the  possibility  of  UK  financial  institutions  to 
provide their services throughout the EU.  

The Bank of England’s 2017 stress tests indicate 
that  banks  remain  resilient.  The  results  of  the 
tests  indicate  that  the  banking  system  would 
weather  a  simultaneous  recession  in  the  UK  and 
globally, as well as further misconduct costs. In the 
first 2 years of stress, major UK banks would incur 
losses  of  around  GBP 50 billion  (EUR 57 billion), 
which  could  be  absorbed  by  existing  capital 
buffers.  For  the  first  time  since  the  stress  tests 
started in 2014, no single bank came out in need of 
further capital. Nevertheless, the Bank of England 
stated  that  a  combination  of  a  ‘disorderly’  Brexit 
and  severe  domestic  and  global  conditions  could 
result in a worse outcome, with a negative impact 
on  lending.  The  Bank  of  England  also  stated  that 
banks  had  been  ‘underestimating  the  losses  on 
consumer  credit  exposures  that  could  occur  in  a 
severe stress’ (see Section 1). 

3.2. Financial sector and housing 

Graph 3.2.3:  Return on equity (%): domestic banking 

groups and stand-alone banks (2016 Q4) 

Source: European Central Bank 

Macro-prudential regulation 

continued 

The  UK  authorities  have 
to 
implement  measures  aimed  at  strengthening 
financial  stability  and  at  mitigating  risks 
associated  with  the  UK’s  withdrawal  from  the 
EU.  In  2017,  the  Bank  of  England’s  Financial 
Policy Committee announced measures to prevent 
excessive growth in the number of highly-indebted 
households  with  mortgage  loans.  It  strengthened 
the  application  of  mortgage  affordability  tests, 
announced  changes  to  banks’  leverage  ratios  and 
announced  its  intention  to  raise  the  minimum 
leverage  requirement  (i.e.  the  ratio  of  core  equity 
capital and total consolidated assets). The Bank of 
England  further  implemented  the  bank  resolution 
framework by publishing,  in May 2017,  estimates 
of the amount of ‘minimum requirements for own 
funds  and  eligible  liabilities  for  bail-in’  (i.e.  the 
MREL)  for  the  largest  UK  banks.  The  Bank  of 
England, the Financial Conduct Authority and the 
Prudential  Regulation  Authority  are  working  with 
banks  and  other  financial  sector  institutions  to 
ensure  adequate  contingency  planning  for  the 
UK’s  withdrawal  from  the  EU.  The  government 
plans  to  ensure  an  adequate  legal  and  regulatory 
framework  for  financial  services  via  the  EU 
Withdrawal Bill and related secondary legislation. 

20 

-10-8-6-4-20246810NLFRESDEUKIT%EUEA 
 
3.2. Financial sector and housing 

3.2.2.   HOUSING SECTOR 

Graph 3.2.4:  Real house price growth (Q1-2007 to Q2-2017) 

While  house  price  growth  has  slowed  in  recent 
quarters, affordability has continued to decline 
amid low wage growth. As discussed in previous 
country reports, rapid house price growth in recent 
years  has  led  to  a  significant  deterioration  in 
affordability.  This  has  contributed  to  declining 
rates  of  home  ownership,  particularly  among 
younger age cohorts. With inadequate and inelastic 
housing  supply  commonly  identified  as  the  main 
factors  driving 
rapid  house  price  growth, 
particularly  in  urban  areas,  the  government  is 
pursuing  a  range  of  measures  aimed  at  boosting 
supply. 

Housing demand and affordability 

Source: Eurostat, OECD, Bank for International Settlements, 
Commission calculations 

House price growth has slowed since mid-2016, 
although  it  remains  positive.  According  to  the 
Office for National Statistics, nominal house price 
growth  (year-on-year)  fell  from  8.2 %  year-on-
year  in  June  2016  to  around  4.8 %  for  2017  as  a 
whole.  The  slowdown  has  been  particularly 
marked  in  London,  with  growth  falling  from 
11.6 %  in  June  2016  to  around  3.2 %  in  2017 
(year-on-year).  Real  house  price  growth  has  also 
fallen, from 7 % year-on-year in the first quarter of 
2016  to  2.7 %  year-on-year  in  the  second  quarter 
of 2017 (Graph 3.2.4). Private housing rental price 
growth  has  also  fallen  (in  Great  Britain),  from 
2.6 % year-on-year in January 2016 to 1.2 % year-
on-year  in  December  2017,  below  the  rate  of 
consumer  price  inflation.  These  factors  point  to  a 
weakening  of  housing  demand,  despite  a  mild 
pick-up  in  the  growth  of  lending  secured  on 
dwellings  and  the  low  cost  of  mortgages.  At  the 
same time, price-to-rent and price-to-income ratios 
continued to point to overvaluation of around 25 % 
in the housing market at the end of 2016, while a 
model-based  assessment  pointed  to  overvaluation 
of  around  10 %  (see  Philiponnet  and  Turrini, 
2017). 

from 

the  Royal 

Forward-looking  indicators  point  to  further 
demand-side  weakness  in  the  coming  quarters. 
Survey  data 
Institution  of 
Chartered Surveyors suggest a further softening of 
demand  and  house  sales  across  the  UK  in  the 
coming  months,  with  the  ‘New  Buyers  Enquiries’ 
indicator  remaining  in  negative  territory  for  most 
of  2017.  These  data  also  show  that  near-term 
expectations  for  prices  are  negative,  particularly 
for London and other regions in England, although 
price growth is still expected in most regions over 
a  12-month  period.  As  discussed  in  Section  1, 
Commission 
(based  on  an  error-
correction  model)  point  to  subdued  real  house 
price developments between 2017 and 2019. 

forecasts 

Despite  the  slowdown  in  house  price  growth, 
housing  affordability  in  the  UK  continues  to 
deteriorate.  House  price  growth  has  remained 
higher  than  wage  growth,  which  has  been  modest 
(see Section 1). According to data from the Office 
for  National  Statistics,  the  ratio  of  median  house 
prices  to  median  annual  earnings  rose  to  a  new 
high of 7.7 in 2016, compared to just 3.5 in 1997 
and an average of 6.5 in the period 2000 to 2016.  

The  increase  in  house  prices  over  the  last 
decade has contributed to a decline in the home 
ownership  rate,  particularly  among  younger 
age cohorts. The rate of home ownership fell from 
70.9 %  in  2003  to  62.9 %  in  2015-2016,  with  a 
more  substantial  fall  for  those  aged  between  25 
and 34. According to the Redfern Review (2016), 
this  decline  has  been  largely  driven  by  three 

21 

-20-15-10-505102007Q12009Q12011Q12013Q12015Q12017Q1% yoy 
 
3.2. Financial sector and housing 

Graph 3.2.5:  Quarterly housing starts and completions 

(England) (2002-2017) 

Source: Department for Communities and Local 
Government 

Despite  these  increases,  new  housing  supply 
continues  to  fall  short  of  estimates  of  housing 
needs.  Most  studies  estimate  that  the  housing 
stock  needs  to  increase  by  between  200 000  and 
300 000  units  a  year  to  meet  new  housing  needs 
(generally  measured  as  estimated  household 
formations)  and  to  address  the  existing  shortfall. 
For example, the House of Lords (2016) states that 
‘300 000  new  homes  are  needed  annually  for  the 
foreseeable future’ to ‘address the housing crisis’. 

age 

factors:  (i)  the  higher  cost  of,  and  restrictions  on, 
mortgage lending for first-time buyers since 2008; 
(ii)  higher  real  house  prices;  and  (iii)  declining 
relative incomes for younger age cohorts compared 
to  older 
cohorts.  Declining  housing 
affordability for younger age cohorts reduces those 
households’  ability  to  accumulate  wealth  and,  as 
discussed  by  the  Resolution  Foundation  (2017b), 
increases  intergenerational  inequality.  According 
to  the  same  study,  households  headed  by  30  year 
olds  spend  a  higher  proportion  of  disposable 
income on housing costs, are more likely to live in 
overcrowded  accommodation,  and  have  longer 
commute times than previous cohorts.  

to 

Deteriorating affordability in the private rental 
sector  is  likely  to  have  contributed  to  an 
increase 
the 
in  homelessness.  According 
National  Audit  Office  (2017a),  changes  in  the 
affordability  of  private  rental  accommodation 
explains  around  one  fifth  of  the  variation  in 
homelessness  across  local  authority  areas  in  the 
period between 2012-2013 and 2016-2017. Indeed, 
according to the same report, the ending of private-
sector  tenancies  has  become  the  single  largest 
driver of homelessness in England. As discussed in 
Section  3.3,  the  incidence  of  homelessness  has 
been on an increasing trend in England.  

Housing supply and constraints 

Annual  housing  supply  has  increased  in  recent 
years. After bottoming out in the early part of this 
decade,  housing  starts  have  steadily  increased  in 
recent years (Graph 3.2.5) to reach around 168 000 
in  England  in  2016,  reflecting  a  cyclical  recovery 
and the impact of government policy reforms. Net 
additions  to  the  housing  stock,  which  account  for 
conversions  and  demolitions,  rose 
to  around 
217 000 units in England in 2016-2017, compared 
to  around  190 000  in  2015-2016.  Indicators  of 
supply  were  quite  strong  in  the  first  half  of  2017, 
with  housing  starts  in  England  rising  to  93 310, 
compared to 84 480 in the first half of 2016. This 
is 
in 
construction output in recent quarters (see Section 
3.4). 

to  an  overall  slowdown 

in  contrast 

to 

for 

land 

available 

As  discussed  in  previous  country  reports,  a 
inelastic 
number  of  factors  contribute 
housing  supply.  Regulation  of  the  land  market  is 
strict  and  complex,  limiting  the  amount  and 
location  of 
residential 
development.  In particular,  there  are  limits  placed 
on  residential  development  around  major  urban 
centres,  due  to  the  government’s  ‘green  belt’ 
policy  aimed  at  containing  urban  sprawl.  The 
is 
process  of  obtaining  planning  permission 
complex  and  costly,  although  the  government  has 
undertaken  a  number  of  initiatives  in  this  area  in 
recent  years.  Finally,  the  residential  construction 
sector has become increasingly concentrated, with 
the  high  cost  of  land  and  complexity  of  the 
planning  system  creating  barriers  to  entry  for 
smaller firms. The dominance of the housebuilding 
industry  by  a  small  number  of  large  firms  may 
limit  its  ability  to  adequately  respond  to  high 
demand  for  housing  by  increasing  supply.  The 

22 

010203040506002030405060708091011121314151617thousands quarterlyHousing startsHousing completions 
 
3.2. Financial sector and housing 

house building  only  approached  the government’s 
current  target  of  300 000  per  year  when  local 
authorities  made  a 
significant  contribution, 
although data do not include conversions.  

Graph 3.2.6:  House building in England by tenure (1969-

2017) 

Source: Department of Communities and Local Government 

an 

increase 

announced 

The public sector currently has a limited role in 
home  building.  In  its  2017  Autumn  Budget,  the 
government 
of 
GBP 1 billion  (EUR  1.1  billion)  in  the  ‘housing 
revenue account’ borrowing caps and invited local 
authorities in areas of ‘high affordability pressure’ 
to  bid  for  increased  caps.  This  will  allow  local 
authorities  to  build  more  homes.  However,  it  will 
have  a  marginal  effect  on  housing  supply,  with 
local authorities constructing an average of around 
1 500  homes  annually  since  2010.  Indeed,  the 
significant 
public 
contribution  to  house  building  since  the  1980s 
(Graph 3.2.6). At the same time, the public sector 
can  undertake  an  important  facilitator  role  in  the 
development  of  new  housing  projects  through  the 
roll-out  of  necessary  infrastructure,  such  as  in  the 
Oxford-Milton Keynes-Cambridge corridor project 
(see Section 3.4). As stated by the National Audit 
Office  (2017b),  the  European  Investment  Bank 
provides  funding  for  development  of  social 
housing in the UK through a number of channels, 
including through funding to housing associations. 

sector  has  not  made  a 

Demand-side  measures  aimed  at  increasing 
home  ownership  may  put  upward  pressure  on 
prices  and  further  reduce  affordability  for 

building sector also reports that it faces difficulties 
in securing a sufficient number of skilled workers. 

The government’s policy response 

supply  and  has 

The  UK government  recognises  the  problem  of 
insufficient  housing 
set 
ambitious  objectives  for  increasing  supply  in 
the  coming  years.  As  set  out  in  the  Department 
for Communities and Local Government’s ‘Single 
Departmental  Plan’  (2016),  the  UK  government 
has  two  broad  objectives  for  the  housing  market: 
(i) to drive up housing supply; and (ii) to increase 
home  ownership.  It  has  become  increasingly 
ambitious 
its  policy  objectives,  with  a 
commitment to deliver 1 million more homes (net 
additions)  between  2015  and  2020  recently  being 
complemented  by  the  objective  of  increasing 
annual supply to 300 000 homes by the mid-2020s. 

in 

in 

2017) 

(February 

the  building 

The government has set out its policy objectives 
in  a  white  paper  entitled  ‘Fixing  Our  Broken 
Housing  Market’ 
and 
announced a range of new measures in its 2017 
Autumn  Budget.  The  white  paper  sets  out  four 
broad  policy  objectives  for  the  housing  market. 
These  are:  (i)  increasing  the  supply  of  land 
available  for  house  building;  (ii)  accelerating  the 
rate  of  house  completions;  (iii)  encouraging  more 
diversity 
industry;  and  (iv) 
to  people  across  different 
providing  support 
tenures,  and 
to  prevent  homelessness.  The 
measures  announced  in  the  2017  Autumn  Budget 
build  on  these  priorities  and  include  further 
reforms 
such  as 
strengthening  of  central  government’s  powers  to 
direct local authorities to produce a ‘local plan’ to 
address local housing needs. Measures also include 
increased  funding  for  the  Housing  Infrastructure 
Fund,  which  provides  funding  to  local  authorities 
to  build  housing-related  public  infrastructure,  and 
the  Home  Building  Fund,  which  provides 
financing to private-sector home builders.  

the  planning 

system, 

to 

Measures adopted by the government in recent 
years  largely  seek  to  incentivise  the  private 
sector  to  build  more  homes.  It  is  noteworthy, 
however, that while house building activity by the 
private 
followed 
macroeconomic  cyclical  trends  over  the  last  50 
years,  there  has  not  been  substantial  variation 
around  an  average  annual  output  of  around 
130 000  units.  Indeed,  during  this  period,  total 

broadly 

sector 

has 

23 

050,000100,000150,000200,000250,000300,000350,0001969-701972-731975-761978-791981-821984-851987-881990-911993-941996-971999-002002-032005-062008-092011-122014-15Private EnterpriseHousing AssociationsLocal Authorities 
 
3.2. Financial sector and housing 

lower  income  cohorts.  In  its  2017  Autumn 
Budget, 
two  key 
the  government  announced 
measures aimed at increasing home ownership: an 
extension of the ‘help to buy’ equity loan scheme 
and an exemption of first-time buyers from stamp 
duty (subject  to  several  caps). With respect  to  the 
‘help to buy’ equity loan scheme, analysis from the 
Resolution  Foundation  (Resolution  Foundation, 
2017c)  shows  that  price  growth  of  new-build 
properties  has  outpaced  that  of  properties  sold  in 
the  secondary  market  in  recent  quarters.  This 
suggests  that  the  scheme  may  have  contributed  to 
more  rapid  price  growth  in  this  segment  of  the 
market. Similarly, in its latest economic and fiscal 
outlook 
for 
Budgetary  Responsibility  states  that it  expects  the 
stamp duty exemption to increase house prices by 
around 0.3 %, with most of the effect occurring in 
2018. Both schemes may also suffer from elevated 
deadweight  costs  as  regards  their  efficiency,  with 
many buyers that benefit from them likely to have 
purchased homes in the absence of support. 

(November  2017), 

the  Office 

commitment 

to  maintaining 

In  its  white  paper,  the  government  confirmed 
existing 
its 
protections for the ‘green belt’, thus limiting the 
possibility  of  residential  construction  around 
existing urban areas. The ‘green belt’ consists of 
banks  of  land  in  which  there  are  additional, 
specific  restrictions  on  residential  development. 
These  areas  generally  surround  urban  centres  and 
it  is  estimated  that  they  cover  13 %  of  the  total 
land  area  of  England.  In  its  white  paper,  the 
government  refers  to  the  success  of  this  policy  in 
containing  urban  sprawl,  as  well  as  to  achieving 
wider  environmental  and  societal  objectives.  At 
the same time, it has been criticised, including by 
organisations  such  as  the  OECD,  for  limiting  the 
ability of housing supply to respond to demand and 
to  shifts 
the  UK's  economic  geography. 
According to Mace et al. (2016), the Metropolitan 
Green  Belt,  which  surrounds  London,  has 
contributed  to  a  housing  crisis  there  by  ‘locking 
up’ developable land, thus forcing development to 
take  place  outside  of  the  area  covered  and 
increasing commuting times. 

in 

24 

 
3.3.  LABOUR MARKET, EDUCATION AND SOCIAL POLICIES 

Labour market 

While  the  UK  has  a  good  record  in  creating 
jobs, there is concern about the quality of some 
of  those  jobs,  particularly  in  more  atypical 
forms  of  work.  The  UK  has  a  high  employment 
rate  (20-64)  of  78.2%  and  an  unemployment  rate 
of  4.2%.  However,  while  over  60 %  of  total 
employment  is  full-time  and  permanent,  a  large 
proportion of the employment growth is related to 
atypical employment such as part-time work, self-
employment,  including  bogus  self-employment, 
and new  forms  of  employment.  A particular  issue 
for  consideration  is  the  ‘gig  economy’,  estimated 
to represent around 1.3 million workers or 4 % of 
those 
in  employment.  The  UK  Government 
recently  commissioned  and  published  a  review  of 
‘Modern  Employment  Practices’  and  intends  to 
publish a response to the report in 2018. 

In-work  progression  is  limited.  A  recent  Social 
Mobility  Commission  report  notes  that  ensuring 
routes  to  progress  in  work  is  especially  important 
for  those  on  lower  incomes.  Of  those  low  paid  in 
2006,  only  17 %  were  found  to  have  made  a 
sustained move onto higher wages by 2016 (Social 
Mobility  Commission,  2017).  An  ongoing 
propensity  for  a  substantial  number  of  workers  to 
either get stuck on or fail to permanently exit from 
low wages, points to the need for reforms in adult 
learning  and  upskilling  more  broadly  (see  below 
on skills). 

Inactivity  and  part-time  work  due  to  care 
responsibilities remain high for women. In 2016, 
a  large  share  of  inactive  (28.1%)  and  part-time 
working 
(40.1%)  women  were  not  seeking 
employment due to them looking after children or 
incapacitated  adults.  These  figures  are  among  the 
highest  in  the  EU.  This  is  closely  related  to  the 
lack  of  compensated,  non-transferable  parental 
leave  entitlements  for  fathers  and  the  insufficient 
availability  of  full-time  childcare  for  children 
under three (see section on childcare provision). 

The gender pay gap is relatively high. At 20.9 % 
in  2015,  the  unadjusted  gender  pay  gap  is  among 
the highest in the EU, which may also partly be a 
consequence  of  disrupted  careers  for  women  as 
mentioned  above.  Women  are  more  likely  to  be 
low paid than men and are also far more likely to 
get stuck on low pay. However, there has been an 
improvement  over  the  past  decades  for  women 

(Social  Mobility  Commission,  2017).  The  UK 
government has introduced mandatory reporting of 
gender pay gaps for companies with more than 250 
employees.  The  most recent figures  show  that the 
gender  overall  earnings  gap  in  the  UK  stood  at 
45 %  (2014),  while  the  gender  pension  gap  stood 
at 34.4 % in 2016. 

in 

remains 

the  UK 

Disability  employment  issues  have  received 
attention  from  the  government.  The  disability 
employment  gap 
large 
(33.6 pps.  vs.  the  EU  average  of  25.7 pps.,  EU-
SILC  2015).  The  UK  Government  has  recently 
launched  a  Disability  Employment  Strategy. 
Targets  include  getting  a  million  more  disabled 
people  in  work  by  2027  and  providing  a  more 
comprehensive  offering  encompassing  welfare, 
health,  local  authority  and  employer  initiatives. 
The  new  Work  and  Health  Programme  to  help 
disabled  people  into  employment  commenced  in 
November 2017. 

Social  dialogue  in  the  UK  remains  much  less 
structured  than  in  some  other  EU  Member 
States. Engagement between government, business 
and unions tends to be ad-hoc and for operational 
purposes  only.  For  example,  as  outlined  below, 
business  is  involved  in  both  the  Institute  for 
Apprenticeships  and  the  new  National  Retraining 
Scheme,  while  unions  are  only  involved  in  the 
latter. 

Skills 

indicate 

Matching  jobs  to  the  skills  profile  of  the 
workforce  (i.e.  addressing  mismatches)  and  to 
the needs of particular sectors remains an issue. 
Business  surveys  point  to  skills  shortages  in 
certain  sectors  for  both  high  and  low  skilled 
occupations.  The  European  Business  Survey 
responses 
that  about  20-25 %  of 
businesses  in  the  UK  require  more  skilled  labour. 
This is higher than the EU average of about 14 % 
and  risks  being  further  aggravated  depending  on 
the future relationship between the EU and the UK 
and  the  mobility  of  skilled  EU  workers.  At  the 
same  time,  there  is  evidence  that  the  number  of 
low-skilled  jobs  on  offer  in  the  UK  has  remained 
constant  while 
low-skilled 
workers has decreased. This situation suggests that 
policies  to  stimulate  demand  for  skilled  workers 
may  be  needed  to  complement  the  supply  side 
measures proposed or underway. 

the  proportion  of 

25 

 
 
3.3. Labour market, education and social policies 

Box 3.3.1: Monitoring performance in light of the European Pillar of Social Rights 

The  European  Pillar  of  Social  Rights,  proclaimed  on  17  November  2017  by  the  European  Parliament,  the 
Council and the European Commission, sets out 20 principles and rights to benefit citizens in the EU. In light 
of the legacy of the crisis and changes in our societies driven by population ageing, technological change and 
new  ways of  working,  the  Pillar  serves as  a  compass for  a  renewed  process of  convergence  towards  better 
working and living conditions. 

of 

the 
The  UK  performs  adequately  on 
the  Social  Scoreboard1 
indicators 
supporting  the  European  Pillar  of  Social 
Rights. 
and 
unemployment  rates  are  relatively  high.  Social 
transfers  (other  than  pensions)  contribute  to 
poverty reduction.  

employment 

Headline 

tax  benefit 

The  UK 
system  performs 
relatively well in reducing poverty at present, 
but is at risk of deteriorating. Social transfers 
reduced  poverty  by  a  considerable  43.4 %  in 
2016  in  the  UK.  Nevertheless,  as  discussed  in 
Section  3.3  and  previous  UK  Country  Reports, 
much  of 
the  cumulative  effect  of  recent 
working-age welfare reforms and other cutbacks 
are  expected  to  take  an  increasing  toll  over  the 
next  few  years,  notably  in  the  areas  of  social 
protection,  minimum  income,  healthcare,  long-
term care, childcare and support to children. The 
latter, in particular, may come under pressure as 
a  result  of  restricting  means-tested  support  to  a 
maximum  of  two  children,  regardless  of  family 
size, from April 2017.  

1   The  Social  Scoreboard  is  composed  of  14  headline  indicators,  of  which  12  are  currently  used  to  compare  Member 
States' performance. The indicators “participants in active labour market policies per 100 persons wanting to work” and 
“compensation of employees per hour worked (in EUR)” are not used due to reservations by Member States. Possible 
alternatives will be discussed in the relevant Committees. Abbreviation: GDHI – gross disposable household income. 

Over a quarter of workers in the UK have only 
low skills, which holds back labour productivity 
and  job  quality  (see  Section  3.4).  Even  if  the 
disparity  between  the  employment  rates  of  low, 
medium  and  high-skilled  workers  in  the  UK  was 
one of the lowest in the EU in 2016, in the context 
of  the  Upskilling  Pathways  Recommendation, 
upskilling  and  better  utilisation  of  skills  among 
those 
increase 
productivity,  job  quality  and  consequently  raise 
living standards (OECD, 2017). Geographical and 
sectoral  balancing  of  skills  supply  with  skills 
demand is a challenge. The high employment rate 
somewhat  obscures  the  need  to  develop  the  skills 

low-skilled 

could 

jobs 

in 

and  prospects  of  the  current  workforce.  For 
example,  the  UK  lacks  sufficient  skilled  ICT 
professionals. 

There  is  a  great  deal  of  devolution  of  skills 
polices in the UK. This is particularly the case for 
Scotland,  Wales  and  Northern  Ireland.  As  in 
previous  country  reports,  there  is  little  scope  to 
reflect differentiation in this report. Consequently, 
the 
indicated, 
concerns England only. 

text  below,  unless  otherwise 

A  number  of  policies  are  either  in  progress  or 
have  been  announced  in  relation  to  skills 

26 

Early leavers from education and training (% of population aged 18-24)On averageGender employment gapOn averageIncome quintile ratio (S80/S20)On averageAt risk of poverty or social exclusion (in %)On averageYouth NEET (% of total population aged 15-24)On averageEmployment rate (% population aged 20-64)Best performersUnemployment rate (% population aged 15-74)Better than averageGDHI per capita growth On averageImpact of social transfers (other than pensions) on poverty reductionBetter than averageChildren aged less than 3 years in formal childcareOn averageSelf-reported unmet need for medical care On averageIndividuals' level of digital skillsBetter than averageSocial protection and inclusionDynamic labour markets and fair working conditionsEqual opportunities and access to the labour marketUNITED KINGDOMMembersStatesareclassifiedaccordingtoastatisticalmethodologyagreedwiththeEMCOandSPCCommittees.ThemethodologylooksjointlyatlevelsandchangesoftheindicatorsincomparisonwiththerespectiveEUaveragesandclassifiesMemberStatesinsevencategories(from"bestperformers"to"criticalsituations").Forinstance,acountrycanbeflaggedas"betterthanaverage"iftheleveloftheindicatorisclosetoEUaveragebutitisimprovingfast.Formethodologicaldetails,pleaseconsultthedraftJointEmploymentReport2018,COM(2017)674final.NEET:neitherinemploymentnorineducationortraining;GDHI:grossdisposablehousehold income. 
 
3.3. Labour market, education and social policies 

contrasts  with 
governance seen elsewhere in the EU. 

shared 

the 

apprenticeship 

Vocational  paths  for  school  leavers  are  being 
reformed. The 2017 Spring Budget announced the 
introduction  of  T-levels  –  technical  qualifications 
that 16- to 19-year-olds will be able to take as an 
alternative  to  A-levels,  the  main  school  leaving 
qualification.  T-levels  and  apprenticeships  offer 
alternative routes for school leavers. These may be 
important  to  improve  employment  and  reduce 
unemployment  and  inactivity  in  younger  age 
groups. 

gap 

remains 

the  provision 

A 
of 
in 
upskilling/reskilling  opportunities  outside  of  T-
Levels  or  apprenticeships.  This  may  particularly 
be  the  case  for  those  currently  in  the  workforce 
and  seeking  in-work  progression.  The  ‘Unlocking 
Talent,  Fulfilling  Potential’  initiative  launched  in 
December  2017  seeks  to  improve  social  mobility 
via education, including through lifelong learning. 

in  England  are 

The  November  2017  Industrial  Strategy  White 
Paper  (see  Section  3.4)  contained  a  number  of 
skills  announcements.  Certain  aspects  of  skills 
governance  structures 
to  be 
devolved.  Local  Enterprise  Partnerships,  Skills 
Advisory Panels and the devolution of Adult Skills 
Budgets  to  some  authorities  are  all  intended  to 
address  the  regional  disparity  associated  with 
productivity,  skills  and  progression.  It  is  intended 
that  Local  Industrial  Strategies  will  be  the  key 
outcome of this devolution. 

The white  paper  and  the  2017  Autumn  Budget 
also  announced  a  National  Retraining  Scheme 
for  England.  This  aims  to  improve  lifelong 
learning,  for  those  in  and  out  of  work.  It  will  be 
overseen  by  a  National  Retraining  Partnership, 
involving  the  government,  employers  and  unions 
in  a  rare  example  of  tripartite  cooperation. Career 
Learning 
GBP 40 million 
allocated 
(EUR 45.6 million)  in  the  2017  Spring  Budget  to 
set up pilots to test initial approaches that will feed 
into  a  National  Retraining  Scheme.  In  2018  the 
scheme  is  to  use  an  additional  GBP 30 million 
(EUR 34 million) for particular digital skills needs 
and  GBP 34 million 
for 
particular construction skills needs. 

(EUR 39 million) 

was 

challenges.  Apprenticeship  reform  has  seen  the 
commencement  of  both  the  Apprenticeship  Levy 
and  of  the  Institute  for  Apprenticeships.  The 
introduction of the levy has coincided with a 59 % 
drop in apprenticeship starts in the final quarter of 
the  2016-2017  academic  year  compared  with  the 
same  quarter  in  2015-2016.  This  reflects  the 
increased  engagement  required  by  employers  as  a 
result  of  the  reform.  However,  it  also  affects  the 
prospects  for  the  achievement  of  the  statutory 
target  of  3  million  apprenticeships  starts 
in 
England between 2015 and 2020. 

Measuring quality of apprenticeships is needed 
to complement quantity targets. A parliamentary 
committee  report  calls  for  a  greater  emphasis  on 
outcomes of apprenticeships (House of Commons, 
2017a). The report notes the potential difficulty in 
seeking  to  satisfy  the  needs  of  individual  firms, 
sectors and regional economies while also seeking 
to  use  apprenticeships  as  a  means  of  helping 
people to achieve social mobility. The recent drop 
in  apprenticeship  starts  arguably  confirms  these 
concerns.  Nevertheless,  statistics  for  the  2016-
2017  academic  year  indicated  a  large  increase  of 
37.4 % 
‘higher’ 
apprenticeships  (level  4  and  above),  albeit  from  a 
very  low  base.  These  represent  around  7.4 %  of 
starts in 2016-2017, up from around 5.3 % of starts 
in 2015-2016. This could indicate an improvement 
in the quality of apprenticeships. The age profile of 
those 
remains 
unusually  high  compared  to  other  EU  countries. 
The  proportion  of  starts  by  those  aged  over  25  is 
46.5 %  compared  to  those  aged  19-24  at  28.7 % 
and those aged under 19 at 24.8 %. 

apprenticeships 

engaging 

engaged 

those 

in 

in 

in 

engagement 

impact  of 
The  trajectory  of  the  potential 
important 
apprenticeship  policy 
is  at  an 
juncture.  Vital 
is 
employer 
encouraged  by  the  reforms.  Smaller  employers, 
who are now required to contribute around 10 % to 
the  costs  of  an  apprenticeship,  appear  more 
reluctant  to  take  on  apprentices.  Some  larger 
employers  may  also  regard  the  levy  as  a  payroll 
tax  and  may  be  reluctant  to  recoup  this  via 
engagement  with  apprentices.  Conversely,  most 
stakeholders  appear  to  welcome  changes  from  the 
previous  system,  which  may  have  incentivised 
encourage 
providers 
some 
apprenticeship  starts  to  maximise  their  financial 
return.  The  limited  involvement  of  trade  unions 

training 

to 

27 

 
3.3. Labour market, education and social policies 

through  the  Teaching  and  Leadership  Innovation 
Fund (19).  However,  in  England,  an  investigation 
by  the  National  Audit  Office  (NAO)  concluded 
for  Education  cannot 
that  “the  Department 
demonstrate  that  its  efforts  to  improve  teacher 
retention  and  quality  are  having  a  positive  impact 
and are value for money” (NAO, 2017c). 

likely 

achieving 

challenges 

Inclusion  and  widening  participation  in  higher 
education remains a political priority across the 
UK.  Although  young  people  from  disadvantaged 
backgrounds  are  now  60 %  more 
to 
participate in higher education than in 2006, there 
remain 
equitable 
to 
participation  and  the  gap  remains  large:  young 
people  from  disadvantaged  backgrounds  are  2.5 
times less likely to attend higher education than the 
average.  The  Office  for  Fair  Access  has  annual 
access  agreements  with  each  higher  education 
institute  and,  from  the  2018-2019  academic  year, 
will  agree  arrangements  with  colleges  and 
universities which are proposing a fee rise, so that 
places  can  be  secured  for  talented  students  from 
disadvantaged  backgrounds  (OFFA,  2017).  In  the 
the  Teaching  Excellence 
first 
Framework (20) 
research 
universities  (with  the  highest  tuition  fees)  did  not 
receive the highest grading for teaching. 

high-ranking 

results  of 

some 

Social indicators and policies 

Poverty  and  other  social  indicators  are  stable 
for  the  UK.  Graph  3.3.1  shows  a  gradual  decline 
in  the  at-risk-of-poverty-or-social-exclusion  rate 
and  its  components.  Nevertheless,  there  remains 
much  concern  about  the  cumulative  effects  of 
working-age  welfare 
reforms  and  cutbacks 
introduced  since  2010.  The  freeze  in  working-age 
benefits (including in-work benefits) from 2015 is 
being  implemented  in  the  context  of  a  3 % 
inflation  rate.  This  will  negatively  affect  the 
income  benefits.  The 
adequacy  of  minimum 
coverage  of  unemployment  benefits  is  also  below 
the EU average and is falling (21). The UK at-risk-
of-poverty  rate  after  housing  costs  at  34.8 %  in 
2016 is among the highest in the EU. The UK has 

(19)  https://www.gov.uk/guidance/teaching-and-leadership-

innovation-fund  

(20)  http://www.hefce.ac.uk/lt/tef/ 
(21)  According  to  the  benchmarking  exercise  in  the  area  of 
unemployment  benefits  and  active  labour  market  policies 
conducted  within  the  EMCO  Committee.  See  the  draft 
Joint Employment Report 2018 for details. 

Education 

in  Wales  below 

There  are  disparities  in  educational  outcomes 
across the UK. Students in England and Northern 
Ireland  score  above  the  OECD  average,  whereas 
students  in  Scotland  are  around  the  average  and 
students 
it  (OECD,  2016). 
Nevertheless,  analysis  shows  that  the  gap  in 
England  and  Scotland  between  top  performers 
from  an  economically  disadvantaged  background 
and  their  ‘well  off’  peers  was  equivalent  to  more 
than 2 years of schooling on average (Sutton Trust, 
2017). The 2015 results for Wales and Scotland in 
the  Programme 
International  Student 
Assessment  (PISA)  show  negative  trends.  Each 
nation is attempting to reduce performance gaps. 

for 

in 
A  revised  National  Funding  Formula 
England  alters 
the  distribution  of  school 
funding  (DfE,  2017).  The  intention  is  to  move 
from allocations at local authority level to a system 
providing  more  evenly  distributed  funding  per 
pupil  across  all  schools.  A  House  of  Commons 
Select Committee is, however, very critical of the 
funding  reforms,  challenging  the  government’s 
expectation of major efficiency savings (House of 
Commons, 2017b). 

Supply  and  retention  of  teachers  is  a  serious 
constraint  on  the  UK  education  system.  The 
shortage  of  teachers  is  a  continuing  challenge  for 
the  education  sector,  particularly 
in  certain 
subjects and regions. In England, a total of 30 000 
new  teachers  per  year  are  needed  to  maintain 
supply,  but  this  target  has  not  been  achieved  for 
the  last  4  years.  As  concerns  retention,  a  2016 
survey  found  that  the  proportion  of  teachers 
considering  leaving  the  profession  had  increased 
from 17 % in 2015 to 23 % in 2016 (NFER, 2016). 
The Institute for Fiscal Studies (IFS) estimates that 
the  high  number  of  teachers  who  leave  the 
is 
profession  within  5  years  of  qualifying 
equivalent to GBP 312 million (EUR 356 million) 
of  public  expenditure  wasted  on  their  initial 
training (Ward, 2016). 

The effectiveness of the teacher supply model is 
unclear  (DfE,  2013).  Teacher  recruitment  targets 
are  not  being  met  both  in  overall  numbers  and  in 
particular 
regional  needs.  The 
government has been investing in recruitment and 
retention 
GBP 75 million 
teachers. 
(EUR 86 million) over 3 years was made available 

subject  or 

of 

28 

 
                                                           
3.3. Labour market, education and social policies 

one  of  the  largest  at-risk-of-poverty-or-social-
exclusion  gaps  between  people  with/without 
disabilities in the EU (14.6 pps vs. the EU average 
of 10.1 pps). 

Graph 3.3.1:  At-risk-of-poverty-or-social-exclusion rate and 

its components 

April  2018,  while  working-age  payment  rates 
remain  frozen.  Furthermore,  the  income  share  of 
older  workers  (age  group  55-64)  has  increased  in 
the  period  2007-2014,  while  that  of  the  younger 
cohort  (age  group  25-39)  has  decreased.  This  has 
been  mainly  driven  by  changes  in  the  income  per 
worker in each age group (European Commission, 
2017a). 

Graph 3.3.2:  At-risk-of-poverty-or-social-exclusion rate, 

age groups 

Source: Eurostat 

family  support 

Child  poverty  is  forecast  by  some  to  increase 
due  to  a  restriction  of  benefits.  There  is  now  a 
curb  on  means-tested 
to  a 
maximum  of  two  children, which  will  impact  any 
further  children  born  after  April  2017.  This  is 
forecast  to  lead  to  an  increase  in  child  poverty 
where  the  intended  behavioural  impact  of  the 
policy  does  not  occur.  The  IFS  forecasts  that 
absolute  child  poverty  (after  housing  costs,  AHC) 
will  rise  from  27.5 %  in  2014-2015  to  30.3 %  in 
2021-2022. It also forecasts an increase in absolute 
poverty  (AHC)  for  children  living  in  working 
households from 21.4 % in 2014-2015 to 23.3 % in 
2021-2022.  Absolute  poverty  (AHC)  for  all  is 
forecast to fall slightly from 20.3 % to 19.8 % over 
the same period. 

Differences in income growth have stimulated a 
intergenerational  ‘fairness’.  The 
debate  on 
narrowing  of 
the  at-risk-of-poverty-or-social-
exclusion  gap  between  the  elderly,  the  working-
age population and children observed in 2016 (see 
Graph  3.3.2)  is  projected  to  reverse  its  trajectory 
up  to  2021-2022.  The  ‘triple-lock’  on  pension 
increases  will  exacerbate  this  trend,  as  the  3 % 
inflation figure from September 2017 will trigger a 
commensurate  increase  in  the  state  pension  from 

Source: Eurostat 

In-work  poverty  rates  are  relatively  stable  at 
present.  However,  there  are  notable  differences 
between  disaggregated  groups  (see  Graph  3.3.3). 
the  number  of  children 
As  noted  above, 
experiencing  poverty 
is 
in  working  families 
projected  to  increase.  The  current  proportion  of 
children experiencing poverty who are in a family 
with  at  least  one  working  adult  is  projected  to 
remain  around  66 %.  This  is  likely  to  be  strongly 
correlated  to  work  intensity,  and  thus  concerns 
about  low-wages,  low-hours  or  low  progression 
prospects  mentioned  in  this  and  previous  country 
reports are  relevant. As noted  in previous country 
reports,  the  cut  to  work  allowances  in  Universal 
Credit  makes 
system 
considerably  less  generous  than  the  legacy  Tax 
Credits system. 

in-work  benefit 

the 

29 

051015202530200520062007200820092010201120122013201420152016% of populationAt-risk-of-poverty-or-social-exclusion rateAt-risk-of-poverty rateSevere material deprivationPeople living in low work intensity households1520253035200520062007200820092010201120122013201420152016% of populationChildren (<18y)Working age (18-64)Elderly (65+) 
 
 
3.3. Labour market, education and social policies 

Graph 3.3.3:  In-work-poverty rate, groups 

Childcare provision 

In  2015,  fewer  than  30 %  of  children  less  than 
3 years  of  age  attended  formal  childcare.  The 
adequacy  of  supported  childcare  provision  in 
England  has  increased  since  2016.  This  is  largely 
thanks  to  the  September  2017  full  roll-out  of  the 
improved  offering  of  30  hours  of  free  childcare. 
However, this is confined to children aged 3 and 4 
where all parents are working and is offered for the 
equivalent  of  38  weeks  per  year.  The  take-up  of 
the improved offer for 3 and 4 year olds was ahead 
of expectations, whereas the offer available to the 
most  disadvantaged  2  year  olds 
remains 
undersubscribed.  The  Sutton  Trust  has  suggested 
that  a  shift  in  focus  away  from  high  quality  early 
years  education  towards  affordable  childcare  for 
working families could damage social mobility. 

Childcare  supply  concerns  linger.  The  2017 
Childcare  Survey  suggests  that  sufficient  supply 
remains  an  issue,  reporting  that  half  of  local 
authorities 
in  England  do  not  have  enough 
childcare  provision  for  parents  working  full  time. 
The figures for Scotland (75 %) and Wales (80 %) 
indicated  prices  had 
are  worse.  The  survey 
remained  somewhat  steady  over  the  last  year. 
However,  at  an  average  of  GBP  116  (EUR 132) 
per  week  for  a  part-time  (25  hours)  place  for  a 
child under 2, affordability remains an issue. 

Health sector 

Overall,  access  to  care  is  sufficient.  The  rate  of 
self-reported unmet needs for medical care due to 
cost,  distance  and  waiting  lists  (2.8 %)  is  slightly 
lower  than  the  EU  average  (3.2 %).  Financial 
protection  is  very  good  with  low  out-of-pocket 
striking 
spending.  However, 
inequalities 
by 
socioeconomic  status  and  most  behavioural  risk 
factors  are  far  more  prevalent  among  people  with 
lower  income  and  education.  (OECD/European 
Observatory  on  Health  Systems  and  Policies, 
2017).   

the  UK  has 

self-reported 

health 

in 

Hospitals are working at near-full capacity with 
low  bed  numbers,  high  occupancy  rates  and 
short lengths of stay. There are also relatively few 
doctors  and  falling  numbers  of  nurses.  Together 
with  the  lack  of  integration  of  health  and  social 
care,  these  factors  contribute  to  the  long-standing 

Source: Eurostat 

Universal  Credit  roll-out  continues.  The  full 
roll-out  of  Universal  Credit  remains  projected  to 
take  until  2022.  As  of  14 December 2017,  there 
were 700 000 claimants of Universal Credit (some 
42 % in at least partial employment). Attention has 
recently  been  focused  on  differences  with  the 
working-age welfare systems the Universal Credit 
is  designed  to  supersede.  Concerns  have  been 
raised  about 
the 
frequency of payment and difficulties for those in 
receipt  of  housing  support.  The  2017  Autumn 
Budget  announced  measures  including  reducing 
the waiting period from 6 weeks to 5. 

initial  waiting  period, 

the 

Trials  of  in-work  conditionality,  which  can 
apply to all working adults in a household, are 
ongoing.  Ultimately,  it  is  hoped  that  in-work 
conditionality  can  address  issues  of  low-work 
intensity, low-wages and low-hours and also assist 
with  progression.  A  randomised  control  trial  of 
15 000 participants is under way and is expected to 
report in summer 2018. 

Housing  affordability  remains  a  concern. 
Supply  issues  (see  Section  3.2.2)  coexist  with 
pressures on social assistance for housing. 12.3 % 
of  the  UK  population  spend  over  40 %  of  their 
income  on  housing,  which  is  above  the  EU 
average. This rises to 35.4 % for those who rent. In 
England 
in  2015,  14 470  households  were 
considered as ‘statutorily homeless’ (meaning they 
are  considered  in  ‘priority  need’),  a  6 %  increase 
on 2014 (Feantsa, 2017 overview).  

30 

051015202530200520062007200820092010201120122013201420152016% of employedTotalTemporaryPart-timeLone parents 
 
3.3. Labour market, education and social policies 

challenges  of  waiting  times  for  elective  and 
emergency care. 

The  National  Health  Service  has  been  very 
reliant  on  the  international  recruitment  of 
health workers. It has been estimated that 12 % of 
NHS staff in England are non-British. About 10 % 
of doctors and 7 % of nurses working for the NHS 
from  other  EU  countries22.  Anticipated 
are 
workforce  shortages,  restrictions  on  pay  rises  for 
NHS staff and questions about future staffing once 
the UK leaves the EU are sources of concern. 

funded 

care.  This 

Long-term  care 
is  under  severe  financial 
pressure  affecting  access  to,  levels  and  quality 
of  publicly 
reflects 
demographically-driven  increases  in  demand,  new 
cost  pressures  and  cuts  to  the  budgets  for  local 
authorities  responsible  for  funding  and  providing 
care.  Based  on  the  projections  of  the  Ageing 
Report, above average increases on expenditure on 
are  projected  until  2070. 
long-term 

care 

the 

long-term 

challenges 

The  healthcare  system 
is  currently  under 
financial  pressure  and  projected  health  care 
spending 
fiscal 
sustainability  of  the  health  care  system.  Health 
services are predominantly financed from taxation. 
In  2015,  80 %  of  total  health  expenditure  came 
from  public  sources  (comparable  to  the  EU 
is 
average  of  79 %).  Healthcare  expenditure 
expected  to  increase  by  at  least  1.4  pps  of  GDP 
between  2016  and  2070,  due  to  the  ageing 
population. Based on the projections of the Ageing 
Report  2018  (forthcoming),  this  will  threaten  the 
medium  and  long-term  fiscal  sustainability  of  the 
system. In recent years, growth in health spending 
has  not  matched  the  increase  in  demand  for 
healthcare  (see  Section  3.1).  Official  estimates 
from  2014,  based  on  demand  trends  at  that  time 
and  on  an  assumption  of  flat  real-term  funding 
increases,  highlighted  that  by  2020-2021  there 
(EUR 34 billion) 
would  be  a  GBP 30 billion 
shortfall 
in  England. 
in  NHS 
Subsequently, the government committed to inject 
extra  funds  into  the  health  system  while  the  NHS 
committed 
to 
improve effectiveness and efficiency.  

introduce  further  measures 

funding 

to 

22According 
http://researchbriefings.parliament.uk/ResearchBriefing/Su
mmary/CBP-7783 

to 

31 

 
                                                           
3.4. INVESTMENT 

Investment trends 

The  UK  has  long  had  the  lowest  investment 
share  in  GDP  of  any  G7  nation  (Graph  3.4.1). 
Over  the  last  20  years,  the  UK’s  average  gross-
physical-capital-formation-to-GDP ratio of 16.7 % 
was almost 3pps lower than the next lowest figure 
among a group of over 30 advanced EU and non-
EU  economies (ONS,  2017a).  The  UK  has  the 
lowest average non-government sector investment-
to-GDP  ratio,  along  with  the  second  lowest 
average  government  sector 
investment-to-GDP 
ratio.  However,  there  is  evidence  that  the  UK 
performs  better  on  measures  of 
intangible 
investment (European  Commission,  2017c).  Box 
3.4.2  summarises  UK  investment  trends  and  sets 
out the principal barriers to higher investment. 

Graph 3.4.1:  Investment shares in G7 nations, quarterly 

data 

Source: OECD 

Private  investment  remains  well  below  the  EU 
average,  particularly 
in  equipment.  After 
recovering from a trough in the financial crisis, as 
set out in Section 1, private investment growth has 
stalled  since  2015  and  is  projected  to  remain 
subdued  in  the  UK,  in  contrast  with  a  robust 

(Graph  3.4.2) 

European  and  global  picture.  Low  equipment 
investment 
is  only  partially 
accounted  for  by  the  relatively  small  weight  of 
capital-intensive production industries in UK GDP, 
as within specific sectors fixed investment by UK 
firms  is  also  relatively  low.  As  set  out  in  Section 
3.2,  the  government  aims  to  facilitate  increased 
the  chronic 
dwellings 
housing  shortage.  Housebuilding  continues 
to 
grow,  although 
the  broader 
construction sector lost momentum in 2017. 

the  recovery 

to  address 

investment 

in 

Graph 3.4.2:  Equipment and dwellings investment share in 

the UK and the EU-27 

Source: European Commission 

Public  capital  expenditure  has  risen  somewhat 
in  the  last  2  years.  Total  public  sector  net 
investment is projected to remain at around 2.0 % 
of  GDP  until  2019-2020.  Since  2010, 
the 
government has increasingly focused public sector 
net 
infrastructure, 
especially  transport,  while  it  has  reduced  the 
proportion  spent  on  public  services  such  as 
education 
sector 
healthcare. 
construction  rose  in  2017,  but  it  is  set  to  fall 
slightly in 2018 before picking up again. 

investment  on  economic 

Public 

and 

32 

1416182022242605060708091011121314151617% GDPCanadaFranceGermanyItalyJapanUKUSA01234567804050607080910111213141516171819% of GDPUK equipmentEU27 equipmentUK dwellingsEU27 dwellingsforecast 
 
 
 
3.4. Investment 

Box 3.4.1: Policy highlights: Making infrastructure policy more coherent and long term 

The government has recently created two agencies to provide a more stable and long-term 
framework  for  infrastructure  investment.  As  discussed  in  Section  3,  the  UK  requires  major 
investment to meet current and projected future demand for housing and infrastructure, but there 
are currently shortcomings in infrastructure planning and implementation. The Infrastructure and 
Projects Authority (IPA), established in 2015, is in charge of monitoring projects and helping to 
deliver them. The National Infrastructure Commission (NIC) is an independent body established in 
2016  to  conduct  long-term  infrastructure  planning,  for  the  economy  as  a  whole  and  for  selected 
key projects. The government has asked the NIC to assume that annual government spending on 
economic  infrastructure  will  be  1.0-1.2 %  of  GDP  between  2020  and  2050,  a  slight  increase  on 
current levels. 

The infrastructure pipeline suggests that annual investment should grow substantially over 
the  next  decade.  The  IPA’s  December  2017  National  Infrastructure  and  Construction 
Pipeline (IPA,  2017)  provided  an  update  on  the  delivery  of  the  National  Infrastructure  Delivery 
Plan  2016-2021.  The  plan  sets  out  a  pipeline  of  over  GBP 460 billion  (EUR 525 billion)  of 
planned  public  and  private  investment  projects  across  the  economy,  of  which  GBP 240  billion 
(EUR 274 billion)  is  expected  to  be  invested  by  2021.  The  main  components  of  the  pipeline  by 
value are energy generation, utilities, transport and social infrastructure. Over 45 % of the value of 
the  pipeline  requires  private  funding.  Of  this  private  funding,  40 %  relates  to  privatised  utilities 
subject  to  economic  regulation.  The  IPA  projects  total  infrastructure  investment  over  the  next 
decade at GBP 600 billion (EUR 685 billion). This implies that the total infrastructure investment 
required in the five-year period 2021-2022 to 2026-2027 will be almost 50 % higher than what is 
on course to be delivered in the preceding 5 years (2016-2017 to 2020-2021). 

In  October  2017,  the  NIC  published  its  interim  assessment  of  national  infrastructure 
priorities over the longer term (NIC, 2017a). The interim assessment is a ‘visions and priorities’ 
document that sets out the key objectives for the UK’s infrastructure networks between now and 
2050.  It  sets  out  the  challenges  to  deliver  investment  in  new,  upgraded  and  replacement 
infrastructure,  and  outlines  current  weaknesses  in  infrastructure  planning  that  need  to  be 
overcome.  The  interim  assessment  is  a  precursor  to  the  first  full  National  Infrastructure 
Assessment in 2018. The NIC has also emphasised the importance of the effective use of digital 
technologies  for  maximising  the  performance  of  existing  infrastructure.  This  includes,  for 
example,  demand  management  systems  in  transport  and  energy  networks,  and  the  use  of  digital 
signalling and sensors to increase the capacity of road and rail networks. 

The  NIC  also has a  facilitator  role. In  the  Oxford-Milton Keynes-Cambridge  corridor project 
(NIC, 2017b), which includes both a new railway line and housing developments, it has helped to 
bring the interested parties together. This is a positive example that could act as a pilot to support 
the government’s focus on city-regions, and on connecting homes and jobs.  

Infrastructure investment 

The  UK  faces  significant  challenges  to  deliver 
modern  network  infrastructure  with  sufficient 
capacity to meet future demand. As discussed in 
Section  3.5,  road  congestion  is  high  and  rail 
capacity is increasingly inadequate in places in the 
face  of  rapidly  growing  demand.  There  is  also  an 
increasingly  urgent  need  for  higher  investment  in 
new energy generation and supply capacity. While 

many  firms  are  positive  about  the  government’s 
infrastructure  policy  approach  over  the  last  five 
years,  only  30 %  are  satisfied  with  the  pace  of 
delivery  and  almost  three  quarters  doubt  that 
overall 
improve  by  2022 
(CBI/AECOM,  2017).  As  discussed  in  Box  3.4.1, 
the  government  has  established  new  agencies  that 
aim  to  improve  the  coherence  of  infrastructure 
policy making, and support longer-term planning. 

infrastructure  will 

33 

 
3.4. Investment 

The  increased  private  financing  envisaged  by 
the  IPA  (Box  3.4.1)  is  not  straightforward  for 
new  transport  infrastructure.  It  is  important  to 
carefully  assess  the  feasibility  and  desirability  of 
delivering  transport  infrastructure  with  private 
capital  on  a  project-by-project  basis.  The 
government  has  broadened  the  UK  Guarantees 
scheme to allow construction guarantees. Although 
to  date  only  GBP  4  billion  (EUR 4.6 billion)  of 
guarantees  have  been  signed  under  this  scheme 
compared  to  a  capacity  of  up  to  GBP  40  billion 
(EUR 46 billion),  the  government  sees  its  added 
value  as  being  as  much  about  providing  expertise 
and  coordination  as  money.  The  government  sees 
the  potential  to  increase  the  currently  limited  use 
of  private  finance  for  economic  infrastructure, 
while  emphasising  it  needs  to  be  careful  to  avoid 
repeating  past  mistakes, 
in  particular  where 
alternative  approaches  may  have  delivered  lower 
full  life  costs  (NAO,  2017d).  The  scope  for 
pension funds to invest in the construction phase of 
projects  is  limited  by  their  risk  aversion  and 
financial 
regulations.  For  new  public-private 
partnership  projects,  the  government  plans  to 
publish  the  forecasted  and  actual  rates  of  return 
annually,  hence  allowing  a  comparison  between 
the expected and actual performance of projects. 

Productivity 

UK  productivity  is  significantly  below  the  G7 
average. The UK is an open economy with a high 
employment  rate  and  many  positive  aspects  to  its 
business environment which should tend to support 
hiring,  investment  and  productivity.  The  UK  also 
has  comparatively  low  levels  of  regulation  in 
product  and  labour  markets,  a  high-quality  public 
administration,  deep  capital  markets,  strong 
universities and a high stock of FDI. However, UK 
output per hour is 15 % below the G7 average, and 
more  than  20 %  below  what  workers  in  France, 
Germany and the United States produce. 

Labour  productivity  is  no  higher  than  it  was  a 
decade  ago,  and  real  wages  remain  well  below 
their  pre-crisis  peak  (see  Graph  3.4.3).  In  the 
decade  before  the  financial  crisis  the  UK  was 
catching  up  with  the  G7  average.  However,  more 
recently  it  has  fallen  further  behind.  In  2017-Q3 
output per hour was only 1 % higher than it was a 
decade  ago  (ONS,  2017b).  By  2016,  the  UK’s 
“productivity  puzzle”  —  the  difference  between 
the current level of labour productivity and what it 

prioritising 

government 

The 
public 
is 
infrastructure  investment,  although  it  is  not 
clear if this will prove adequate. In countries that 
do not have excess capacity, network infrastructure 
spending  (construction  and  maintenance)  tends  to 
have  particularly  strong  positive 
impacts  on 
demand  in  the  short  term  and  on  productivity  in 
the longer term (OECD, 2016). Given the scale of 
the  challenge and  the  potential benefits,  including 
the  complementarity  between  public  and  business 
investment,  there  is  a  strong  case  for  increased 
public  investment  spending  in  the  UK.  The 
‘National  Productivity  Investment  Fund’  (NPIF) 
will  provide  a 
total  of  GBP  31  billion 
(EUR 35 billion)  of  funding  for  infrastructure, 
housing  and  R&D  between  2017-2018  and  2022-
2023,  with  a  planned  focus  on  regional  growth, 
including improvements to infrastructure needed to 
support  housing  development.  The  European 
Investment  Bank  (EIB)  has  also  had  an  important 
in 
in  funding  UK  projects,  particularly 
role 
infrastructure.  The  EIB  lent  EUR  6.93  billion 
(GBP  6.07  billion)  to  UK  projects  in  2016  and 
EUR 1.84 billion (GBP 1.61 billion) in 2017. 

the 

returns 

identified  scope 

for 
Recent  analysis  has 
improving 
from 
economic 
infrastructure  investment  on  both  the  cost  and 
benefit  sides.  The  unit  cost  of  building  and 
maintaining infrastructure is often particularly high 
in the UK. The UK government acknowledges this 
and has set out plans to improve the effectiveness 
of infrastructure spending (IPA, 2017b). The UK is 
systematic  in  its  use  of  cost  benefit  analysis  in 
infrastructure projects, particularly in transport, but 
there  remains  scope  for  improvement  in  planning 
and  implementation  (Institute  for  Government, 
the  government’s 
2017a).  An  analysis  of 
management  of  six  major  projects,  (Institute  for 
Government  2017b)  concluded 
serious 
problems persist with: (i) comprehensive planning 
(ii) 
infrastructure  on  a  national  basis; 
of 
considering  options  at  an  early  stage;  (iii) 
modelling 
ensuring 
appropriate 
risk  management 
and 
capability  within  government;  and  (v)  mustering 
the  political  will 
issue  of 
‘concentrated  losers’.  If  successful,  the  increased 
policy  focus  on  joining  up  different  aspects  of 
infrastructure,  including  transport  and  housing, 
could  deliver  higher  future  returns  from  transport 
investment  than  those  captured  in  the  core  results 
of a cost benefit analysis. 

to  address 

project 

costs; 

risks 

that 

(iv) 

and 

the 

34 

 
3.4. Investment 

1.2 %  per  year  until  2023 (OBR,  2017c).  As  a 
result  the  OBR  expect  that  by  the  beginning  of 
2023  output  per  hour  will  be  27 %  below  an 
extrapolation of the pre-crisis trend. 

ideas,  people, 

On 27 November 2017 the government released 
an  Industrial  Strategy  White  Paper (BEIS, 
2017a).  The  white  paper  set  out  plans  to  address 
the  UK’s  weak  overall  productivity  performance 
and  to  consolidate  or  develop  sectoral  strengths. 
The  paper  focused  on  five  ‘foundations  of 
productivity’  — 
infrastructure, 
business environment and places. It also identified 
four  ‘grand  challenges’  —  artificial  intelligence, 
clean  growth,  ageing  society  and  the  future  of 
mobility.  In  line  with  other  recent  reports  on  the 
UK productivity challenge, it put a major focus on 
addressing  broad-based  underperformance  across 
sectors,  firms  and  places,  as  well  as  supporting 
innovation  and  pockets  of  excellence.  The  four 
‘sector  deals’  announced  in  the  paper  —  artificial 
intelligence, automotive, construction, life sciences 
— reflect this balance. 

The  UK  has  pockets  of  excellence,  but  a  wide 
dispersion  of  firm-level  performance.  The  UK 
has  many  high-performing  sectors  and  firms, 
which are well integrated into global value chains. 
The  UK’s  sectoral  strengths  are  focused  in  areas 
where  intangible  assets  are  especially  important, 
for example pharmaceuticals, higher education and 
financial  and  professional 
services.  Among 
manufacturing  firms,  average  output  per  worker 
and  management  practices  are  both  considerably 
higher in multinationals than domestic firms, with 
productivity lowest in firms with family ownership 
and  management (ONS,  2017e).  After  adjusting 
for  size,  industry  and  other  factors,  firms  with 
inward  FDI  are  75 %  more  productive  than  non-
FDI  firms (ONS,  2017f).  The  gap  in  service 
productivity  between  high  and  low-performing 
firms is 50 % larger in the UK than other advanced 
economies 
and  has  been  widening  over 
time (Haldane, 2017). 

The  UK  has  a  long  tail  of  poor  performance, 
with  much  of  the  economy  operating  far  from 
the  productivity  frontier.  Across  large  parts  of 
the  economy,  the  UK  has  long  lagged  behind  its 
the  main  drivers  of 
main  competitors  on 
productivity — skills, investment and the adoption 
and 
business 
of 
processes.  A  combination  of  patchy  management, 

implementation 

efficient 

would have been  if  the pre-downturn  productivity 
trend had  continued  — was 15.8 %,  the  largest  in 
the G7 (ONS, 2017c). The reasons for this shortfall 
were  discussed  in  the  2016  country  report.  Since 
2010, a combination of strong employment growth 
and  subdued  investment  has  resulted  in  a  falling 
stock  of  capital  per  worker  employed (ONS, 
2017d). 

Graph 3.4.3:  Recent trends in UK labour productivity and 

real wages 

Source: ONS and European Commission 

in 

the 

employment  away 

Most  of  the  productivity  slowdown  occurred 
within  sectors,  although  there  has  also  been  a 
shift 
from  high-
productivity  sectors  such  as  financial  services, 
and  oil  and  gas.  Half  of  the  within-sector 
productivity  shortfall  is  accounted  for  by  non-
financial  services  (with  IT  and  communications 
largest  contributor),  a  quarter  by 
being 
services,  and  another  quarter  by 
financial 
manufacturing, 
and 
construction (Kierzenkowski  et  al,  2017a).  The 
OECD  recommended  that  for  most  regions  there 
should  be  more  government  focus  on  improving 
the performance of service sectors that have a large 
weight  in  the  economy,  such  as  ICT  and  other 
knowledge-intensive services (OECD, 2017). 

production 

other 

Medium-term  prospects  for  productivity  look 
subdued.  Since  2010,  the  OBR  had,  like  other 
forecasters,  been  consistently  overoptimistic  on 
UK productivity by predicting an imminent return 
to  close  to  pre-crisis  growth  rates.  It  is  now  clear 
that  the  lower  post-crisis  level  and  growth  of 
productivity 
than 
cyclical.  In  its  November  2017  Economic  and 
Fiscal  Outlook  the  OBR  sharply  downgraded  its 
forecast for medium-term UK productivity growth, 
by  an  average  of  0.7 pps.  to  between  0.9 %  and 

is  mainly  structural  rather 

35 

758085909510010511011512098000204060810121416Index Q1-08 =100Real wagesOutput per hourPre-crisistrend of productivity growth  
 
3.4. Investment 

OECD  found  that  overall  regional  investment 
ratios  appear  weakly  linked  to  productivity,  with 
the  sectoral  composition  of  regions  and  their  type 
of  investment  more  important (Kierzenkowski  et 
al., 2017b). 

Graph 3.4.4:  Regional disparities in nominal labour 

productivity 

Source: ONS 

Regional  differences in R&D  spending are  also 
large. Overall UK R&D spending is below the EU 
average  (see  Section  3.5).  R&D  intensity  in  the 
East  of  England  is  similar  to  levels  in  Sweden  at 
3.5 % of GDP, with South East England at 2.4 %. 
By  contrast,  North  East  England,  London (23)  and 
Yorkshire  and  the  Humber  invest  only  around  1-
1.1 % of their GDP in R&D. 

The government  seeks to make  investment and 
growth policy in city regions more coherent. To 
date  there  is  little  sign  of  low-performing  regions 
converging with London and South East England. 
Boosting  relatively  low  living  standards  in  these 
regions  (see  Section  3.3)  will  require  addressing 
deficiencies  in  human  and  physical  capital  and 
capturing  potential  agglomeration  benefits  within 
and  across  city 
through 
regions, 
improved  transport  connectivity  (see  Section  3.5). 
The  government  recognises  this  will  require  both 
higher  infrastructure  investment  outside  London 
and  an  improvement  in  the  returns  from  that 
investment  through  better  coordination  between 
both  transport  and  housing  policy,  and  different 
layers of government and the private sector. 

including 

(23)  The  low  R&D  intensity  in  London  is  the  result  of  the 
importance of high-productivity services in its economy. 

low  equipment  and  R&D  spending,  and  gaps  in 
workforce  skills  hold  back  innovation  and  its 
diffusion,  particularly  in  domestic  firms (OECD, 
2017).  The  Confederation  of  British  Industry 
(CBI) recently  emphasised  the  need  for  a  public 
policy focus on promoting the more consistent and 
appropriate  diffusion  of  existing  technology  and 
business  best  practice  (CBI,  2017).  For  example, 
across  UK  manufacturing  as  a  whole,  the  density 
of  industrial  robots  is  one  of  the  lowest  in  the 
OECD  (IFR,  2016),  while  the  proportion  of  UK 
businesses  using  technologies  such  as  electronic 
information  sharing  (19 %)  and  radio-frequency 
identification (7.7 %) are among the lowest in the 
EU (European Commission, 2017d). The business-
led  Productivity  Council  focuses  on  improving 
business-to-business  engagement,  supported  by 
government funding. 

Productivity  is  also  held  down  by  impediments 
to the efficient allocation of capital and labour. 
Since  the  financial  crisis,  flows  of  labour  and 
capital  between  companies  have  been  unusually 
low,  and the dispersion  in rates  of  return between 
sectors  has  been  high (Haldane,  2017).  This  may 
be  partly  caused  by  ‘zombie  firms’,  which  have 
poor  performance  and  prospects  but  have  been 
able to continue to operate and to tie up capital and 
resources.  However,  the  number  of  such  firms  is 
not especially high in the UK (Adalet McGowan et 
al,  2017).  Higher  financing  costs  may  lead  to  a 
more  rapid  exit  from  the  market  among  the  least 
productive and least profitable firms. 

The housing shortage (discussed in Section 3.2) 
is  part  of  the  problem.  The  OECD  emphasises 
the  importance  of  relaxing  barriers  to  housing 
supply  so  as  to  improve  resource  allocation,  and 
specifically  to  allow  cities  to  grow  in  an  organic 
way (OECD,  2017).  Despite  its  much  higher 
productivity,  in  terms  of  household  disposable 
income  after  housing  costs  London  is  only  at  the 
national average (Resolution Foundation, 2017d).  

The  UK  also  has  large  regional  disparities  in 
productivity,  with  low  levels  outside  London 
and  South  East  England  (Graph  3.4.4).  Out  of 
15  UK  metropolitan  areas,  11  have  a  lower 
productivity than the average metropolitan area in 
the OECD (OECD, 2017). In contrast, London has 
a  congestion  and  costs  issue  to  address  to  cement 
its  status  as  a  leading  global  economic  hub.  The 

36 

2025303540450506070809101112131415GVA/hour (GBP)Greater LondonSouth East EnglandAverage across regionsNorthern IrelandWales 
 
                                                           
3.4. Investment 

Box 3.4.2: Investment challenges and reforms in the United Kingdom 

Macroeconomic perspective 

Total physical 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.  Public  investment  is  marginally  below  the  EU  average  (see  Section  3.4)  and  there  are 
shortcomings in transport infrastructure (see Section 3.5). Private investment is significantly below the EU 
average,  despite  a  robust  recovery  from  a  post-crisis  trough.  Equipment  investment  is  particularly  low, 
which  is  only  partly  related  to  the  UK’s  specialisation  in  services.  Relatively  low  housebuilding  has 
contributed to the UK’s housing shortage (see Section 3.2). Heightened uncertainty is currently weighing on 
investment, and this is set to persist (see Section 1). 

Assessment of barriers to investment and ongoing reforms 

Overall barriers to private investment in the UK are moderate, as confirmed by the European Commission’s 
assessment.  Relevant  reforms  have  been  adopted  on  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 3.4). Planning restrictions can also hinder the use of 
modern, efficient 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  3.3)  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,  tradespeople  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.  

37 

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 / TelecomEducation CSREnergyLegend:TransportNo 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 
 
3.5. SECTORAL POLICIES 

Transport infrastructure 

The UK’s road, rail and aviation networks have 
significant  and  growing  capacity  pressures. 
Relative  to  population,  the  UK’s  road  and  rail 
networks  are  less  dense  than  the  EU  average 
(European Commission, 2017e). In terms of higher 
capacity  routes  —  motorways  and  electrified  rail 
—  the  UK  has  fallen  further  behind  the  EU 
average  since  the  mid-1990s  (ibid.).  At  the  same 
time,  demand  and  congestion  have  been  rising, 
corresponding  to  longer  commutes (Trade  Union 
Congress,  2017).  The  NIC  projects  that,  by  2050, 
road  use  in  Great  Britain  could  grow  by  37-61 % 
and rail use by 12-43 % (NIC, 2017a). Rail freight 
has  the  potential  to  nearly  double  by  2030  if 
allowed to grow unconstrained (DfT, 2014). 

improve 

There are challenges to both increase transport 
investment  and 
its  targeting  and 
in  Section  3.4,  high 
efficiency.  As  set  out 
congestion  and  relatively  underdeveloped  public 
transport  networks  are  factors  contributing  to  the 
low  labour  productivity  in  many  parts  of  the  UK. 
Improved  transport  networks  could  therefore  help 
to  improve  economic  performance.  Over  85 %  of 
transport  investment  is  publicly  funded  (IPA, 
2017),  and  historically  the  UK  has  had  relatively 
low  rates  of  public 
transport 
infrastructure.  The  government  recognises  the 
scale  of  the  challenge,  and  is  increasing  spending 
on new projects and improvements, particularly in 
rail. As discussed in Section 3.4, there is scope to 
cost 
and 
selection 
improve 
effectiveness of transport investment. 

investment 

project 

the 

in 

Current  investment  focuses  on  London  and 
major inter-city projects. Almost 30 % of public 
transport infrastructure investment is on projects in 
London. This makes it the region with the highest 
per  capita  spending  (HM  Treasury,  2017b).  The 
government has stated that there should be a better 
geographical  balance  in  future.  There  has  been  a 
tendency 
large  and  high-profile 
construction  projects  over  smaller  improvements, 
renewals  and ongoing  maintenance  that may  have 
superior benefit to cost ratios (DfT, 2017a). In the 
coming years a large proportion of the rail budget 
is  also  committed  to  a  few  large  projects,  in 
particular  ‘High  Speed  2’  (see  below).  The 
government  now  plans  to  focus  more  on  smaller 
schemes that deliver quickly at lower risk (ibid.). 

to  prioritise 

transport 

infrastructure 

Low 
investment 
outside  the  south  of  England  may  have  held 
back  agglomeration  effects  (OECD,  2017)  (see 
Section 3.4). The ‘Northern Powerhouse Strategy’ 
(HM  Treasury,  2016b)  set  out 
insufficient 
transport  connectivity  as  one  of  the  barriers 
holding back productivity in the north of England 
relative  to  the  south.  In  most  of  the  major  UK 
conurbations  outside  London,  over  70 %  of 
journeys to work are made by car despite growing 
road congestion (in London only 30 % are by car). 
This  is  a  much  higher  proportion  than  in  most 
comparable  cities  across  Europe (EMTA,  2017), 
and  reflects  poor  public transport availability.  For 
the  next  few  years  the  government  has  only 
committed a modest amount of additional funding 
to urban transport projects. There are growing calls 
for  significantly  higher 
in  urban 
transport  and  associated  infrastructure  outside 
London  in  order  to  improve  intra-city  linkages 
between people and jobs (Transport for the North, 
2018).  The  government  has  also  given  a 
commitment  that  in  future  central  government 
decision making will take account of the views and 
transport  bodies (DfT, 
plans  of  sub-national 
2017a).  The  growing  number  of  combined 
authorities  —  covering  multiple  local  authorities 
within  a  city  or  region  —  have  been  given  new 
powers  to  borrow  to  fund  infrastructure  projects 
(NAO, 2017e). 

investment 

Road transport 

In  recent  years  road  congestion  has  been 
increasing  within  nearly  all  major  cities (NIC, 
2017a,  p.74).  The  UK  was  among  the  most 
congested  developed  countries  in  the  world  in 
2016,  with  traffic  congestion  costing  drivers  over 
GBP  37  billion  (EUR 42 billion)  (INRIX,  2018). 
Since  1993  road  traffic  has  grown  by  23 %  while 
the  length  of  the  network  has  only  increased  by 
3 %.  In  the  longer  term,  continued  traffic  growth 
could  lead  to  severe  congestion  spreading  across 
the  arterial  roads  of  the  strategic  road  network 
(SRN) (DfT, 2017a). 

The  government  is  in  the  process  of  setting  its 
post-2020  road  investment  priorities.  Highways 
England now manages the SRN in England, which 
carries  a  third  of  road  traffic  on  2 %  of  the  total 
road  length.  The  UK  is  mid-way  through  the  first 
Roads  Investment  Strategy  (RIS),  covering  2015-
2020, which has focused on tackling a backlog of 

38 

 
 
3.5. Sectoral policies 

recently  been  signed  for  construction  of  the  first 
phase  of  ‘High  Speed  2’  between  London  and 
Birmingham.  In  the  current  Rail  Control  Period  5 
the  government 
(CP5),  covering  2015-2019, 
committed  itself  to  more  projects  than  could  be 
delivered with the resources and time available. As 
a  result,  a  number  of  planned  schemes  have  been 
scaled back, and some lines will no longer be fully 
electrified.  Due  to  cost  overruns,  GBP  3.4  billion 
(EUR 3.9 billion)  of  renewals  are  likely  to  be 
pushed beyond 2020. 

the 

In  November  2017,  the  government  published 
its  strategic  vision  for  rail (DfT,  2017e).  There 
have  been  problems 
incentives  and 
in 
collaboration  between  Network  Rail,  which 
manages rail infrastructure, and the train operating 
companies.  To  address  this,  the  government  has 
announced  plans  to  roll  out  joint  teams  running 
day  to  day  train  and  track  operations.  The 
Government  is  developing  its  proposals  for  Rail 
CP6 (covering 2019-2024) and has announced that 
GBP  47.9  billion  (EUR 54.7 billion)  will  be 
available for rail infrastructure spending. GBP 34.7 
billion  (EUR 39.6 billion)  will  be  provided  as 
government  grants,  with  the  remainder  coming 
from track access charges and commercial income. 
While  a  high  degree  of  pre-commitment  of  funds 
has  somewhat  limited  the  room  for  manoeuvre  in 
CP6, the government has also announced plans to 
reopen  a  number  of  lines  that  were  closed  in  the 
1960s.  In  the  longer  term,  network  improvements 
intra-urban 
may 
connectivity  outside  London,  as  discussed  above. 
The government is seeking to continue to shift the 
cost  of  funding  rail  infrastructure  from  taxpayers 
to  passengers.  Ticket  prices  are  already  high  and 
passengers’  stated  top  priority  for  improving  the 
railways 
of 
value 
tickets (Transport Focus, 2017). 

focus  more  on 

for  money 

improving 

the 

is 

Aviation 

scheme 

The  government’s  preferred 
for 
additional airport  capacity is  a new  north-west 
runway at Heathrow Airport. Additional runway 
capacity  in  the  south-east  of  England  is  needed  if 
London is to maintain its status as an international 
aviation hub and meet growing domestic demand. 
The government has consulted on a draft Airports 
National  Policy  Statement.  However,  there  are 
many  political,  regulatory  and  environmental 
processes  and  concerns  that  will  need  to  be 

projects  needed  to  address  notorious  bottlenecks. 
In developing the second RIS, covering the period 
from  2020-2025,  the  government  is  seeking  to 
‘address  long  standing  under  investment  in  the 
SRN’  and  has  highlighted  the  need  to  improve 
road links to ports and airports. 

Central  funding  is  being  increased  but  cuts  to 
local  funding  threaten  maintenance.  Overall 
spending  on  road  maintenance  has  dropped 
significantly  since  the  financial  crisis  and  there  is 
evidence  of  aggregate  under-investment  (RAC 
transport 
Foundation,  2017).  While  central 
infrastructure  funding  has  been  prioritised,  local 
authorities  are  under  severe  financial  pressures. 
Given that maintenance spending often has a very 
high return, estimated to average GBP 13 for every 
is  not 
GBP 1 spent (DfT,  2015) 
efficient 
is 
consulting  on 
intermediate 
introducing 
designation  of  ‘Major  Road  Network’  to  ensure 
that  maintenance  and  enhancement  of  locally 
managed A-roads is not neglected. 

in  aggregate.  The  government 

this  pattern 

an 

Rail transport 

freight 

There  is  continued  growth  in  demand  across 
intercity,  commuter  and 
services. 
Passenger rail traffic per capita has increased more 
rapidly than in most other EU countries in the last 
20 years but the overall density of the rail network 
remains comparatively low. As a result, passenger 
traffic per km of rail line has almost doubled, but 
progress in extending electrification — currently at 
34 %  of  the  network  —  has  been  modest  (DfT, 
2017b).  In  the  past  few  years  the  effects  of 
growing  pressure  on  the  network  have  become 
increasingly apparent, though there are indications 
that  passenger  growth  has  recently  slowed.  The 
effects  of  any  disruption  are  magnified  when 
ageing 
full 
capacity (DfT,  2017c). Overcrowding  during peak 
times  in  London  increased  by  45 %  from  2011  to 
2016 (DfT,  2017d).  Punctuality  has  also  dropped 
across the network as a whole (ORR, 2017). 

is  operating 

infrastructure 

at 

A  number  of  major  projects  are  being 
delivered, although some planned projects have 
recently been delayed or cancelled. ‘Crossrail’ is 
a  new  rail  line  linking  east  and  west  London  and 
the  surrounding  area.  The  central  tunnel  is  due  to 
open  in  2018  with  services  fully  operating  by 
December 2019. A number of large contracts have 

39 

 
3.5. Sectoral policies 

time the capacity market is in operation. Following 
a  competitive  process,  the  capacity  market  pays 
providers  in  return  for  a  commitment  to  provide 
reliable  sources  of  electricity  to  maintain  system 
reliability  when  needed.  The  IPA  project  an 
acceleration  of  energy  infrastructure  investment 
from  a  total  of  GBP  57  billion  (EUR 65 billion) 
over the next 4 years to a total of GBP 134 billion 
(EUR 153 billion)  in  the  subsequent  six  years 
(IPA,  2017).  The  government  plays  an  important 
role  in  managing  the  complex  regulation  of  the 
energy  sector.  While  only  42 %  of  infrastructure 
providers  surveyed  in  summer  2017  expressed 
confidence  in  the  ability  of  current  government 
policy to improve UK energy infrastructure, this is 
a  sharp  30 pps  improvement  from  a  year  before 
in  policy  uncertainty 
fall 
reflects  a 
and 
(CBI/AECOM, 2017). 

Graph 3.5.1:  Projected electricity generation by source 

Source: Department for Business, Energy & Industrial Strategy 

the 

(CfD) 

is  now 

The  cost  of  new  offshore  wind  capacity  has 
fallen  sharply.  The  main  form  of  government 
the 
low  carbon  energy 
support  for 
‘Contracts 
scheme 
for  Difference’ 
introduced  in  2014.  If  an  agreed  ‘strike  price’  is 
higher than the market price, the counterparty must 
pay 
the  difference 
between  the  two  prices.  In  the  opposite  case,  the 
renewable generator must pay back the difference. 
Most contracts are awarded through a competitive 
bidding process open to specified technologies for 
a  period  of  15  years.  In  September  2017,  for 
projects  delivering  in  2022/23,  the  second  CfD 
allocation round set a strike price less than half the 

renewable  generator 

addressed  before  the  development  of  any  new 
runway. 

Telecommunications networks 

is  a  substantial  gap 

There 
in  superfast 
broadband  availability  between  urban  and 
rural  areas.  The  UK  already  has  superfast 
broadband  (≥  30Mbit/s)  available  to  the  vast 
majority  of  premises.  However,  as  of  November 
2016,  two-thirds  (67 %)  of  rural  connections 
received  an  average  speed  of  less  than  10Mbit/s, 
compared  to  24 %  of  urban  connections  (Ofcom, 
2017a). In May 2017, around 3 % of UK premises 
(840 000) had access to ‘full fibre’ services, which 
offer download speeds of between 250 Mbit/s and 
1 Gbit/s (Ofcom, 2017b). 

a 

universal 

broadband 

On  1  March  2017,  the  UK  Government 
published  an  umbrella  strategy  to  support 
digitalisation. This set out the aim to complete the 
roll-out  of  4G  and  superfast  broadband  and  to 
implement 
service 
obligation  (USO)  by  2020  (DCMS,  2017).  It  also 
reconfirmed  a  GBP  1  billion  (EUR 1.14 billion) 
investment  program  in  full  fibre  and  5G.  The 
government  will  invest  up  to  GBP  400  million 
(EUR 456  million)  into  the  Digital  Infrastructure 
Investment Fund (launched in July 2017) over four 
years  to  support  an  at  least  equivalent  amount  of 
commercial 
investment. 
Investment in full fibre is also being supported by 
100 %  business  rates  relief  on  new  full-fibre 
infrastructure  for  a  five  year  period  from  April 
2017. 
the  government 
confirmed that it will use a regulatory USO to give 
every household  and  business  in  the  UK  the  right 
to  request  a  broadband  connection  with  speeds  of 
at  least  10  Mbit/s  by  2020.  As  set  out  in  Section 
3.4,  the  NIC  has  emphasised  the  potential  for 
digital  infrastructure  to  improve  the  performance 
of UK transport networks. 

In  December  2017, 

financing 

fibre 

for 

Energy infrastructure 

Substantial  investment  is  needed  to  gradually 
reduce  the  share  of  fossil  fuels  in  the  energy 
supply  mix,  increase  efficiency,  and  reduce 
emissions.  As  shown  in  Graph  3.5.1,  the  UK 
authorities anticipate a significant shift in the UK’s 
electricity supply mix over time. This is in addition 
to  any  replacement  and  maintenance  of  ageing 
existing  capacity.  Winter  2017-2018  is  the  first 

40 

02040608010012014016018020020162017201820192020202120222023202420252026202720282029203020312032203320342035TWhCoalGasOilNuclearRenewablesImports 
 
3.5. Sectoral policies 

the projects under construction (25) are anticipated 
to  be  completed  by  the  early  2020s  and  to  more 
than  double  Great  Britain’s 
interconnected 
capacity.  The  projected  growth  of  net  electricity 
imports  shown  in  Graph  3.5.1  is  linked  to  this 
extra capacity. 

its 

The  UK  power  generation  sector  has  a  much 
lower  level  of  concentration  than  the  EU 
average  due  to  the  UK’s  early  moves  to 
liberalise 
energy  markets.  However, 
wholesale  prices  are  above  the  EU  average  (56.1 
vs.  40.6  EUR/MWh),  which  is  linked  to;  (i)  the 
UK’s  high  dependence  on  natural  gas;  (ii)  an 
ageing  generation  fleet;  (iii)  the  small  size  of  the 
British  market  compared  to  the  interconnected 
continental  European  market;  and  (iv)  the  Carbon 
Price  Floor.  The  planned  higher 
levels  of 
interconnection should help bring wholesale prices 
down in the future. 

In  October  2017,  the  government  published 
draft legislation to place a temporary price cap 
for  domestic  customers  on  expensive standard 
variable tariffs and default tariffs. Around two-
thirds of domestic energy consumers are currently 
on  these  tariffs.  The  proposed  legislation  would 
result  in  a  cap  on  energy  prices  which  would  run 
until the end of 2020 and possibly be extended to 
2023.  In  July  2017,  Ofgem  announced  plans  to 
protect  vulnerable  consumers  through  a  safeguard 
tariff (Ofgem,  2017a).  Ofgem  is  also  continuing 
with  its  switching  programme (Ofgem,  2017b)  to 
make it easier for consumers to switch supplier or 
tariff to try to ensure that all consumers have better 
access  to  cheaper  energy  deals.  The  six  largest 
electricity  and  gas  suppliers  still  dominate  the 
market,  though  their  combined  market  share  fell 
from over 90 % in 2012 to approximately 80 % in 
2017,  particularly  as  a  result  of  new  small-  and 
medium-sized suppliers entering the market. 

Climate, energy and environment 

The UK is currently on track to meet its Europe 
2020  target  for  greenhouse  gas  emissions  not 
covered  by  the  EU  Emissions  Trading  Scheme 
(ETS).  According  to  approximated  data,  in  2016 
UK  greenhouse  gas  emissions  were  22 %  below 

(25)  These are Eleclink (1GW to France); Nemo Link (1GW to 
Belgium);  North  Sea  Link  (1.4GW  to  Norway)  and  IFA2 
(1GW to France). 

average  price  awarded  to  offshore  schemes  in  a 
2015 auction. The falling cost of intermittent wind 
power  could  enhance  the  case  for  investing  in 
tariffs  were 
storage 
introduced  in  2010  and  remain  in  place  for 
generators of below 5MW. 

future.  Feed-in 

the 

in 

The cost-effectiveness of new nuclear capacity is 
uncertain.  In  September  2016,  contracts  were 
signed  with  energy  company  EDF 
for  a 
GBP 18 billion  (EUR 20.5 billion)  nuclear  power 
plant  —  Hinkley  Point  C  —  which  will  provide 
7 %  of  the  UK’s  electricity  needs.  The  NAO  has 
published  a  report  on  Hinkley Point C which  was 
critical of the high costs and risks that the project 
will  impose  on  consumers,  and  questioned  its 
overall value for money (NAO, 2017f). As shown 
in  Graph  3.5.1,  the  government  envisages  the 
construction of substantial new nuclear generating 
capacity  over 
the  next  15-20  years.  The 
government  has  not  re-evaluated  its  strategic  case 
for nuclear power since 2008. However, as set out 
in  the  2017  Industrial  Strategy  White  Paper  (see 
Section  3.4),  government-industry  discussions  are 
ongoing regarding how substantial cost reductions 
can  be  achieved  in  respect  of  nuclear  new  build. 
The  UK  government  is  also  taking  steps  to  foster 
the development of small modular.  

low 

Projects in the planning phase could raise Great 
Britain’s  currently 
level  of  electricity 
low 
interconnection.  The  UK  currently  has  an 
interconnection  level of  about  6 %  of  installed 
generating  capacity  (24).  This  is  expected  to 
increase  to  8 %  by  2020,  still  below  the  target  of 
10 %.  The  Great  Britain  market  (i.e.  England, 
Wales  and  Scotland)  has 
levels  of 
interconnection  with  the  rest  of  Europe.  By 
contrast,  the  Northern  Irish  electricity  market  is 
fully  integrated  with  the  Republic  of  Ireland  (see 
the  Ireland  country  report).  New  rules  on  the 
Integrated Single Electricity Market are scheduled 
to enter into force in May 2018. This is expected to 
facilitate  the  transition  to  a  low-carbon  energy 
sector in a more competitive  market environment. 
Some  11  new  interconnectors  are  currently  in 
various planning phases since the UK undertook a 
policy  to  actively  promote  interconnection  and 
Ofgem,  the  energy  regulator,  launched  the  ‘cap 
and floor’ regulatory regime in 2014. Out of these, 

(24)  11  January  2017,  19:00  pm  from  ENTSO-E  Winter 

Outlook 2016/2017. 

41 

 
                                                           
                                                           
3.5. Sectoral policies 

nitrogen dioxide (40µg/m3) has been in force since 
2010, 37 out of the 43 air quality zones in the UK 
did  not  meet  this  air  quality  standard  in  2016 
(Defra,  2017).  Air  pollution  is  also  a  cause  of 
many  premature  deaths  in  the  UK  (EEA,  2017). 
Road  vehicles  contribute  about  80 %  of  NO2 
pollution at the roadside. Growth in the number of 
diesel cars has exacerbated this problem, as has the 
high  level  of  road  congestion  discussed  above.  In 
the  past,  the  relatively  favourable  treatment  of 
diesel 
the  Vehicle  Excise  Duty  system 
contributed  to  this.  Following  a  series  of  legal 
the  government  published  a  final 
challenges 
revised  air  quality  plan  in  July  2017.  Based  on 
these  measures  the  government  expects  37  of  the 
UK’s 43 zones to be compliant by 2021, with full 
compliance  achieved  only  in  2026.  A  wider  air 
quality  strategy  covering  a  broader  range  of 
pollutants  and  sources  has  been  announced  for 
2018. 

in 

Research, development and innovation 

low 

levels  of  R&D 

Protracted 
investment 
continue  to  hold  back  UK  productivity  growth 
(see  Section  3.4).  Over  the  past  decade,  R&D 
intensity  has  been  broadly  flat,  remaining  well 
below  the  EU  average.  In  2016,  R&D  investment 
accounted for 1.69 % of UK GDP, compared to an 
EU  average  of  2.03 %.  As  discussed  in  Section 
3.4,  there  are  significant  regional  differences  in 
R&D intensity.  

Private  R&D  has  slightly  increased  in  recent 
years,  but  remains  below  the  EU  average. 
Private R&D intensity has increased slightly since 
2012,  when  it  bottomed  at  1.02 %  of  GDP,  to 
reach  1.13 %  in  2016,  still  below  the  1.32 %  EU 
average. To  some  extent,  this  is linked  to  the  low 
weight of manufacturing in the UK economy (see 
Section 3.4), in particular high-tech manufacturing. 

Public  R&D  has  declined  since  2009,  which 
could  jeopardise  the  UK’s  world  class  science 
base.  UK  public  R&D  —  covering  both 
government  and  Higher  Education  expenditure  — 
fell  from  0.63 %  of  GDP  in  2009  to  0.52 %  in 
2016.  This  is  significantly  below  the  EU  average 
of  0.69 %  of  GDP.  This  protracted  low  level  of 
public  R&D  expenditure  could  negatively  affect 
the  quality  of  the  UK’s  scientific  production. 
However,  to  date,  UK  science  continues  to  be 
world-class,  supported  by  a  culture  of  evaluation. 

2005 
levels.  Projections  based  on  existing 
measures  indicate  that  emissions  from  non-ETS 
sectors  will  be  26 %  below  2005  levels  by  2020, 
over-achieving the 16 % target under Europe 2020. 
In  October  2017,  the  UK  government  published 
the  Clean  Growth  Strategy  (HM  Government, 
2017),  which  sets  out  a  set  of  policies  and 
proposals  to  deliver  increased  economic  growth 
and  decreased  emissions  throughout  the  next 
decade. 

The  UK  met  interim  targets  but  still  has  a 
challenge  to  meet  its  2020  renewable  energy 
target of 15 %. The share of renewable energy is 
estimated to have reached 9.3 % in 2016. This put 
the  UK  above  its  2015-2016  interim  indicative 
target  (7.47 %),  though  the  trajectory  to  reach  the 
2020 
remains  challenging.  There  are 
encouraging  levels  of  growth  in  the  renewable 
electricity  sector,  which  in  2016  reached  25 %  of 
electricity  generation  (HM  Government,  2017). 
Around  75 %  of  new  electricity  generation 
capacity  added  since  2010  uses  renewable  energy 
sources (BEIS, 2017b). 

target 

The  UK  should  continue  its  efforts  on  energy 
efficiency  to  meet  its  indicative  2020  targets. 
Between  2005  and  2016,  the  UK  achieved  a 
significant  decrease  in  the  levels  of  both  primary 
energy consumption (down by 18 %, to 182 Mtoe) 
and  final  energy  consumption  (down  by  12 %  to 
134 Mtoe).  However, 
the 
decreasing  trend  seems  to  have  stalled.  As  with 
other EU countries, this could be partially linked to 
the  economic  recovery,  which  implies  additional 
energy  efficiency  efforts  will  be  required  if  the 
energy consumption targets are to be met. 

recent  years 

in 

The UK is very active in the promotion of eco-
innovation.  However,  the  UK  ranked  11th  in  the 
EU  eco-innovation  rankings  scoreboard  for  2015 
(Eco-innovation  observatory  2015).  Multiple 
organisations foster systemic eco-innovation and a 
more circular economy. Particularly dynamic areas 
are  remanufacturing  and  new  business  models, 
recycling,  sustainable  use  of  natural  resources, 
ultra-low  emission  vehicles  and  carbon  abatement 
technologies. In the UK, access to capital  appears 
to  be  more  of  a  barrier  to  circular  economy 
projects than technical impediments. 

Air pollution continues to be a challenge in the 
UK.  Although  an  annual  EU  limit  value  for 

42 

 
3.5. Sectoral policies 

where 

The  CCS  attempts  to  favour  aggregation  of 
demand 
the 
professionalisation  of  procurement  officers  and 
support  administrations  in  achieving  value  for 
money through guidance and policy actions. 

possible, 

increase 

to  pay 

Small suppliers are encouraged to participate in 
public  procurement  procedures.  In  the  last  few 
years,  a  strong  emphasis  has  been  placed  on 
actions to make it easier for SMEs to access public 
procurement  procedures.  These  actions  include 
assessing suppliers after the award of the contract 
instead of doing so during the procedure; ensuring 
small  enterprises  and 
to 
prompt  payment 
encouraging  big 
smaller 
suppliers 
subcontractors  within  a  maximum  of  60  days; 
dividing contracts into smaller lots; and creating an 
ʻSME  Panelʼ  of  industry  representatives  giving 
policy  advice  and  recommendations  on  how  to 
improve  access  for  SMEs.  Despite  the  effort 
towards  greater  aggregation,  UK  authorities  have 
paid  attention  to  making  framework  agreements 
more  SME-friendly.  While 
review 
procedures  remain  costly,  in  particular  for  SMEs, 
the CCS has set up a ʻMystery Shopperʼ scheme to 
settle 
issues  during  procurement 
procedures  and  analyse  possible  irregularities  or 
inefficiencies. 

emerging 

judicial 

The  UK  lags  behind  other  EU  countries  in 
eGovernment.  This  is  particularly  the  case  with 
regard to take up of eGovernment services, online 
the  sophistication  of 
service  completion  and 
services:  availability  of  pre-filled  forms  is  very 
low (17 out of 100). By contrast, the UK performs 
relatively well in the use of open data. In February 
2017,  the  UK  announced  a  new  Government 
Transformation  strategy  for  2017-2020  (Cabinet 
Office,  2017).  Its  implementation  will  be  crucial 
for  improving  eGovernment  services  and  for 
encouraging higher usage. 

The  UK  produces  14.8 %  of  the  top  10 %  most 
cited 
highest 
proportion of any EU Member State. 

publications  worldwide, 

the 

itself 

The  government  has  committed 
to 
significantly increasing public R&D investment. 
In  the  2017  Autumn  Budget,  the  government 
pledged to increase public R&D spending by GBP 
2.3 billion (EUR 2.6 billion) in 2018-2019, and up 
to  GBP  12.5  billion  (EUR 14.3 billion)  by  2021-
2022.  This  increased  public  investment  is  part  of 
the  government’s  productivity 
(see 
Section  3.4)  and  is  intended  to  help  achieve  a 
target of raising the UK’s overall R&D investment 
to the level of the OECD average, currently 2.4 % 
of  GDP.  To  date,  UK-based  stakeholders  have 
received  EUR 4.2 billon  (GBP 3.7 billion)  from 
the  EU  Horizon  2020  Research  and  Innovation 
Framework Programme. 

strategy 

Improving  relatively  weak  science-business 
linkages  would  help  the  UK  to  capitalise  on  its 
scientific  excellence.  Existing  initiatives,  such  as 
the  Catapult  Centres  or  the  Higher  Education 
Innovation Fund, should be evaluated with a view 
to  refining  and  potentially  expanding  and/or 
complementing  them.  In  addition,  the  creation  of 
UK Research and Innovation — bringing together 
the  Research  Councils,  Innovate  UK,  science  and 
innovation  functions  of  the  Higher  Education 
Funding  Council  for  England,  and  the  Industry 
Strategy Challenge Fund  — can help improve the 
coherence of government policy. 

Public administration 

issues 

involving 

In  spite  of  recent 
large 
contractors, the UK public procurement system 
generally  functions  well  and  is  one  of  the  most 
efficient in the EU. This is due in part to the high 
degree of professionalism of civil servants dealing 
central 
with 
government  level  and  the possibilities  for  training 
and professional development provided to them. 

procurement 

procedures 

at 

regulatory 

Legal  and  regulatory  contracting  authorities 
perform  well  on 
compliance. 
the  Cabinet  Office  developed  a 
Recently 
comprehensive 
and 
‘Commercial 
competency  framework’  for  civil  servants.  A 
central government entity, the Crown Commercial 
Service (CCS), has brought together policy, advice 
and  direct  buying  as  a  central  procurement  body. 

skills 

43 

 
ANNEX A 

OVERVIEW TABLE 

Commitments 

2017 country-specific recommendations (CSRs) 

CSR 1: 

Pursue  a  substantial  fiscal  effort  in  2018-19  in  line 
with  the  requirements  of  the  preventive  arm  of  the 
Stability  and  Growth  Pact,  taking  into  account  the 
need  to  strengthen  the  ongoing  recovery  and  to 
ensure  the  sustainability  of  the  United  Kingdom’s 
public finances. 

Summary assessment (26) 

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

CSR 2: 

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

Take further steps to boost housing supply, including 
their 
to  planning 
through 
implementation. 

rules  and 

reforms 

Some  progress  on  boosting  housing  supply. 
The government is implementing a wide-range 
of  measures  to  boost  housing  supply  and 
announced  further  measures 
its  2017 
Autumn  Budget.  These  measures  have  likely 
contributed 
housing 
higher 
completions  in  recent  years.  However,  new 
housing  supply  remains  below  estimated 
to 
housing  need 
housebuilding remain. 

and  many  barriers 

annual 

in 

to 

CSR 3: 

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

Address  skills  mismatches  and  provide  for  skills 
progression,  including  by  continuing  to  strengthen 
the quality of apprenticeships and providing for other 

Some  progress 
in  addressing  skills  and 
apprenticeship  issues.  There  has  been  some 

(26)  The following categories are used to assess progress in implementing the 2017 country-specific recommendations (CSRs): 
No progress: The Member State has not credibly announced nor adopted any measures to address the CSR. This category covers a 
number  of  typical  situations,  to  be  interpreted  on  a  case-by-case  basis  taking  into  account  country-specific  conditions.  They 
include the following: 
 

no  legal,  administrative,  or  budgetary  measures  have  been  announced  in  the  national  reform  programme,  in  any  other 
official  communication  to  the  national  Parliament/relevant  parliamentary  committees  or  the  European  Commission,  
publicly (e.g. in a press statement or on the government's website);  
no non-legislative acts have been presented by the governing or legislative 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 to be taken (unless the CSR explicitly asks for orientations or exploratory actions). 
However, it has not proposed any clearly-specified measure(s) to address the CSR. 

 
 

Limited progress: The Member State has: 

 
 

 

announced certain measures but these address the CSR only to a limited extent; and/or 
presented legislative acts in the governing or legislative body but these have not been adopted yet and substantial further, 
non-legislative work is needed before the CSR is implemented;  
presented non-legislative acts, but has not followed these up with the implementation needed to address the CSR. 

 
 

Some progress: The Member State has adopted measures:  
that partly address the CSR; and/or  
that address the CSR, but a fair amount of work is still needed to address the CSR fully as only a few of the measures 
have  been  implemented.  For  instance,  a  measure  or  measures  have  been  adopted  by  the  national  Parliament  or  by 
ministerial decision, but no implementing decisions are in place. 

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

have been implemented. 

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

44 

 
 
                                                           
funded ‘Further Education’ progression routes. 

A. Overview Table 

progress in implementing this CSR. Quality in 
apprenticeships,  if  measured  by  the  level  at 
which an apprenticeship is taken, increased in 
2016-2017.  For  example,  there  has  been  an 
increase of 37.4 % in ‘higher’ apprenticeships, 
albeit from a very low base, and they still only 
represent  7.5 %  of  starts.  This  coincided with 
the  beginning  of  the  Apprenticeship  Levy. 
Other routes for those aged 16-19 will become 
available  via  new 
‘T-level’  vocational 
qualifications,  while  other  upskilling  and 
reskilling 
for  older  participants, 
whether  currently  working  or  not,  should 
become 
‘National 
Retraining  Scheme’  is  in  operation.  For  now 
both developments are at a very early stage. 

available  when 

routes 

the 

Europe 2020 (national targets and progress) 

Employment rate target: None 

R&D target: None 

77.5 %  of  the  population  aged  20-64  was 
employed in 2016. 

R&D  intensity  fell  marginally  to  1.69 %  in 
2016.  Public  R&D  intensity  was  0.52 %  and 
business R&D intensity 1.12 %. 

The  UK  is  below  the  EU  average  of  2.03 % 
for  R&D  intensity.  EU  average  public  R&D 
intensity  was  0.69 %  and  business  R&D 
intensity 1.32 %. 

National greenhouse gas (GHG) emissions target: 

2020 target: -16 % 

-16 %  in  2020  compared  to  2005  (in  sectors  not 
included in the EU emissions trading scheme) 

2020 renewable energy target: 15 % 

2020 Share of renewables in transport: 

45 

According  to  the  latest  national  projections 
and taking into account existing measures, the 
target  is  expected  to  be  achieved:  -26 %  in 
2020  compared  to 2005 (with  a  margin of 10 
percentage points). 

Non-ETS 2016 target: -17 % 

to  preliminary  estimates, 

the 
According 
change in non-ETS greenhouse gas emissions 
between  2005  and  2016  was  -22 %,  therefore 
the target is expected to be achieved. 

At  an  estimated  level  of  9.3 %  in  2016,  the 
UK is still some distance away from its 2020 
target  of  15 %,  even  though  it  is  above  its 
indicative national trajectory.  

With  an  estimated  4.9 %  share  of  renewable 

 
 
 
A. Overview Table 

energy sources in transport in 2016, the UK is 
almost  halfway  towards  the  binding  10 % 
target in transport to be achieved by 2020. The 
the 
UK's  slow  uptake  of  renewables 
transport  sector  has  been  driven  by  the 
restriction  in  the  use  of  biofuels  with  high 
indirect land-use change implications. 

in 

The UK is now 2.3 % above its 2020 primary 
energy  consumption  target  and  3.5 %  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  2.2 pps  reduction  over  a  five-year  period, 
from 13.4 % in 2012 to 11.2 % in 2016, which 
is below the EU average of 10.7 %. 

The tertiary attainment rate of 30-34 year olds 
reached  48.2 %  in  2016,  a  small  increase  on 
the  2015  rate  of  47.9 %. This  is  significantly 
above the EU average of 39.1 %. 

The 
‘at-risk-of-poverty-or-social-exclusion 
rate’ stood at 22.2 % in 2016, a decrease from 
the 2015 figure of 23.5 %. 

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: None 

Tertiary education target: None 

Target  for  reducing  the  number  of  people  at  risk  of 
poverty or social exclusion: None 

46 

 
ANNEX B 

MACROECONOMIC IMBALANCE PROCEDURE SCOREBOARD 

Table B.1: 

The MIP scoreboard for United Kingdom (AMR 2018) 

(1) This table provides data as published under the Alert Mechanism Report 2018, which reports data as of 24 Oct 2017. 
Please note that figures reported in this table may therefore differ from more recent data elsewhere in this document. 
(2) Figures highlighted are those falling outside the threshold established in the European Commission's Alert Mechanism 
Report. 
Source: European Commission 2017, Statistical Annex to the Alert Mechanism Report 2018, SWD(2017) 661. 

47 

Thresholds201120122013201420152016Current account balance, % of GDP 3 year average-4%/6%-3.4 -3.5 -4.1 -5.0 -5.4 -5.5 Net international investment position% of GDP-35%-11.7 -29.0 -18.5 -22.3 -18.4 -1.1 Real effective exchange rate - 42 trading partners, HICP deflator3 year % change±5% (EA) ±11% (Non-EA)-8.0 5.9 3.4 10.1 10.8 0.2 Export market share - % of world exports5 year % change-6%-25.7 -20.9 -12.0 -8.9 2.2 -0.1 Nominal unit labour cost index (2010=100)3 year % change9% (EA) 12% (Non-EA)7.1 3.2 3.4 3.1 2.2 3.1 House price index (2015=100), deflated 1 year % change6%-5.0 -1.7 0.3 6.0 5.3 5.5 Private sector credit flow, consolidated% of GDP14%1.7 1.8 6.9 6.8 3.5 8.2 Private sector debt, consolidated% of GDP133%179.6 179.6 173.7 166.8 164.7 168.1 General government gross debt% of GDP60%81.3 84.5 85.6 87.4 88.2 88.3 Unemployment rate3 year average10%7.8 7.9 7.8 7.2 6.3 5.4 Total financial sector liabilities, non-consolidated1 year % change16.5%10.4 -3.6 -7.7 4.7 -8.8 11.6 Activity rate - % of total population aged 15-643 year change in pp-0.2 pp-0.3b0.4 1.0 1.2 0.8 0.9 Long-term unemployment rate - % of active population aged 15-743 year change in pp0.5 pp1.3 0.8 0.2 -0.5 -1.1 -1.4 Youth unemployment rate - % of active population aged 15-243 year change in pp2 pp6.3 2.1 0.8 -4.3 -6.6 -7.7 External imbalances and competitivenessInternal imbalancesEmployment indicators 
 
 
 
 
 
ANNEX C  

STANDARD TABLES 

Table C.1: 

Financial market indicators 

(1) Latest data Q3 2017. Includes not only banks but all monetary financial institutions excluding central banks 
(2) Latest data Q2 2017. 
(3) As per ECB definition of gross non-performing debt instruments 
(4) Quarterly values are not annualised 
* Measured in basis points. 
Sources: European Commission, World Bank, Eurostat, ECB 

48 

201220132014201520162017Total assets of the banking sector (% of GDP)(1)459.9431.0394.8359.5371.5393.3Share of assets of the five largest banks (% of total assets)42.843.738.937.035.5-Foreign ownership of banking system (% of total assets)(2)28.927.937.137.238.839.6Financial soundness indicators:2)              - non-performing loans (% of total loans)(3)2.01.82.8-1.61.4              - capital adequacy ratio (%)17.119.3-19.520.820.5              - return on equity (%)(4)1.92.23.83.22.12.7Bank loans to the private sector (year-on-year % change)(1)2.9-4.71.97.6-9.12.7Lending for house purchase (year-on-year % change)(1)4.4-0.89.79.6-10.81.7Loan to deposit ratio(1)102.699.396.196.894.494.1Central Bank liquidity as % of liabilities------Private debt (% of GDP)179.6173.7166.8164.7168.1-Gross external debt (% of GDP)(2) - public26.325.726.327.929.929.1    - private124.0121.7126.0102.495.2100.8Long-term interest rate spread versus Bund (basis points)*24.945.797.7129.8113.180.8Credit default swap spreads for sovereign securities (5-year)*51.234.921.818.432.720.6 
 
 
 
 
 
C. Standard Tables 

Table C.2: 

Headline Social Scoreboard indicators 

† The Social Scoreboard includes 14 headline indicators, of which 12 are currently used to compare Member States 
performance. The indicators "participants in active labour market policies per 100 persons wanting to work" and 
"compensation of employees per hour worked (in EUR)" are not used due to technical concerns by Member States. Possible 
alternatives will be discussed in the relevant Committees. 
(1) People at risk of poverty or social exclusion (AROPE): individuals who are at risk of poverty (AROP) and/or suffering from 
severe material deprivation (SMD) and/or living in households with zero or very low work intensity (LWI).       
(2) Unemployed persons are all those who were not employed but had actively sought work and were ready to begin 
working immediately or within two weeks.       
(3) Gross disposable household income is defined in unadjusted terms, according to the draft Joint Employment Report 2018.       
(4) Reduction in percentage of the risk of poverty rate, due to social transfers (calculated comparing at-risk-of poverty rates 
before social transfers with those after transfers; pensions are not considered as social transfers in the calculation).       
(5)  Average of first three quarters of 2017, except for the indicator "individual who have basic or above basic digital skills" 
(annual data). Data for unemployment rate is seasonally adjusted  
Source: Eurostat 

49 

201220132014201520162017 5Equal opportunities and access to the labour marketEarly leavers from education and training (% of population aged 18-24)13.412.411.810.811.2:Gender employment gap (pps)11.611.111.311.211.010.3Income inequality, measured as quintile share ratio (S80/S20)5.04.65.15.25.1:At-risk-of-poverty or social exclusion rate1 (AROPE)24.124.824.123.522.2:Young people neither in employment nor in education and training (% of population aged 15-24)13.913.211.911.110.9:Dynamic labour markets and fair working conditions†Employment rate (20-64 years)74.174.876.276.877.578.1Unemployment rate2 (15-74 years)7.97.56.15.34.84.4Gross disposable income of households in real terms per capita3 (Index 2008=100) ::99.9102.4102.9:Public support / Social protection and inclusionImpact of social transfers (excluding pensions) on poverty reduction446.147.242.943.343.4:Children aged less than 3 years in formal childcare27.030.028.930.428.4:Self-reported unmet need for medical care1.41.62.12.81.0:Individuals who have basic or above basic overall digital skills (% of population aged 16-74):::67.069.071.0 
 
 
 
 
C. Standard Tables 

Table C.3: 

Labour market, education and social indicators 

* Non-scoreboard indicator       
(1) Long-term unemployed are people who have been unemployed for at least 12 months.       
(2) Difference between the average gross hourly earnings of male paid employees and of female paid employees as a 
percentage of average gross hourly earnings of male paid employees. It is defined as "unadjusted", as it does not correct for 
the distribution of individual characteristics (and thus gives an overall picture of gender inequalities in terms of pay). All 
employees working in firms with ten or more employees, without restrictions for age and hours worked, are included.       
(3) PISA (OECD) results for low achievement in mathematics for 15 year-olds.       
(4) Impact of socio-economic and cultural status on PISA (OECD) scores. Values for 2012 and 2015 refer respectively to 
mathematics and science.. 
(5) Average of first three quarters of 2017. Data for youth unemployment rate is seasonally adjusted.  
Source: Eurostat, OECD 

50 

Labour market indicators201220132014201520162017 5Activity rate (15-64)76.176.476.776.977.3:Employment in current job by durationFrom 0 to 11 months13.213.514.615.315.0:From 12 to 23 months9.79.910.311.011.6:From 24 to 59 months19.018.018.118.219.5:60 months or over57.057.556.154.753.1:Employment growth* (% change from previous year)1.11.22.41.71.41.1Employment rate of women(% of female population aged 20-64)68.469.370.671.372.173.0Employment rate of men (% of male population aged 20-64)80.080.481.982.583.183.3Employment rate of older workers* (% of population aged 55-64)58.159.861.062.263.463.9Part-time employment* (% of total employment, aged 15-64)25.925.625.325.225.224.9Fixed-term employment* (% of employees with a fixed term contract, aged 15-64)6.26.16.36.16.05.7Transition rate from temporary to permanent employment(3-year average)58.555.457.758.6::Long-term unemployment rate1 (% of labour force)2.72.72.21.61.31.2Youth unemployment rate (% active population aged 15-24)21.220.717.014.613.012.1Gender gap in part-time employment30.629.930.029.729.529.1Gender pay gap2 (in undadjusted form)21.220.520.920.8::Education and training indicators201220132014201520162017Adult participation in learning(% of people aged 25-64 participating in education and  training)16.316.616.315.714.4:Underachievement in education321.8::21.9::Tertiary educational attainment (% of population aged 30-34 having successfully completed tertiary education)46.947.447.747.948.2:Variation in performance explained by students' socio-economic status412.5::10.5:: 
 
 
 
 
C. Standard Tables 

Table C.4: 

Social inclusion and health indicators 

*  Non-scoreboard indicator 
(1) At-risk-of-poverty rate (AROP): proportion of people with an equivalised disposable income below 60 % of the national 
equivalised median income.  
(2) 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. 
(3) Percentage of total population living in overcrowded dwellings and exhibiting housing deprivation. 
(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) Ratio of the median individual gross pensions of people aged 65-74 relative to the median individual gross earnings of 
people aged 50-59. 
(6) Fixed broadband take up (33%), mobile broadband take up (22%), speed (33%) and affordability (11%), from the Digital 
Scoreboard.Source: Eurostat, OECD 

51 

201220132014201520162017Expenditure on social protection benefits* (% of GDP)Sickness/healthcare8.78.68.49.9::Disability1.81.61.61.7::Old age and survivors12.212.011.711.7::Family/children3.12.92.82.7::Unemployment0.70.60.40.4::Housing1.51.41.41.3::Social exclusion n.e.c.0.80.70.70.6::Total28.727.927.128.4::of which: means-tested benefits4.13.83.53.4::General government expenditure by function (% of GDP, COFOG)Social protection17.316.916.516.4::Health7.47.57.67.6::Education5.75.45.45.1::Out-of-pocket expenditure on healthcare (% of total health expenditure):14.814.714.8::Children at risk of poverty or social exclusion (% of people aged 0-17)*31.232.631.230.327.2:At-risk-of-poverty  rate1 (% of total population)16.015.916.816.615.9:In-work at-risk-of-poverty rate (% of persons employed)9.08.48.78.18.6:Severe material deprivation rate2  (% of total population)7.88.37.46.15.2:Severe housing deprivation rate3, by tenure statusOwner, with mortgage or loan0.81.21.10.50.6:Tenant, rent at market price4.25.04.54.85.2:Proportion of people living in low work intensity households4 (% of people aged 0-59)13.013.212.311.911.3:Poverty thresholds, expressed in national currency at constant prices*79777920805481278304:Healthy life years (at the age of 65)Females10.510.710.610.4::Males10.510.69.710.2::Aggregate replacement ratio for pensions5 (at the age of 65)0.50.50.50.50.5:Connectivity dimension of the Digital Economy and Society Inedex (DESI)6::65.769.372.174.2GINI coefficient before taxes and transfers*55.054.353.655.353.6:GINI coefficient after taxes and transfers*31.330.231.632.431.5: 
 
 
 
 
 
C. Standard Tables 

Table C.5: 

Product market performance and policy indicators 

(1) The methodologies, including the assumptions, for this indicator are shown in detail here: 
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 codified 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 don't know.       
(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 here: http://www.oecd.org/competition/reform/indicatorsofproductmarketregulationhomepage.htm       
(6) Aggregate OECD indicators of regulation in energy, transport and communications (ETCR).       
Source: European Commission, World Bank, OECD, SAFE 

52 

Performance Indicators2010201120122013201420152016Labour productivity (real, per person employed, year-on-year % change)Labour productivity in Industry3.40-1.75-3.95-1.881.981.230.66Labour productivity in Construction13.842.62-7.01-0.613.234.06-2.00Labour productivity in Market Services2.190.37-0.280.420.791.380.24Unit labour costs (ULC) (whole economy, year-on-year % change)ULC in Industry-0.553.394.505.46-1.621.383.41ULC in Construction-7.480.959.471.74-6.45-3.260.90ULC in Market Services0.56-0.82-0.102.97-0.490.520.97Business Environment2010201120122013201420152016Time needed to enforce contracts(1) (days)399.0399.0437.0437.0437.0437.0437.0Time needed to start a business(1) (days)11.511.511.511.56.04.54.5Outcome of applications by SMEs for bank loans(2)na1.12na0.760.570.350.33Research and innovation2010201120122013201420152016R&D intensity1.671.671.601.651.671.671.69General government expenditure on education as % of GDP6.506.005.705.405.405.10naPersons with tertiary education and/or employed in science and technology as % of total employment45515152535354Population having completed tertiary education(3)32333536373838Young people with upper secondary level education(4)81808283848685Trade balance of high technology products as % of GDP-1.22-0.65-0.88-0.96-1.14-1.12naProduct and service markets and competition200320082013OECD product market regulation (PMR)(5), overall1.101.211.08OECD PMR5, retail2.152.181.79OECD PMR5, professional services0.960.820.82OECD PMR5, network industries(6)1.300.980.79 
 
 
 
 
C. Standard Tables 

Table C.6:  Green growth 

All macro intensity indicators are expressed as a ratio of a physical quantity to GDP (in 2010 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 % of total value added for the economy 
Industry energy intensity: final energy consumption of industry (in kgoe) divided by gross value added of industry (in 2010 EUR)  
Real unit energy costs for manufacturing industry excluding refining : real costs as % 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 GHG 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 2010 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 covering natural gas, total petrol products, nuclear heat, renewable 
energies and solid fuels 
* European Commission and European Environment Agency 
Source: European Commission, European Environment Agency 

53 

Green growth performance201120122013201420152016MacroeconomicEnergy intensity kgoe / €0.110.110.100.100.090.09Carbon intensity kg / €0.300.310.290.260.25-Resource intensity (reciprocal of resource productivity)kg / €0.310.300.290.300.280.27Waste intensity kg / €-0.12-0.13--Energy balance of trade % GDP-1.0-1.2-1.1-0.8-0.6-0.5Weighting of energy in HICP%8.7010.208.808.007.606.70Difference between energy price change and inflation %5.45.24.62.9-3.3-3.7Real unit of energy cost% of value added9.910.010.010.0--Ratio of environmental taxes to labour taxesratio0.180.190.190.200.20-Environmental taxes% GDP2.52.52.52.42.52.4Sectoral Industry energy intensity kgoe / € 0.110.110.110.110.11-Real unit energy cost for manufacturing industry excl. refining% of value added10.911.111.110.9--Share of energy-intensive industries in the economy% GDP7.196.776.566.366.36-Electricity prices for medium-sized industrial users€ / kWh0.100.120.120.130.150.13Gas prices for medium-sized industrial users€ / kWh0.030.030.040.040.040.03Public R&D for energy % GDP0.010.010.010.010.010.01Public R&D for environmental protection% GDP0.020.020.020.010.010.01Municipal waste recycling rate%42.042.643.343.743.5-Share of GHG emissions covered by ETS*%39.239.839.437.934.831.1Transport energy intensitykgoe / €0.710.710.690.670.66-Transport carbon intensitykg / €1.601.601.571.501.52-Security of energy supplyEnergy import dependency%36.642.947.146.137.335.3Aggregated supplier concentration indexHHI4.95.25.86.44.0-Diversification of energy mixHHI0.280.270.260.270.270.30 
 
 
 
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58