COMMISSION STAFF WORKING DOCUMENT Country Report United Kingdom 2019 Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE EUROPEAN COUNCIL, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP 2019 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: 2019-02-27
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, 27.2.2019  SWD(2019) 1027 final  COMMISSION STAFF WORKING DOCUMENT Country Report United Kingdom 2019 Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE EUROPEAN COUNCIL, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP 2019 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(2019) 150 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.   Competitiveness reforms and investment 

Annex A: Overview Table 

Annex B: Commission Debt Sustainability Analysis and fiscal risks 

Annex C: Standard Tables 

References 

LIST OF TABLES 

Table 1.1: 

Key economic and financial indicators — United Kingdom 

Table 2.1: 

Assessment of 2018 CSR implementation 

Table 3.1.1:  Composition of tax revenues 2017 

Table 3.2.1: 

Financial soundness indicators, all banks in UK 

Table C.1: 

Financial market indicators 

Table C.2: 

Headline Social Scoreboard indicators 

Table C.3: 

Labour market and education indicators 

Table C.5: 

Product market performance and policy indicators 

Table C.6: 

Green growth 

LIST OF GRAPHS 

Graph 1.1: 

Annual real GDP growth 

Graph 1.2: 

Private consumption and wages 

Graph 1.3: 

Real households saving ratio 

Graph 1.4: 

Potential GDP growth 

Graph 1.5: 

Inflation and the nominal effective exchange rate 

1 

3 

6 

13 

17 

17 

20 

24 

32 

42 

45 

46 

51 

12 

15 

17 

20 

46 

47 

48 

49 

50 

6 

6 

7 

7 

7 

 
 
 
 
Graph 1.6: 

Unemployment rate and potential additional labour force 

Graph 1.7: 

Current account balance 

Graph 1.8: 

Consumer credit growth 

Graph 2.1:  Overall multiannual implementation of 2011-2018 CSRs to date 

Graph 3.1.1:  Public debt as % of GDP 

Graph 3.2.1:  Real house price growth 

Graph 3.2.2:  Quarterly housing starts and completions (England) (2003-2018) 

Graph 3.3.1: 

Inactive population aged 20-64 by reason, in percentage, 2017 

Graph 3.3.2:  Relative dispersion of employment rates by education level, 2010, 2014 and 2017 

Graph 3.3.3:  At risk of poverty or social exclusion rate, age groups 

Graph 3.4.1: 

Trends in UK productivity and real wages 

Graph 3.4.2:  Productivity levels and change in employment for aggregated sectors 2007-2016 

Graph 3.4.3:  Productivity differences within sectors. Ratio between labour productivity of the top 

10 % and the median of the firm distribution 

Graph 3.4.4:  G7 investment shares, quarterly data 

Graph 3.4.5:  Equipment and dwellings investment in the UK and the EU-27 (% of GDP) 

Graph 3.4.6:  Projected electricity generation by source 

Graph 3.4.7:  Productivity levels of top, average and bottom NUTS2 Region in the UK 2004-2016 

LIST OF BOXES 

Box 2.1: EU funds help overcome structural challenges and foster development in the UK 

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

Box 3.4.1: Investment challenges and reforms in the UK 

8 

9 

10 

13 

18 

21 

22 

26 

26 

28 

32 

32 

33 

35 

35 

38 

40 

16 

25 

41 

2 

 
 
 
 
 
EXECUTIVE SUMMARY 

is  high  and 

The  United  Kingdom  could  boost  its  low, 
stagnant  productivity  by  raising  investment. 
Employment 
the  UK  business 
environment  has  many  positive  aspects,  including 
relatively  free  and  efficient  product,  labour  and 
capital markets. However, labour productivity and 
investment  are  low.  The  UK  faces  a  broad-based 
need  to  invest  more  in  equipment,  infrastructure 
and  housing,  at  the  same  time  as  bringing  down 
project  costs.  There  are  weaknesses  in  basic  and 
technical skills. Tight regulation of the land market 
can also prevent capital and labour from moving to 
where it is most needed (1). 

Given  the  uncertainty  over  the  terms  of  the  UK’s 
future  relations  with  the  EU,  this  report  does  not 
speculate on the possible economic implications of 
different  scenarios.  Given  the  ongoing  ratification 
process  of  the  Withdrawal  Agreement  in  the  EU 
and  the  UK,  projections  for  2019  and  2020  are 
based  on  a  purely  technical  assumption  of  status 
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. 

The  slowdown  in  the  UK’s  economic  growth  is 
set  to  continue.  Annual  growth  slowed  from  a 
post-crisis peak of 2.9 % in 2014 to 1.8 % in 2017. 
Growth  was  relatively  subdued  through  2018, 
and 1.4 %  for  the  year.  Private  consumption  was 
constrained by weak real disposable income and an 
already-low  household  saving  ratio.  Business 
investment growth also remains weak, due largely 
to uncertainty related to the UK’s withdrawal from 
the  EU.  Net  exports  contributed  negatively  to 
growth  as  the  effect  of  the  depreciation  of  the 
pound  in  2016  faded  and  external  markets  grew 
more  slowly.  On  the  basis  of  the  purely  technical 
assumption,  the  UK’s  GDP  growth  is  expected  to 
remain weak, at 1.3 % in both 2019 and 2020. 

Consumer  price 
inflation  eased  gradually, 
to 2.1 % in December 2018. The steady fall from 
a peak of 3.1 % in November 2017 largely reflects 

(1)  This  report  assesses  the  UK’s  economy  in  light  of  the 
European Commission’s Annual Growth Survey published 
on 21 November 2018. 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. 

the fading impact of sterling depreciation. Inflation 
is expected to be 1.8 % in 2019 and 2.0 % in 2020. 

high 

(78.6 % 

in  Q3-2018) 

The  labour  market  remains  resilient,  despite 
slower GDP growth. The employment rate is at a 
and 
record 
unemployment  has 
to  4.1 % 
fallen 
in Q3-2018.  Wage  growth  picked  up  in  2018  but 
remains  relatively  subdued  given  the  tight  labour 
market.  Growth 
in  average  nominal  weekly 
earnings  was  3.4 %  in  November 2018,  a  1.1 % 
increase in real terms. 

further, 

trade  and 

The current account deficit grew in 2018, due to 
worsening 
It 
was 5.0 %  of  GDP  in  Q3-2018,  as  compared 
with 3.3 %  for  2017.  The  increase  was  driven  by 
the  trade  deficit  (1.6 %  of  GDP  in  Q3-2018)  and 
the primary income deficit (2.1 % of GDP). 

income  balances. 

Household debt remains high, having stabilised 
at  86 %  of  GDP  in  2017.  Growth  in  lending  to 
households continued to ease in 2018, in a context 
of subdued house price growth and housing market 
activity.  The  banking  system  has  continued  to 
improve  its  capital  position.  UK  banks  became 
more profitable in 2017 and 2018. 

the 

sharply 

The  UK  needs  to  address  shortfalls  in  its 
investment  in  both  physical  capital  and  people 
to  deliver  inclusive,  long-term  growth.  It  has 
long  been  an  outlier  among  advanced  economies 
for its low investment rate. UK investment also fell 
particularly 
financial  crisis. 
in 
Shortfalls  in  both  physical  and  human  capital 
investment contribute to weak productivity. On the 
physical  capital  side,  the  UK  needs  to  deliver  a 
in  research  and 
investment 
higher 
innovation,  equipment  and  house  building,  and  to 
modernise  and  expand  infrastructure  networks 
while  bringing  down  project  costs.  On  the  skills 
improve  the 
side,  the  main  challenge 
effectiveness of education and training systems in 
areas such as basic and technical skills,  where the 
UK performs comparatively poorly. 

level  of 

is  to 

Overall, the UK has  made some  (2) progress in 
addressing 
country-specific 
2018 
the 
recommendations.  

(2)  Information  on  the  level  of  progress  and  actions  taken  to 
address  the  policy  advice  in  each  respective  subpart  of  a 

3 

 
 
                                                           
                                                           
There  has  been  some  progress  in  the  following 
areas: 

  Housing 

increased  significantly 

investment.  Annual  net  housing 
supply  has 
from 
post-crisis  lows.  However,  the  recovery  in 
house  building  has  lost  momentum  since 
mid-2017 and it is now flattening off at a level 
below the estimated growth in demand. Many 
obstacles  to  higher  house  building  remain, 
including  extensive  ‘no-build’  zones.  Real 
house  prices  are  high,  but  have  stabilised  in 
the  context  of  economic  uncertainty.  The 
government has recently extended and revised 
a  number  of  housing  policies, 
including 
updating  spatial  planning  rules.  It  is  now 
easier  for  local  authorities  to  borrow  in  order 
to  build  public  housing,  but  wholly  new 
initiatives have otherwise been limited. 

the 

prospects.  However, 

  Skills and career progression. The government 
has  taken  various  steps  to  improve  workers’ 
career 
high 
proportion  of  low-skilled  employees  is  still 
weighing  on  productivity.  In  parallel  with 
ongoing  reforms  to  work-based  training,  the 
government 
15 
classroom-based  ‘T-level’  qualifications,  but 
only three of these will be available by 2020. 
An apprenticeship levy has been introduced to 
provide  funding  for  employers,  but  uptake 
remains low. Overall registrations for the new 
twin-track system are far fewer than expected.  

introduce 

plans 

to 

Regarding progress in reaching the national targets 
under  the  Europe  2020  strategy,  the  UK  is 
performing  well  on  greenhouse  gas  emissions.  It 
has  made  progress  on  renewable  energy  and 
energy  efficiency  but  additional  effort  is  required 
if it is to achieve the 2020 targets. 

indicators  of 

The  UK  performs  relatively  well  on  a  number 
of 
the  Social  Scoreboard 
supporting the European Pillar of Social Rights, 
but  some  challenges  remain.  A  high  percentage 
of  people  are  in  work  or  training,  jobs  are  being 
created, and youth and long-term unemployment is 
low, but there is persistent underemployment, with 
pay and career progression remaining difficult  for 
some.  Although  social  transfers  are  relatively 

country-specific  recommendation 
overview table in the Annex. 

is  presented 

in 

the 

Executive summary 

efficient in reducing poverty, employment creation 
is  not  enough  to  reduce  in-work  poverty.  Child 
poverty has also risen in the last four to five years 
and is predicted to rise further.  

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

in 

  High general government debt is a potential 
source  of  vulnerability.  The  fiscal  deficit 
in  2017-2018,  down 
was 2 %  of  GDP 
General 
2016-2017. 
from 2.4 % 
government debt has started to fall, to 85.7 % 
of  GDP  in  2017-2018,  but  it  is  projected  to 
remain above 80 % in 2020-2021. In the long 
term,  a  projected  increase  in  spending  on 
public  pensions,  health  and  care  in  the  UK 
poses risks to fiscal sustainability. 

  The  availability  and  affordability  of 
housing  remains  a  major  challenge.  House 
prices  and  rents  remain  high,  especially  in 
areas  of  high  demand,  and  there  are  signs  of 
fewer  young 
overvaluation.  Significantly 
adults  now  own  their  own  homes  and  this 
contributes to inequality between generations. 
The amount and location of land available for 
new  housing  is  limited  by  tight  regulation  of 
the land market, particularly around big towns 
and cities. This has prevented housing supply 
from  responding  adequately 
in 
demand,  and  inflated  the  price  of  building 
land  and  existing  houses.  The  government 
recognises the problem and is implementing a 
range  of  measures  to  boost  housing  supply, 
but  house  building  remains  below  what  is 
required to meet estimated demand. 

to  shifts 

conditions, 

contractual 

It is easy for  most people to find work, but 
some  find  it  hard  to  progress.  Employment 
is  high,  but  challenges  persist  in  the  form  of 
low-quality 
significant  underemployment, 
jobs,  poor 
and 
disadvantages  for  women  and  people  with 
zero-hour 
disabilities.  The 
contracts  and  other  forms  of  potentially 
precarious  work  is  a  cause  for  concern.  The 
extent  to  which  the  Good  Work  Plan  (issued 
in  December  2018)  will  address  this  remains 
to  be  seen.  Career  progression  remains 
difficult  for  many,  with  people  turning  to 

increase 

in 

 

4 

 
 
                                                                                   
second  jobs  and  extra  hours  to  make  ends 
meet.  There  are  significant  skills  shortages, 
while  many  workers  are  low-skilled.  Various 
initiatives  are  being  taken  to  improve  the 
quality  of  work  and  workers’  chances  of 
career  progression, 
the 
Industrial  Strategy  and  in-work  upskilling 
measures. 

including 

through 

  There 

are 

significant  poverty-related 
challenges.  The  proportion  of  people  with 
disabilities who are at risk of poverty or social 
exclusion  is  higher  than  the  EU  average.  The 
gap  in  employment  rates  between  those  with 
and without disabilities is much wider than the 
EU  average.  This  is  partly  because  many  of 
the former leave the school system early. The 
Disability  Employment  Strategy  and 
the 
‘Improving  Lives:  the  future  of  work,  health 
and  disability’  strategy  are  designed  to  tackle 
these  issues.  Child  poverty  is  high  and  it  is 
projected to rise. Rates of in-work poverty are 
also  up,  particularly  for  parents.  On  the  other 
hand,  the  proportion  of  pensioners  in  poverty 
has halved over the last two decades, from one 
in  three  to  one  in  six.  Homelessness,  in 
particular  among  children,  has 
increased 
considerably and is predicted to rise further. 

  Productivity was already relatively low and 
it  has  stagnated  in  the  past  decade.  Labour 
productivity  is  significantly  lower  in  the  UK 
than in other developed economies. Output per 
hour has barely risen since before the financial 
crisis  and  new  jobs  have  been  mainly  in 
low-productivity  sectors.  This  appears  to  be 
linked  to  deep-rooted  policy  issues.  The  UK 
advanced 
has 
economies  for  its  low  rate  of  investment. 
There 
to  raise  productivity  by 
addressing broad-based problems such as low 
investment  in  equipment,  infrastructure  and 
R&D,  and  gaps  in  (especially  basic  and 
technical) skills. 

stood  out 

is  scope 

among 

long 

Executive summary 

  Major  investment  is  needed  to  modernise 
and expand infrastructure networks. Use of 
the  UK’s  road,  rail  and  aviation  networks  is 
reaching  capacity  and  the  country  needs  to 
deliver  new  and  greener  energy  generation 
capacity.  UK  infrastructure  development  has 
tended to be costly and slow. After decades of 
public  under-investment,  the  government  is 
starting  to  deal  with  the  infrastructure  deficit. 
In  July  2018,  the  National  Infrastructure 
Commission 
a  wide-ranging 
long-term  assessment  of  infrastructure  needs 
to 2050.  It  is  likely  to  be  particularly  hard  to 
secure  all  the  outside  funding  required  in  the 
government’s  projections,  and  to  do  so  cost 
effectively. 

published 

5 

 
 
 
1.  ECONOMIC SITUATION AND OUTLOOK 

Graph 1.2: 

Private consumption and wages 

GDP growth and its composition 

The  pace  of  economic  growth  in  the  UK  has 
continued  to  slow  from  its  peak  in  2014.  It 
slowed  from  its  post  crisis  peak  of  2.9 %  in  2014 
to 1.8 % in 2017 and 1.4 % in 2018 (Graph 1.1). 

Graph 1.1:  Annual real GDP growth 

Source: Office for National Statistics & European Commission 

continued 

consumption 

Private 
to  grow 
modestly  in  2018,  averaging  0.4 %  quarter-on-
quarter,  marginally  above  the  2017  average  rate. 
Despite  an  easing  in  inflation  and  a  modest 
increase  in  nominal  wage  growth  in  2018,  the 
squeeze  on  real  disposable  incomes  continued  to 
constrain  private  consumption  growth.  Through 
2018 nominal wage growth accelerated moderately 
above  the  rate  of  consumer  price  inflation  (Graph 
1.2), resulting in positive real wage growth. 

Source: Office for National Statistics 

The  household  saving  ratio  is  at  near  historic 
lows,  limiting  the  scope  for  further  private 
consumption growth (Graph 1.3). The cash-basis 
saving ratio (3) was negative in the third quarter of 
2018  and  close  to  zero  for  the  preceding  four 
quarters,  indicating  that  households  have  been 
spending  almost  all  of  their  gross  disposable 
income. Surveys suggest that savings intentions of 
consumers  are  high,  reflecting  weak  overall 
consumer  confidence.  It  is  therefore  assumed  that 
private  consumption  growth  will  remain  weak  in 
2019 and 2020 as households take the opportunity 
of rising real wage growth to maintain savings. 

Business investment growth also remains weak, 
largely  due  to  uncertainty  surrounding  the 
the  EU.  Business 
from 
UK’s  withdrawal 
investment  fell  for  four  consecutive  quarters  to 
2018-Q4,  by  a  total  of  3.7 %,  the  first  such 
persistent  fall  since  2009.  As  a  result,  total 
business investment was 0.9 % lower in 2018 than 
2017.  Various  business  surveys  indicate  that  this 
subdued  performance  is  largely  due  to  ongoing 
uncertainty  over 
trading 
relationship  with  the  EU.  Business  investment 
growth is projected to rebound slightly in 2019 but 
to remain relatively subdued following a prolonged 
period of heightened uncertainty. 

the  UK’s 

future 

(3)  This  removes  imputed  transactions  resulting  in  a  measure 
of  gross  saving  that  reflects  household  saving  (excluding 
pension contributions) in the respective quarter or year. 

6 

-6-5-4-3-2-1012345030405060708091011121314151617181920% y/yPrivate consumptionPublic consumptionInvestmentInventoriesNet exportsreal GDP growthfore-cast-6-4-2024603040506070809101112131415161718% y/yNominal wagesInflationPrivate consumption 
 
 
 
 
                                                           
1. Economic situation and outlook 

Graph 1.3: 

Real households saving ratio 

crisis  has  been  due  to  growth  in  the  labour  force 
and employment. 

Graph 1.4: 

Potential GDP growth 

Source: Office for National Statistics 

The contribution of net exports to GDP growth 
deteriorated  significantly  in  2018.  Net  trade 
made  a  negative  contribution  (-0.2 pps)  in  2018. 
Moderating external demand, sector-specific issues 
resulting  in  lower  car  exports,  and  heightened 
uncertainty  over  the  UK’s  future  trading  relations 
with  the  EU27  led  to  a  large  decrease  in  goods 
export  growth.  Over  the  forecast  period,  the  net 
trade contribution to growth is projected to remain 
weak, in line with softer external demand. 

UK GDP growth is expected to remain subdued 
in  2019  and  2020.  Given  the  ongoing  ratification 
process  of  the  Withdrawal  Agreement  in  the  EU 
and  the  UK,  projections  for  2019  and  2020  are 
based  on  a  purely  technical  assumption  of  status 
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.  On  that  basis, 
GDP growth is expected to remain  weak at 1.3 % 
in both 2019 and 2020.  

Potential growth 

Weak  productivity  growth  continues  to  weigh 
on potential GDP growth. Potential GDP growth 
has  remained  relatively  subdued  compared  to  the 
pre-crisis  period  (Graph  1.4).  This  is  in  line  with 
the  stagnation  of  labour  productivity  since  the 
economic crisis discussed in Section 3.4. While the 
contribution  from  total  factor  productivity  (TFP) 
increased slightly  from 2014 to 2017, a  large  part 
of the  modest increase in potential GDP since the 

Source: European Commission 

Inflation 

Consumer  price  inflation  has  eased  gradually 
from  its  peak  of  3.1 %  in  November  2017  to 
2.1 % in December 2018 (Graph 1.5). This easing 
largely reflects the fact that the inflationary impact 
of  the  2016  depreciation  of  sterling  has  mostly 
faded.  As  the  impact  of  sterling’s  depreciation  on 
consumer  prices  unwinds 
is 
expected  to  ease  to  1.8 %  in  2019  and  recover 
slightly to 2.0 % in 2020. 

inflation 

fully, 

Graph 1.5: 

Inflation and the nominal effective exchange 
rate 

Source: European Commission 

7 

-4-20246810121403040506070809101112131415161718%, Q dataHouseholds savings ratio (national accounts)Households savings ratio (cash basis)-0.50.00.51.01.52.02.5060708091011121314151617181920212223Capital Accumulation ContributionTFP ContributionTotal Labour (Hours) ContributionPF Potential Growth% y/y80901001101201301400123456030405060708091011121314151617182010=100% y/yHICPNEER 
 
 
 
 
1. Economic situation and outlook 

the last two  years of the number of long-term EU 
migrants  arriving  in  the  UK  (219 000  in  the  year 
ending  June  2018,  a  decrease  of  23 %).  The 
number of EU citizens leaving the UK (145 000 in 
the  year  ending  June  2018)  has  remained  stable 
following  an  increase  between  the  years  ending 
September 2015 and September 2017. At the same 
time, the ONS reported record vacancy numbers of 
845 000 in August to October 2018, up 44 000 on 
the same period a year earlier. 

Wage  growth  remains  relatively  subdued. 
Nominal  compensation  per  employee  grew  by 
3.1 %  in  2017,  only  slightly  above  inflation 
(2.7 %).  Average  growth  in  weekly  earnings  rose 
to  3.4 %  in  November  2018  (a  1.1  %  increase  in 
real terms), and it is expected to remain at similar 
levels in 2019 and 2020. During the crisis and the 
subsequent  recovery,  wage  growth  has  often  been 
lower than what would be predicted on the basis of 
economic  fundamentals  (4).  According  to  recent 
research  (European  Commission,  2018a),  the  UK 
is  among  the  Member  States  with  a  higher 
cumulated  wage  gap  in  2010-2017,  although  this 
gap  was  wider  in  2010-2013  than  in  2014-2017. 
This  is  consistent  with  the  idea  that  some  labour 
market  slack 
low  headline 
remains  despite 
unemployment (see above). 

Social developments 

Social  indicators  have  improved,  and  income 
inequality  is  now  close  to  the  EU  average.  The 
proportion  of  people  at  risk  of  poverty  or  social 
exclusion  (AROPE)  (22 %  in  2017)  has  been 
declining  since  2012  and  is  just  below  the  EU 
average  (22.4 %).  However,  the  proportion  of 
people  living  in  low  work-intensity  households 
remains  quite  high  (10.1 %  in  2017,  vs  9.5 %  in 
the EU). Income  inequality before  social transfers 
is  relatively  high.  However,  the  tax  and  benefit 
in 
system 
disposable  income.  In  2017,  the  income  of  the 
richest  20 %  was  5.4  times  that  of  the  poorest 
20 %, which is above the EU average (5.1) (5). 

significantly 

inequality 

reduces 

Labour market 

Despite the slowdown in GDP growth, headline 
labour  market  figures  remain  positive.  The 
robust  labour  market  performance  in  recent  years 
has  supported  potential  growth  (see  above).  The 
labour  market  continued  to  tighten  in  2018,  with 
and 
across  most 
job 
creation 
in 
further, 
falling 
unemployment 
Q3-2018.  Wage  growth 
relatively 
subdued.  Regional  disparities  on  key  employment 
indicators  are  relatively  narrow,  except  in  youth 
inactivity,  which  ranges  from  26.7 %  in  Cumbria 
to 59.6 % in Inner London-West. 

sectors 
to  4.1 % 

remains 

However,  low  unemployment  seems  to  mask 
remaining  labour  market  reserves.  The  rate  of 
underemployment  continues  to  be  relatively  high 
(4.1 % in Q3-2018), above pre-crisis levels (Graph 
1.6).  The  recovery  in  average  hours  worked  has 
remained sluggish (European Commission, 2018a), 
suggesting  that  the  labour  market  recovery  is  not 
yet 
and 
Blanchflower, 2018) has found that the natural rate 
of  unemployment  has  fallen  sharply,  so  much 
lower unemployment may now be needed to reach 
full employment. 

complete.  Recent 

research 

(Bell 

Graph 1.6: 

Unemployment rate and potential additional 
labour force 

Source: Eurostat 

EU  net  migration  into  the  UK  continues  to 
decline.  According  to  the  Office  for  National 
Statistics (ONS), in the year ending June 2018, EU 
net  migration  was  at  its  lowest  level  since  2012 
(74 000),  down  from  189 000  in  the  year  ending 
June  2016.  This  was  mainly  driven  by  the  fall  in 

(4)  This  is  a  benchmark  for  wage  growth  consistent  with 
internal  labour  market  conditions.  It  is  wage  growth 
predicted  on  the  basis  of  changes  in  labour  productivity, 
prices  and  the  unemployment  rate  (see  Arpaia  and  Kiss, 
2015). 

(5)  S80/S20 income quintile share ratio. 

8 

024681012141618200809101112131415161718UKUnemployment rateAvailable but not seekingUnderemployedSeeking but not available% of labour force 15-74 
 
                                                           
1. Economic situation and outlook 

Graph 1.7:  Current account balance 

Source: Office for National Statistics & European Commission 

includes 

The financing of the current account deficit has 
become more risky alongside a reduction in the 
appetite  of  foreign  investors  for  UK  assets.  In 
2017 and early 2018, the  share of foreign inflows 
in  the  ‘other  investment’  category  into  the  UK 
increased.  This  category 
loans  and 
deposits  to  banks.  As  highlighted  by  the  Bank  of 
England’s  Financial  Policy  Committee  (FPC)  in 
November  2018,  other  investments  are  short-term 
in  nature  and  are  therefore  subject  to  foreign 
investors’  appetite  and  refinancing  risk.  In  recent 
quarters 
this  position  has  reversed  with  net 
outflows of other investments by foreign residents. 
Over the same period, the net outflow of other UK 
investments  has  not  been  offset  by  net  positive 
inflows  of  portfolio  investment  and  positive  but 
diminishing  net 
foreign  direct 
inflows  of 
investment.  Consequently,  there  has  been  a  net 
outflow  of  total  overseas  investment  into  the  UK 
over  this  period.  Foreign  investors’  appetite  for 
UK  assets  appears  to  have  reduced  over  the  latter 
part  of  2018,  which  is  consistent  with  heightened 
uncertainty  over  the  terms  of  the  UK’s  future 
relations  with  the  EU.  At  the  same  time,  UK 
residents  have  reduced  their  net  acquisition  of 
foreign assets faster than the rate at which overseas 
investors’  disinvested  of  UK-based  assets.  The 
UK’s  growing  current  account  deficit  was 
therefore  largely  financed  by  the  sales  of  UK 
overseas assets, rather than the inflow of overseas 
investment over recent quarters. 

The  net 
deteriorated  slightly 

international 

investment  position 
It  widened 

in  2017. 

Homelessness  is  increasing  and  shows  no  signs 
of  abating.  According  to  recent  research  by  the 
housing  and  homeless  charity  Shelter,  there  were 
around  320 000  homeless  people  in  the  UK  in 
Q1-2018.  This  is  a  4 %  increase  on  the  same 
period a  year earlier (Shelter, 2018). The increase 
was  largely  driven  by  rises  in  homeless  people  in 
temporary  accommodation  and  people  without  a 
shelter  of  any  kind.  Worryingly,  homelessness  is 
also surging among children. A calculated 131 000 
children  were  homeless  in  March  2018.  This  is 
3 %  higher  than  last  year  and  59 %  higher  than 
five  years  ago.  Wales  and  Scotland  have  seen 
bigger  proportionate  increases  in  homelessness 
than England over the last year (ibid.). 

External position 

The  improvement  in  the  current  account  in 
2017 reversed in 2018. The current deficit rose to 
5.2 % of GDP in 2016, the largest deficit on record 
(Graph 1.7), before narrowing to 3.3 % of GDP in 
2017.  The  majority  of  this  improvement  came 
from  the  primary  income  balance  becoming  less 
negative. Despite the boost to cost competitiveness 
from  the  depreciation  of  sterling  in  2016,  the 
improvement  in  the  trade  balance,  particularly  in 
services,  contributed  much 
the 
improvement in 2017, the current account balance 
still poses external financing risks. At around 3 % 
of  GDP  in  cyclically-adjusted  terms,  the  current 
account  deficit  remained  considerably  below  the 
country-specific  ‘norm’  of  around  zero  suggested 
by  fundamentals.  The  current  account  deficit 
subsequently  increased  throughout  2018,  reaching 
5.0 %  of  GDP  in  Q3-2018.  This  increase  resulted 
from  a  worsening  of  the  trade  deficit,  to 1.6 %  of 
GDP,  and  the  primary  income  deficit,  to 2.1 %  of 
GDP. 

less.  Despite 

9 

-12-10-8-6-4-2024680405060708091011121314151617% GDPGoodsServicesPrimary incomeSecondary incomeCAB 
 
1. Economic situation and outlook 

more severe overall than the global financial crisis. 
The  2018  European  Banking  Authority  stress  test 
produced unexpectedly weak results for UK banks, 
which  partly  reflects  differences  in  methodology 
and the scenarios applied (see Section 3.2.1). 

Graph 1.8:  Consumer credit growth 

Source: Bank of England 

The  pace  of  growth  in  unsecured  lending  to 
households  continued  to  ease  in  2018.  Total 
lending to households grew by 3.8 % year-on-year 
in  December  2018,  slightly  below  its  post-crisis 
peak of 4.3 % in March 2016. Lending secured on 
dwellings grew by 3.3 % (Graph 1.8), close to the 
2017  average  rate  (3.1 %).  Unsecured  consumer 
credit growth continued to slow to 6.6 % year-on-
year,  down  from  its  post  crisis  peak  of  10.9 %  in 
November  2016.  The  Bank  of  England’s  2018 
stress 
that  UK  banks  could 
successfully  absorb  potential  losses  on  mortgage 
lending  and  consumer  credit  in  a  severe  stress 
scenario. 

showed 

test 

Despite stabilising over recent years, household 
debt  remains  high.  After  falling  steadily  from  a 
peak of 96 % of GDP in 2009, household debt has 
broadly  stabilised  in  the  past  four  years.  In  2017, 
household debt stood at 86 % of GDP, stable from 
2016.  In  its  November  2018  Financial  Stability 
Report,  the  FPC  stated  that  the  proportion  of 
households  with  high  mortgage  debt-servicing 
ratios  is  close  to  historical  lows.  Nonetheless,  the 
and 
Commission’s 
fundamentals-based  benchmarks  for  household 
debt  suggest  that  household  indebtedness  still 

prudential 

threshold 

from  -2.4 %  of  GDP  in  2016  to  -8.1 %  in  2017. 
This  was  the  result  of  total  assets  decreasing  by 
GBP 112 billion 
while 
GBP 6 billion 
liabilities 
(EUR 7 billion) and remained larger than assets. In 
2017, the sterling exchange rate appreciated which 
led to a lower  valuation  in the  stocks  held abroad 
when converted back into sterling. 

(EUR 127 billion), 
by 

increased 

Monetary Policy 

In  February  2019,  the  Bank  of  England 
maintained  Bank  Rate  at  0.75 %.  The  Bank’s 
Monetary  Policy  Committee  also  voted  in  its 
February meeting to maintain the stock of sterling 
non-financial 
investment-grade  corporate  bond 
purchases, financed by the issuance of central bank 
reserves,  at  GBP 10 billion  (EUR 11.3 billion). 
The  Committee  also  voted  unanimously 
to 
maintain  the  stock  of  UK  government  bond 
purchases, financed by the issuance of central bank 
reserves,  at  GBP 435 billion  (EUR 492 billion). 
The Committee judged that, were the UK economy 
to  continue  to  develop  broadly  in  line  with  their 
February  2019  projections,  an  ongoing  tightening 
of monetary policy over the forecast period would 
be  appropriate  to  return  inflation  sustainably  to 
their 2 % target. The Committee reiterated that any 
future  increases  in  Bank  Rate  are  likely  to  be 
gradual and limited. 

Financial sector and debt 

The  UK  banking  system  has  continued  to 
improve its capital position and the profitability 
of  UK  banks  improved  in  2017  and  2018  (see 
Section 3.2.1.). Consequently, the  banking system 
is  in  a  better  position  than  before  the  global 
financial crisis, though challenges and risks persist. 
In particular, costs relating to past misconduct are 
still  likely  to  affect  profitability  in  the  coming 
years.  UK  investment  banking  revenues  also 
remain subdued. 

In  November,  the  Bank  of  England’s  Financial 
Policy  Committee  (FPC)  maintained  the  UK 
countercyclical  capital  buffer  rate  at  1 %.  The 
FPC continued to judge that, apart from those risks 
related to Brexit, domestic financial stability risks 
remained at a standard level overall. The FPC also 
judged that the Bank’s 2018 stress test showed that 
the  UK  banking  system  was  resilient  to  deep 
simultaneous  UK  and  global  recessions  that  were 

10 

-10-5051015202503040506070809101112131415161718% y/ySecuredUnsecuredCredit cardExcl. credit card 
 
1. Economic situation and outlook 

projects  that  the  Government  will  meet  its  fiscal 
targets (see Section 3.1) (OBR 2018a). 

General government debt remains high, but has 
started to fall. Government debt fell from a peak 
of 86.4 % of GDP in 2016-2017 to 85.7 % of GDP 
in  2017-2018.  According  to  the  Commission’s 
2018 autumn forecast, this downward trend should 
continue over the forecast period, to 85 % of GDP 
in 2018-2019 and 82 % of GDP in 2020-2021. For 
the 2018 Autumn Budget, the OBR revised its debt 
forecast down and now expects debt to fall slightly 
faster than previously expected. 

poses  financial  stability  risks.  Furthermore,  the 
Commission’s  household  debt 
sustainability 
indicators (S1 and S2) suggest that the near record-
low household saving ratio would need to increase 
to  make  debt  levels  sustainable  over  both  the 
medium and long term. 

to 

Growth  in  credit  for  non-financial  corporates 
was  2.6 %  year-on-year  as  of  December  2018. 
This  growth  was  driven  by  credit 
large 
businesses, which grew by 4.0 % annually. At the 
same time, growth in credit to small and medium-
sized enterprises grew by only 0.1 % year-on-year, 
which  limited  the  increase  in  corporate  leverage. 
The ratio of gross non-performing loans improved 
and was one of the lowest in the EU at 1.3 % as of 
Q2-2018. 

Public finances 

After  several  years  of  falls,  which  continued 
into 2018-2019, the budget deficit is set to level 
off. The deficit stood at 2 % of GDP in 2017-2018, 
down  from  2.4 %  of  GDP  in  2016-2017.  In  the 
it  was 
Commission’s  2018  autumn  forecast 
projected  to  continue  the  downward  trend,  from 
1.3 %  of  GDP  in  2018-2019  to  1.2 %  of  GDP  in 
the two following financial years. With the output 
gap  remaining  small,  the  structural  budget  deficit 
was expected to follow a similar pattern. However, 
the  Commission  forecast  did  not  reflect  the 
expansionary  measures  announced  in  the  2018 
Autumn Budget (HM Treasury, 2018). 

a 

finances, 

to  higher 

the  public 

in 
announced 

Using  fiscal  space  created  by  an  underlying 
improvement 
the 
Chancellor 
significant 
discretionary  loosening  of  fiscal  policy  in  the 
2018  Autumn  Budget.  Due 
than 
expected  tax  revenues  and  lower  spending,  the 
Office  for  Budget  Responsibility  (OBR)  revised 
down  its  borrowing  forecast  for  2018-2019  by 
(EUR 13.5 billion,  0.5 %  of 
GBP 11.9 billion 
GDP). 
underlying 
the 
2019-2020, 
improvement to the fiscal position, which the OBR 
judges  to  be  permanent  (on  a  no-policy-change 
basis), will mostly be offset by extra spending. For 
2019-2020,  the  Chancellor  announced  additional 
spending  of  GBP 10.9 billion  (EUR 12.3 billion). 
Of  this,  around  50 %  is  for  the  National  Health 
Service (NHS), and this is set to increase further in 
the  following  years  (see  Section  3.1).  The  OBR 

From 

11 

 
1. Economic situation and outlook 

In  

Table 1.1: 

Key economic and financial indicators — United Kingdom 

Source: Eurostat and ECB as of 31-1-2019, where available; European Commission for forecast figures (Winter forecast 2019 for 
real GDP and HICP, Autumn forecast 2018 otherwise) 

12 

2004-072008-122013-1520162017201820192020Real GDP (y-o-y)2.60.02.41.81.81.41.31.3Potential growth (y-o-y)2.31.01.31.51.61.51.41.4Private consumption (y-o-y)2.6-0.42.13.12.1...Public consumption (y-o-y)2.70.91.10.8-0.2...Gross fixed capital formation (y-o-y)4.0-2.24.62.33.5...Exports of goods and services (y-o-y)6.01.02.71.05.6...Imports of goods and services (y-o-y) 5.20.14.13.33.5...Contribution to GDP growth:Domestic demand (y-o-y)2.9-0.52.42.61.9...Inventories (y-o-y)-0.10.00.2-0.1-0.5...Net exports (y-o-y)0.10.2-0.5-0.70.5...Contribution to potential GDP growth:Total Labour (hours) (y-o-y)0.50.50.70.70.60.60.50.4Capital accumulation (y-o-y)0.70.50.50.60.60.60.60.6Total factor productivity (y-o-y)1.10.00.00.20.30.30.30.4Output gap1.2-2.9-0.60.70.90.80.50.3Unemployment rate5.17.46.34.84.44.34.54.7GDP deflator (y-o-y)2.61.91.32.12.21.91.62.0Harmonised index of consumer prices (HICP, y-o-y)2.03.31.40.72.72.51.82.0Nominal compensation per employee (y-o-y)4.81.81.52.93.03.03.13.2Labour productivity (real, person employed, y-o-y)1.6-0.20.70.40.8...Unit labour costs (ULC, whole economy, y-o-y)3.22.00.82.52.22.52.32.3Real unit labour costs (y-o-y)0.50.1-0.50.40.00.60.70.3Real effective exchange rate (ULC, y-o-y)3.1-4.13.8-10.2-4.12.2-0.10.4Real effective exchange rate (HICP, y-o-y)0.8-3.63.5-10.5-4.72.3-0.9-0.2Savings rate of households (net saving as percentage of net disposable income)3.05.04.01.6-1.2...Private credit flow, consolidated (% of GDP)15.72.35.711.58.2...Private sector debt, consolidated (% of GDP)173.7184.3167.9170.0171.5...of which household debt, consolidated (% of GDP)87.392.285.486.186.0...of which non-financial corporate debt, consolidated (% of GDP)86.392.182.383.785.4...Gross non-performing debt (% of total debt instruments and total loans and advances) (2)........Corporations, net lending (+) or net borrowing (-) (% of GDP)-1.30.8-2.8-3.2-0.8-1.0-1.4-1.1Corporations, gross operating surplus (% of GDP)21.521.822.021.921.922.422.222.3Households, net lending (+) or net borrowing (-) (% of GDP)1.43.92.70.9-1.2-1.3-0.9-1.0Deflated house price index (y-o-y)8.1-4.35.911.12.4...Residential investment (% of GDP)3.83.23.43.84.0...Current account balance (% of GDP), balance of payments-2.7-3.4-5.0-5.2-3.3-3.3-3.2-3.0Trade balance (% of GDP), balance of payments0.0*0.0*-1.6-1.6-1.1...Terms of trade of goods and services (y-o-y)-0.5-0.11.31.9-0.40.40.40.9Capital account balance (% of GDP)..-0.1-0.1-0.1...Net international investment position (% of GDP)-5.4-10.7-20.1-2.4-8.1...NIIP excluding non-defaultable instruments (% of GDP) (1)-25.3-26.6-12.71.1-1.5...IIP liabilities excluding non-defaultable instruments (% of GDP) (1)356.9543.7418.1416.7382.2...Export performance vs. advanced countries (% change over 5 years)-1.5-14.9-2.0-2.0-5.4...Export market share, goods and services (y-o-y)..2.1-3.4-3.6...Net FDI flows (% of GDP)0.0*0.0*-3.3-8.23.1...General government balance (% of GDP)-2.9-8.0-5.0-2.9-1.8-1.3-1.0-1.0Structural budget balance (% of GDP)..-4.6-3.3-2.3-1.7-1.3-1.1General government gross debt (% of GDP)40.270.786.787.987.486.084.582.6Tax-to-GDP ratio (%) (3)34.834.934.234.935.535.735.835.8Tax rate for a single person earning the average wage (%)26.925.323.723.3....Tax rate for a single person earning 50% of the average wage (%)20.819.115.314.7....(1) NIIP excluding direct investment and portfolio equity sharesforecast(2) domestic banking groups and stand-alone banks, EU and non-EU foreign-controlled subsidiaries and EU and non-EU foreign-controlled branches.(3) The tax-to-GDP indicator includes imputed social contributions and hence differs from the tax-to-GDP indicator used in the section on taxation 
 
 
 
2.  PROGRESS WITH COUNTRY-SPECIFIC RECOMMENDATIONS 

Since  the  start  of  the  European  Semester  in 
2011,  the  UK  has  recorded  at  least  ‘some 
progress’ on 94 % of CSRs addressed to it. This 
includes  15 %,  covering  access  to  finance  and 
fiscal  policy,  where 
it  achieved  ‘substantial’ 
progress.  On  the  other  6 %  of  CSRs,  it  has 
recorded  only  ‘limited’  progress  (see  Graph 2.1). 
On  labour  market,  housing  and  infrastructure 
CSRs,  it  has  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  still  requiring 
sustained  reform  efforts.  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-

2018 CSRs to date 

(1) The overall assessment of the CSRs 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 
February 2019 Country Report. 
Source: European Commission 

The  fiscal  deficit  has  gradually  decreased  to 
well  below  3 %  of  GDP.  The  UK  left  the 
Excessive  Deficit  Procedure  of  the  Stability  and 
Growth Pact in 2017. 

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  to  the  planning  system.  Housing  has 
become less affordable, despite a recent slowdown 
in  house  price  rises.  The  high  cost  of  housing, 
which is particularly acute in major urban centres, 
underlines  the  long-term  and  structural  challenges 
in the housing market. The government recognises 
these  challenges  and  has  set  itself  the  ambitious 
goal  of  increasing  annual  housing  supply  in 
England  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. 

The  UK  has  received  recommendations  on  a 
range  of  labour  market  and  social  issues.  On 
skills  and  apprenticeships,  concerns  persist  as 
regards  the  implications  of  low  workforce  skills 
for  career  progression  and  productivity.  Skills 
mismatches  and  shortages  have 
increased  as 
employment  rates  have  hit  historical  highs. 
However,  career  progression  is  difficult  for  many 
and  upskilling  of  those  in  work  merits  sustained 
policy efforts and investment. An extensive review 
on Modern Work Practices in 2017 has resulted in 
a  reform  of  the  vocational  training  system  due  to 
be  completed  by  2020,  the  development  of  ‘T-
level’  qualifications,  and  the  establishment  of  a 
tripartite  National 
Partnership 
comprising  the  government,  employers  and  trade 
unions. On childcare, gradual reforms are yielding 
good  results.  Publicly  funded  provision  has 
expanded over the last decade, though issues with 
the adequacy and affordability of childcare remain. 
The UK also received recommendations from 2011 
to 2014 on poverty and the welfare system. These 
had  a  particular  focus  on  child  poverty,  which 
remains quite high and is predicted to increase due 
to  cuts  in  public  expenditure  resulting  from  the 
rollout  of  Universal  Credit  and  reductions  in 
associated means-tested family support. 

Retraining 

received 

recommendations 

The  UK 
on 
infrastructure  from  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.  It  has  also 
improved  the  assessment  of  long-term  challenges 
and  opportunities  through  the  production  of  the 
National Infrastructure Assessment. While tangible 
progress  to  date  has  been  modest  and  pressure  on 

13 

Limited progress6%Some progress79%Substantial progress15% 
 
 
2. Progress with country-specific recommendations 

networks  is  building,  the  UK  is  starting  to  deal 
with  the  cumulated  effects  of  decades  of  public 
under-investment in infrastructure. 

the 

2018 

The  UK  has  made  some (6)  progress 
in 
addressing 
country-specific 
recommendations (CSRs).  The UK currently has 
three CSRs. CSR 1 on fiscal issues is not assessed 
in  this  country  report.  There  has  been  some 
progress  on  CSR 2,  which  relates  to  housing 
supply.  Annual  net  housing  supply  has  increased 
significantly  from  post-crisis  lows.  However,  the 
recovery  in  house  building  has  lost  momentum 
since mid-2017, and it is now stabilising at a level 
below what would be necessary to meet estimated 
demand. Real house prices are stabilising and real 
rents  are  now  falling  slightly,  but  the  cost  of 
housing  remains  high.  The  government  has 
recently extended and revised a number of existing 
housing  policies.  The  rules  on  local  authority 
borrowing  to  build  public  housing  have  been 
relaxed, but wholly new initiatives have otherwise 
been  relatively  limited.  The  UK  has  made  some 
progress 
in  addressing  CSR 3  on  skills  and 
apprenticeships.  Skills  mismatches  persist  and 
shortages  are  starting  to  become  acute  as  the 
labour market tightens and vacancies reach record 
levels.  The  implementation  of  the  apprenticeship 
reform  is  facing  difficulties,  with  low  registration 
rates  and  employers 
facing  a  considerable 
administrative burden and confusion with regard to 
the functioning of the Apprenticeship Levy. 

(6)  Information  on  the  level  of  progress  and  actions  taken  to 
address  the  policy  advice  in  each  respective  subpart  of  a 
CSR  is  presented  in  the  overview  table  in  Annex A.  This 
overall  assessment  does  not  include  an  assessment  of 
compliance with the Stability and Growth Pact. 

14 

 
 
 
 
 
 
 
 
 
                                                           
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2. Progress with country-specific recommendations 

Table 2.1: 

Assessment of 2018 CSR implementation 

Source: European Commission 

15 

The United Kingdom Overall assessment of progress with 2018 CSRs: Some progress CSR 1: Ensure that the nominal growth rate of net primary government expenditure does not exceed 1.6 % in 2019-2020, corresponding to an annual structural adjustment of 0.6 % of GDP. CSRs related to the Stability and Growth Pact will be assessed in spring once the final data is available.  CSR 2: Boost housing supply, particularly in areas of highest demand, including through additional reforms to the planning system. Some progress in boosting housing supply. CSR 3: Address skills and progression needs by setting targets for the quality and the effectiveness of apprenticeships and by investing more in upskilling those already in the labour force. Some progress in addressing skills and apprenticeship issues.   
 
 
 
 
 
2. Progress with country-specific recommendations 

Box 2.1: EU funds help overcome structural challenges and foster development in the UK 

The UK is a beneficiary of European Structural and Investment Funds (ESI Funds) support and can 
receive up to EUR 16.4 billion (GBP 14.5 billion) by 2020. This represents around 3.7 % of annual public 
investment (1) in 2014-2018. By 31 December 2018, an estimated EUR 11.2 billion (GBP 9.9 billion) (68 % 
of the total) had been allocated to projects on the ground. In addition, EUR 347 million (GBP 307 million) 
has  been  allocated  to  specific  projects  on  strategic  transport  networks  through  a  dedicated  EU  funding 
instrument, the Connecting Europe Facility. Numerous research institutions, innovative firms and individual 
researchers  benefited  from  other  EU  funding  instruments,  in  particular  Horizon  2020,  which  has  granted 
EUR 5.1 billion (GBP 4.5 billion) in investments. 

EU  Funds  help  to  both  address  structural  policy  challenges  and  implement  country-specific 
recommendations. The financing goes towards the promotion of R&D investment in the private sector; the 
strengthening of SME competitiveness and the stimulation of closer collaboration between enterprises and 
knowledge  institutions.  In  addition,  investments  in  renewable  energy  sources  and  energy  efficiency 
contribute  to  the  necessary  shift  to  a  low  carbon  economy.  EU  Funds,  in  particular  the  European  Social 
Fund,  are  also  used  to  support  various  training  activities  including  investment  in  education  and  life-long 
learning.  These  activities  focus  on  the  upskilling  and  reskilling  of  both  the  employed  and  unemployed  as 
well as helping the long-term unemployed and “inactive” youth find employment. There is also investment 
in the promotion of social inclusion and measures to decrease poverty and discrimination. The investment of 
EU  funds  is  expected  to  trigger  additional  national  private  and  public  investment  of  EUR 10 billion 
(GBP 8.8 billion).  In  order  to  attract  this  private  investment,  the  use  of  financial  instruments  has 
significantly  increased:  more  than  20 %  of  the  funds  are  being  invested  in  the  form  of  loans,  equity  and 
guarantees. 

In  addition,  a  guarantee  of  EUR 2.3 billion  (GBP 2 billion)  from  the  European  Fund  for  Strategic 
Investments,  is  set  to  trigger  EUR 21 billion  (GBP 18.6 billion)  in  additional  private  and  public 
investments. The UK ranks 24th as regards the overall volume of approved operations as a share of GDP. 
The ‘Infrastructure and Innovation’ window comprised 23 approved projects financed by the EIB with EFSI 
backing, for a value of approximately EUR 1.6 billion (GBP 1.5 billion) of financing in total, set to trigger 
EUR 17 billion (GBP 15 billion) in investments. Under the SMEs component, the country saw the approval 
of 18 agreements with intermediary banks or funds financed by the European Investment Fund (EIF) with 
EFSI  backing.  These  amounted  to  EUR 636 million  (GBP 562 million)  in  financing  set  to  trigger 
approximately  EUR 3.8 billion  (GBP 3.4 billion)  in  investments,  with  some  2 979  SMEs  and  mid-cap 
companies expected to benefit from improved access to finance. An example of an EFSI-backed project in 
the UK is the  construction of the  Galloper Wind Farm 27 km off the Suffolk Coast,  for  which the EIB is 
providing  EUR 314 million  (GBP 278 million).  Once  operational,  the  wind  farm  will  be  capable  of 
providing enough clean energy to supply up to 336 000 homes from 56 of the world’s largest wind turbines. 
The project is set to create over 700 jobs during construction and nearly 100 once operational. 

https://cohesiondata.ec.europa.eu/countries/UK 

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

and fisheries. 

16 

 
 
3.  REFORM PRIORITIES 

3.1.  PUBLIC FINANCES AND TAXATION 

Taxation policy 

At  34.1 %,  the  UK's  tax-to-GDP  ratio  remains 
well  below  the  GDP-weighted  EU  average  of 
39 %  (Table  3.1.1).  Total  UK  tax  revenues 
increased by 4.2 % between the fiscal years 2016-
2017 and 2017-2018. In the 2018 Autumn Budget, 
the  UK  government  announced  a  series  of 
measures over the period 2018-2019 to 2023-2024, 
involving net tax cuts amounting to GBP 2 billion 
(EUR 2.3 billion)  (OBR,  2018a).  A  new  digital 
services  tax  of  2 %  levied  on  revenues  of  certain 
digital businesses attributable to UK users  will be 
introduced in April 2020. 

The  tax  burden  on  labour  is  among  the  lowest 
in  the  EU  across  the  income  scale.  Personal 
income  tax  and  National  Insurance  contributions 
make  the  biggest  contribution  to  tax  revenues.  At 
28.8 %  of  the  average  wage  for  a  two-earner 
couple  with  two  children,  the  UK’s  tax  wedge  is 
one  of  the  lowest  in  the  EU  (the  EU  average  was 
36.7 %  in  2017)  (7).  It  is  expected  to  decline 
further  as  the  government  has  announced  that  it 
will  be  raising  the  income  tax  personal  allowance 
to  GBP 12 500  (EUR 14 100)  and  the  higher  rate 
to  GBP 50 000  (EUR 56 550)  from 
threshold 
2019-2020 (HM Treasury, 2018). 

At  2.9 %  of  GDP  in  2017,  corporate  tax 
revenues  are  broadly  in  line  with  the  EU 
average  (2.7 %),  but  some  elements  of  the  tax 
system  may  discourage  corporate  investment. 
Corporate tax revenue increased by 3.3 % in 2017-
2018, with the financial and manufacturing sectors 
seeing  the  largest  increases  (19 %  and  12 % 
respectively)  (HMRC,  2018a).  As  discussed  in 
previous country reports, some elements of the tax 
system  may discourage corporate  investment.  The 
effective  marginal  tax  rate  for  new  investment 
stood at 23.6 % in 2017, one of the highest rates in 
the  EU  (ZEW,  2017),  largely  due  to  property 
taxation  and  the  capital  allowance  regime.  To 
address  a  gap  in  this  regime,  the  government 
announced  a  new  structures  and  buildings  capital 
allowance of 2 %, and a temporary increase in the 

(7)  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 

Annual Investment Allowance for qualifying plant 
GBP 1 million 
and 
(EUR 1.13 million) 
to 
December 2020 (HM Treasury, 2018).  

January  2019 

machinery 

from 

to 

Table 3.1.1:  Composition of tax revenues 2017 

Source: European Commission, Taxation Trends in the 
European Union, 2019 Edition (forthcoming) 

for 

income 

The  UK  tax  system  appears  to  be  one  of  the 
most  attractive 
‘treaty  shopping’  on 
dividend 
(European  Commission, 
2018c).  Treaty  shopping  may  be  used  by 
companies  that  engage  in  aggressive  tax  planning 
and is the practice of structuring a business to take 
advantage of more favourable tax treaties available 
in 
context, 
international  companies  may  use  the  UK’s  tax-
exemption of dividends received from abroad and 
the  lack  of  a  withholding  tax  on  outbound 
dividends  paid, 
tax 
residency  rules  to  legally  divert  dividend  flows 
with  the  aim  of  reducing  or  eliminating  the  tax 
burden (8). 

together  with  corporate 

jurisdictions. 

certain 

this 

In 

through 

The  UK  is  acting  to  curb  aggressive  tax 
implementation  of 
the 
planning 
European and internationally agreed initiatives. 
The  UK  has  implemented  rules  in  its  domestic 
legislation  for  ATAD1  (9),  effective  from  1 
January  2019.  The  UK’s  controlled  foreign 
company  (CFC)  rules  are  currently  subject  to  an 

(8)  In  2016,  dividend  income  received  by  the  UK  was 
EUR 58 billion (GBP 51 billion) and dividend income paid 
by  the  UK  was  EUR  50  billion  (GBP 44 billion)  (Source: 
Eurostat). 

(9)  ATAD  —  Anti-Tax  Avoidance  Directive:  Council 

Directive 2016/1164 of 12 July 2016. 

17 

Tax category GBP  billion %  revenue  UK  % GDP  EU  % GDP* Personal income tax 190 27 9.2 9.4 National insurance contributions  (employers and employees) 135 19.1 6.5 12.2 Corporate income tax 59 8.4 2.9 2.7 Property taxes 89 12.6 4.3 2.6 VAT 141 20.0 6.8 7.1 Indirect taxes other than VAT 91 12.9 4.4 5 Total 705 100 34.1 39   
 
                                                           
 
 
 
 
                                                           
3.1. Public finances and taxation 

the  Commission’s 

expected to continue over the forecast period. The 
value  of 
early-detection 
indicator of fiscal stress S0 (indicating risk due to 
high level of gross financing needs, of the primary 
deficit  and  of  public  debt)  remains  below  its 
critical  threshold  (see  also  Annex  B).  Low  and 
stable spreads and high ratings reflect the financial 
market’s favourable perceptions of sovereign risk. 

Graph 3.1.1:  Public debt as % of GDP 

Source: European Commission, Fiscal Sustainability Report 
2018 

Over  the  medium  term,  fiscal  sustainability  in 
the UK is deemed to be at high risk from a debt 
sustainability  analysis  (DSA)  perspective.  The 
Commission’s  medium-term  fiscal  sustainability 
indicator S1 points to medium risk, due to the high 
initial debt ratio and the projected increase in age-
related  spending.  However,  overall,  the  UK  is 
deemed  at  high  risk  on  the  basis  of  the  DSA 
scenario  analysis.  In  the  DSA  baseline  scenario 
government  debt  is  expected  to  steadily  decline, 
but remain relatively high at 74 % of GDP in 2029 
(see  Graph  3.1.1).  If  fiscal  policy  reverted  to 
historical  behaviour  with  the  structural  primary 
balance (SPB) converging to the 15-year historical 
average deficit of 2.1 % of GDP, government debt 
could  increase  to  97 %  of  GDP  in  2029.  In 
contrast,  if  fiscal  policy  evolved  in  line  with  the 
main  provisions  of  the  Stability  and  Growth  Pact 
(SGP), 
decrease 
substantially, to 67 % of GDP in 2029 (Annex B). 

debt  would 

government 

The UK is also assessed to be at high fiscal risk 
over  the  long  term,  if  future  levels  of  the 

investigation  by  the  Commission  on  whether  the 
rules  allow  multinationals  to  pay  less  UK  tax, 
which  would  be  in  breach  of  EU  State  aid  rules 
(European  Commission,  2017a).  Where  not 
covered  by  existing  rules,  the  ATAD2  provisions 
on  hybrid  mismatches (10)  will  be  transposed  into 
UK  legislation  as  from  1  January  2020.  The  UK 
has  broadly  transposed  the  provisions  of  the 
OECD  Action  Plan  on  Base  Erosion  and  Profit 
Shifting  (BEPS)  where  necessary  (11).  It  will  be 
important 
the 
implementation of ATAD and BEPS will limit the 
scope for aggressive tax planning in the UK. 

to  what 

extent 

assess 

to 

(12.3 %).  At  17.9 %, 

There is some scope for the UK to increase VAT 
revenue  efficiency.  At  11.7 %  in  2016,  the  UK 
VAT gap  —  the difference between expected and 
actual  VAT  revenues  —  was  slightly  lower  than 
the  EU  average 
the 
actionable VAT policy gap due to exemptions and 
reduced  rates  was  slightly  higher  than  the  EU 
average (16.5 %) (CASE, 2018). In addition to its 
standard 20 % VAT rate, the UK applies a reduced 
rate  of  5 %  and  a  super-reduced  rate  of  0 %  (12). 
Revenues  foregone  due  to  reduced  VAT  rates  are 
estimated  at  GBP 52  billion  (EUR 59 billion)  or 
2.6 %  of  GDP  in  2017-2018  (HMRC,  2018b). 
Hence, limiting the use of exemptions and reduced 
VAT  rates,  and  strengthening  tax  compliance 
could further increase the VAT revenue efficiency. 
The UK is introducing new digital record keeping 
rules  and  VAT  return  requirements,  to  make  the 
VAT administration more effective, more efficient 
and simpler for taxpayers. 

Debt sustainability analysis and fiscal risks 

Despite  high  general  government  debt,  there 
are  currently  no  substantial  short-term  fiscal 
risks.  General  government  debt  peaked  in  2016-
2017  at  86.4 %  of  GDP.  Debt  has  started  falling 
since  2017-2018,  and  this  declining  trend  is 

(10)  Rules  designed  to  prevent  that  businesses  lower  or  avoid 
taxation  due  to  tax  classification  differences  in  a  cross-
border context.  

(11)  Including the ratification of the Multilateral Convention to 
Implement  Tax  Treaty  Related  Measures  to  Prevent  Base 
Erosion and Profit Shifting (MLI). 

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

18 

60657075808590951001051101314151617181920212223242526272829% of GDPBaseline no-policy change scenarioNo-policy change scenario without ageing costsHistorical structural primary balance scenario 
                                                           
 
3.1. Public finances and taxation 

structural  primary  balance  were  similar  to 
historical  ones.  The  Commission’s  long-term 
sustainability gap indicator S2 points to a medium 
risk. This is due to the projected increase in public 
pension,  health  and  long-term  care  expenditures 
requiring  the  UK  to  improve  the  SPB  (a  positive 
fiscal  gap  at  3 %  of  GDP).  However,  the  DSA 
historical  scenario,  assuming  an  SPB  converging 
towards  the  15-year  average  deficit  of  2.1 %  of 
GDP, involves a significant increase in debt levels 
and therefore a high risk overall. In its latest Fiscal 
Sustainability  Report, 
the  Office  for  Budget 
Responsibility  (OBR,  2018b)  projects  public 
finances to come under pressure over the long term 
due  to  an  ageing  population  as  well  as  higher 
health  costs  stemming  from  improved  technology 
treatments.  International  Monetary  Fund 
and 
analysis  shows  that  the  UK  has  a  relatively  low 
level of net public assets (IMF, 2018). 

Healthcare 

The  health  system  has  been  under  financial 
pressure  in  recent  years.  Growth  in  government 
spending on healthcare has not kept pace with the 
increased demand for health services. Providers of 
services  for  the  National  Health  Service  (NHS) 
have  been  experiencing  budget  deficits  and  the 
financial pressure has started to affect performance 
(see  Section  3.3).  A  recent  report  (IFS  &  The 
Health  Foundation, 2018) calculates  that real age-
adjusted  per-capita  health  spending  increased  by 
0.1 %  a  year  from  2009-2010  to  2016-2017.  It 
concludes  that  to  maintain  provision  of  health 
services  at  current  levels,  spending  on  healthcare 
will  have  to  rise  by  an  average  3.3 %  a  year  over 
the next 15 years — and the increases will need to 
be  front-loaded  at  4 %  a  year  over  the  next  five 
years  in  order  to  address  the  backlog  of  funding 
problems.  It  indicates  that  if  services  were  to  be 
improved  —  e.g.  to  meet  waiting  list  targets  —
healthcare spending would have to rise by at least 
4 %  a  year  over  the  next  15  years,  again  front-
loaded at 5 % a year for the next five years. 

In June 2018, the UK government committed to 
providing NHS England with an average 3.4 % 
a year real-terms funding increase over the next 
five  years.  The  2018  autumn  budget  confirmed 
this,  allocating  an  additional  GBP 20.5 billion 
(EUR 23.2 billion) for NHS England by 2023. This 
automatically  implies  extra  money  for  Scotland, 
Wales and Northern Ireland, although it will be up 

to these devolved administrations to decide how to 
spend  the  money.  This  increase  will  support  the 
first  half  of  the  delivery  of  the  NHS  Long  Term 
Plan,  released  in  January  2019,  which  sets  out  a 
list  of  ambitions  for  the  NHS  by  2028. The  NAO 
(2019)  welcomes  the  long-term  approach,  but 
notes that the  funding  settlement does not  include 
key  areas  of  health  spending,  namely  capital 
investment  for  buildings  and  equipment,  disease 
prevention 
the 
healthcare  workforce.  It  will  only  be  possible  to 
fully judge the future impact of the settlement once 
the  upcoming  Spending  Review  sets  out  future 
funding in these complementary areas. 

initiatives  and 

training 

for 

Fiscal frameworks 

January 

2017  Charter 

the  2018  Autumn  Budget, 

In 
the  UK 
government confirmed the fiscal rules set out in 
the 
of  Budget 
Responsibility.  Previously,  fiscal  rules  were 
revised  frequently,  making  it  more  difficult  to 
predict  policy  in  the  medium  term.  The  overall 
fiscal  objective  set  out  in  the  Charter  is  to  return 
public  finances  to  balance  by  the  mid-2020s.  The 
fiscal  targets  are:  the  reduction  of  the  structural 
deficit below 2 % of GDP by 2020-2021 (the fiscal 
mandate);  a  fall  of  public  sector  net  debt  as 
(the 
percentage 
supplementary target); and a ‘welfare cap’, setting 
a  limit  on  welfare  spending.  The  Charter  sets  out 
that HM Treasury can review the fiscal rules in the 
event  of  a  significant  negative  shock  to  the  UK 
economy. 

2020-2021 

of  GDP 

in 

While  the  current  assessment  of  compliance 
with  the  fiscal  targets  is  favourable,  some 
downside  risks  could  prevent  the  UK  from 
complying  with  the  fiscal  rules  in  the  medium 
term.  The  OBR  expects  the  government  to  meet 
all  three  fiscal  targets  (OBR,  2018a).  While  the 
mid-2020s is beyond its forecast horizon, the OBR 
judges  that  meeting  the  fiscal  objective  could  be 
challenging.  On  the  expenditure  side,  pressures 
due  to  an  ageing  population  pose  risks.  Also  the 
upcoming  ‘Spending  Review’  in  2019  could  lead 
to higher medium-term expenditure plans, possibly 
further  calling  into  question  the  medium-term 
fiscal  objective  of  a  balanced  budget  by  the  mid-
2020s. 

19 

 
3.2.  FINANCIAL SECTOR AND HOUSING 

3.2.1.  FINANCIAL SECTOR DEVELOPMENTS  

The  UK  banking  system  has  continued  to 
improve  its  capital  position  and  is  now  much 
stronger than it was before the global financial 
crisis.  UK  banks’  capital  strength  has  more  than 
tripled  since  2007,  with  an  aggregate  Common 
Equity  Tier 1  (CET 1)  capital  ratio  of  15.0 %  in 
Q2-2018 (see Table 3.2.1). The level of capital that 
banks  are  required  to  hold  has  also  increased 
significantly. This  means that the banks that  were 
in  the  weakest  position  before  the  financial  crisis 
have had to strengthen their position the most. The 
improvement in banks’ risk-weighted capital ratios 
reflects both an increase in capital resources and a 
reduction  in  the  size  and  riskiness  of  banks’ 
balance  sheets.  On  a  non-risk-weighted-basis, 
banks’ leverage ratios have also improved. 

Table 3.2.1: 

Financial soundness indicators, all banks in UK 

Source: ECB CBO 

ratios 

through 

UK  banks  have  become  more  profitable,  but 
challenges remain. The rise  in earnings  has been 
driven primarily by income rising against a falling 
cost base and the benign credit environment, which 
has  seen  reduced  impairments  as  compared  with 
previous  years.  This  has  helped  banks  improve 
their  capital 
retained  profits. 
However,  a  number  of  challenges  to  profitability 
to  past 
persist.  In  particular,  costs  relating 
misconduct are still likely to affect profitability in 
the coming years, while strong price competition is 
pushing  margins  down  in  some  areas,  such  as 
mortgages. The effect of uncertainty related to the 
UK’s  withdrawal  from 
the  EU  also  has  a 
dampening  effect  on  banks’  earnings,  as  business 
investment is subdued. 

UK  banks’  liquidity  position  remains  strong. 
Since  the  financial  crisis,  major  UK  banks  have 
substantially  reduced  their  reliance  on  wholesale 
funding.  A  combination  of  their  own  liquidity 
resources  and  access  to  central  bank  facilities 
covers short-term liabilities prone to risk.  

On  aggregate,  the  largest  UK  banks  hold  good 
levels of loss-absorbency resources. Resources to 
meet  the  minimum  requirements  for  own  funds 
and  eligible  liabilities  (MREL)  represent  25 %  of 
their  risk-weighted  assets  (RWA)  against  a  2022 
requirement of 29 %. In order to gradually fill this 
gap, banks are continuing to issue new debt. At the 
end  of  May 2018,  total  issuance  of  term  debt 
(loans  with  a  specified  repayment  schedule  and 
due  to  mature  in  at  least  one  month)  was 
over 60 %  higher  than  at  the  equivalent  points  in 
2016 and 2017. 

The  2018  European  Banking  Authority  (EBA) 
stress  test  produced  unexpectedly  weak  results 
for UK banks, at least compared to peers (EBA, 
2018).  Two  major  UK  banks  were  among  the 
worst  three  performers  in  the  EBA  exercise, 
reflecting  their  susceptibility  to  weak  growth, 
credit  losses  and  uncertainty  related  to  the  UK’s 
withdrawal  from  the  EU.  The  2018  Bank  of 
England  stress  test  showed  that  the  UK  banking 
system would be able overall to withstand a global 
recession  that  was  more  severe  than  either  the 
2008 crisis or the estimated impact of a disorderly 
Brexit (BoE, 2018). The Bank judged that none of 
the seven banks involved in the exercise needed to 
strengthen  their  capital  position  as  a  result  of  the 
exercise.  As  well  as  the  exact  scenarios,  an 
essential difference between the EBA and Bank of 
England  stress  tests  is  that  the  former  applies  a 
constant  balance  sheet  methodology,  which  does 
not  allow  for  strategic  management  action  by  the 
banks,  such  as  conversion  of  subordinated  debt 
into equity. 

New  ring-fencing  requirements  took  effect  in 
January 2019. These require UK banks with more 
than  GBP 25 billion  (EUR 28 billion)  of  deposits 
from  households  and  businesses  to  separate  the 
provision  of  core  services  from  other  activities 
within  their  groups,  such  as  investment  banking. 
The  requirements  are  known  as  structural  reform 
or  ‘ring-fencing’.  Ring-fenced  banks  will  provide 
the bulk of UK retail banking services and be kept 
separate  from  other  parts  of  the  banking  group. 
The  Bank  of  England’s  Financial  Policy 
Committee  is  maintaining  the  UK  countercyclical 
capital buffer (CCyB) rate at 1 %, as it judges that 
domestic  risks,  apart  from  those  related  to  Brexit, 
remain at a standard level overall. 

20 

(%)20142015201620172018Q12018Q2Non-performing loans3.3-1.91.51.41.3Coverage ratio77.2-31.833.530.331.2Return on equity**3.83.22.14.34.4-Return on assets**0.20.20.10.30.3-Total capital ratio-19.520.820.520.220.4CET 1 ratio-13.815.014.914.815.0Tier 1 ratio-15.616.917.117.117.2Loan to deposit ratio*90.8105.989.886.388.480.5*ECB aggregated balance sheet: loans excl to gov and MFI / deposits excl from gov and MFI**For comparability only annual values are presented 
 
 
 
 
3.2. Financial sector and housing 

3.2.2.  HOUSING SECTOR 

wealth,  with  negative 
mobility (Resolution Foundation, 2018). 

implications  for  social 

The availability and affordability of housing  in 
the  UK  remains  a  major  challenge.  Annual  net 
housing  supply  has  increased  significantly  from 
post-crisis lows, but it is now stabilising at a level 
below what would be necessary to meet estimated 
demand. Regulation of the land market is strict and 
complex.  Shortages  of  housing  and  high  housing 
costs  are  particular  issues  in  areas  of  high  and 
growing  demand,  such  as  in  and  around  urban 
centres.  The  government  recognises  the  problem 
and  has  put  in  place  a  range  of  policy  initiatives 
and  set  ambitious  objectives  to  increase  supply  in 
the  coming  years.  At  the  same  time,  it  has 
reaffirmed 
limiting 
development  in  the  green  Belt  around  urban 
centres.  Home  ownership  has  fallen  for  younger 
people, 
intergenerational 
inequality. 

commitment 

contributing 

its 

to 

to 

Housing affordability and demand 

House  prices  are  high,  especially  in  areas  of 
high  demand.  Valuation  metrics  continue  to 
suggest  significant  overvaluation  in  the  housing 
market.  The  average  UK  house  price  was 
GBP 231 000  (EUR 261 000)  in  November  2018 
(ONS, 2018a). The ratio of median house prices to 
median annual earnings rose to a new record high 
of 7.8 in 2017 (ONS, 2018c) and the Commission 
estimates  that,  nationally,  UK  housing  is  around 
20 % overvalued. In  London, the average  price  of 
properties bought by first-time buyers (smaller and 
cheaper  than  average  properties)  is  13  times 
average earnings (ONS, 2018d). 

intergenerational 

Young  adults  have  largely  been  priced  out  of 
home  ownership.  Housing  transactions  remain 
well  below  pre-crisis  levels.  A  third  of  house 
purchases are now made without a mortgage, much 
higher than before the crisis. This reflects stretched 
affordability  and 
inequality 
(Resolution  Foundation,  2017).  Home  ownership 
has  declined  overall  in  recent  years,  especially 
among  younger  adults  on  middle  incomes.  In 
1995-1996,  65 %  of 
those  aged  25-34  with 
incomes  in  the  middle  20 %  for  their  age  owned 
their  home,  but  by  2015-2016  the  proportion  had 
fallen to only 27 % (IFS, 2018a). The likelihood if 
young  adults  owning  a  house  has  become  much 
more dependent on their parents’ level of property 

The housing  market has cooled,  particularly in 
the most expensive areas. Real house prices rose 
quite  rapidly  from  2014  to  2016, before  easing  in 
2017  (Graph 3.2.1).  Indicators  of  housing  market 
activity  (both  supply  and  demand)  were  quite  flat 
through  2018.  Nominal  national  house  price 
growth  (year-on-year)  fell  to  2.8 %  in  November 
2018  (ONS,  2018a),  only  marginally  above 
consumer  price  inflation.  The  growth  in  the  price 
of buying and renting property has slowed most in 
the  most  expensive  regions.  In  London,  nominal 
house  prices  declined  by  0.7 %  in  the  year  to 
November  2018.  Private  housing  rent  growth  has 
1.0 % 
also 
year-on-year  in  December  2018  (ONS,  2018b). 
With high economic uncertainty, fragile consumer 
confidence,  and  weak  surveyor  expectations  of 
transaction 
near-term  price  movements  and 
volumes, housing activity and prices appear set to 
remain subdued in the short term (RICS, 2018). 

gradually 

steadily, 

fallen 

to 

Graph 3.2.1:  Real house price growth 

Source: Eurostat 

Mortgage  debt  is  high  but  there  are  limited 
signs  of  associated  financial  distress.  In  recent 
years,  high  loan-to-income  mortgage  lending  has 
edged up in a context of low unemployment, cheap 
credit and high house prices.  This has contributed 
to persistently high household debt (see Section 1). 
The  Bank  of  England  has  taken  macro-prudential 
steps to curb risky mortgage lending and started to 
tighten  monetary  policy  (see  Section  1).  Secured 

21 

-20-15-10-5051007Q208Q209Q210Q211Q212Q213Q214Q215Q216Q217Q218Q2% yoy 
 
credit  to  households  is  still  growing,  but  only 
marginally.  Following  a  long,  gradual  decline, 
interest  rates  on  new  mortgages  have  bottomed 
out.  The  scope  for  households  to  benefit  from 
remortgaging  has  diminished.  While  the  average 
‘mortgage  to  median  income  ratio’  continues  to 
rise  (UK  Finance,  2018a),  the  proportion  of  new 
mortgages  with  a  ‘loan  to  income  ratio’  of  4.5  or 
above 
FPC’s 
recommended  limit  of  15 %  (ibid.).  Mortgage 
arrears  and 
(UK 
Finance, 2018b). 

remains  well 

repossessions 

remain 

below 

low 

the 

Housing supply and constraints 

The  post-crisis  recovery  in  house  building  has 
lost  momentum.  As  shown  in  Graph  3.2.2,  new 
housing  starts  have  been  on  a  slight  downward 
trend  since  peaking  in  early  2017.  Completions 
also  seem  to  have  plateaued.  The  number  of  net 
additional  dwellings  rose  by  2 %  to  222 190  in 
2017-2018,  a  much  smaller  annual  increase  than 
the  14 %  rise  in  the  previous  year  (MHCLG, 
2018a).  While  new  build  completions  are  still 
rising,  office-to-residential  conversions  fell  by  a 
third from their 2016-2017 peak. The official level 
of  annual  demolitions  is  very  low  (one  in  3 000 
dwellings),  which  has implications  for the pace at 
which the  housing stock  modernises and becomes 
more energy-efficient. 

Graph 3.2.2:  Quarterly housing starts and completions 

(England) (2003-2018) 

Source: Ministry for Housing, Communities and Local 
Government 

3.2. Financial sector and housing 

Tight,  inflexible  regulation  of  the  land  market 
limits the scope for residential development. As 
discussed  in  previous  country  reports,  the  process 
of  obtaining  planning  permission  is  complex  and 
costly. The ‘green belt’ policy was put in place to 
contain  urban  sprawl  and  keep  broad  swathes  of 
land  around  existing  conurbations  permanently 
open.  After  growing  through  the  post-war  period, 
the  amount  of  land  designated  as  green  belt  has 
remained  broadly  fixed  in  recent  years.  This 
restricts the scope for the expansion of major urban 
centres.  For  example,  London’s  green  belt  now 
covers  over  half  a  million  hectares,  and  is  about 
three 
itself.  The 
government  has  committed  to  maintaining  the 
green  belt  in  its  current  form,  which  does  not 
directly  distinguish  between  areas  of  high 
environmental amenity value and other areas. 

than  London 

larger 

times 

the 

This  has  prevented  housing  supply 
from 
responding adequately to shifts in demand and 
inflated the price of land used for housing. The 
tight  regulation  of  the  land  market  affects  the 
efficiency  of 
labour  market  and  wider 
economy,  with  distributional  consequences.  On 
average, 70 % of the price paid for a home is now 
accounted  for  by  the  value  of  the  land,  and  only 
30 %  by  that  of  the  property  itself  (IPPR,  2018), 
though  this  average  masks  significant  variation. 
The planning system and high cost of building land 
has  contributed  to  increasing  concentration  in  the 
residential construction sector and created barriers 
to entry for smaller firms. Builders’ profitability is 
heavily  dependent  on  land-price  dynamics  and  it 
can  make  commercial  sense  for  them  to  focus  on 
maximising  margins  rather  than  volume  (Bentley, 
2017). 

Housing  demand  is  set  to  continue  to  outstrip 
supply  although 
estimates  of  household 
formation  have  been  revised  down.  The  Office 
for  National  Statistics  (ONS)  now  expects  the 
number  of  households  in  England  (about  85 %  of 
the  UK  population)  to  increase  by  an  average  of 
159 000  a  year  over  the  next  25  years  (ONS, 
2018e).  This  is  much  less  than  the  210 000 
projected  previously.  To  keep  up  with  demand, 
gross  residential  construction  will  need  to  be 
significantly  higher 
replace 
demolitions  and  accommodate  geographical  shifts 
in  the  population.  High  housing  costs  may  also 
have suppressed household formation, for example 
by forcing young adults to live at home or cohabit 

than 

this, 

to 

22 

010203040506003040506070809101112131415161718thousands quarterlyHousing completionsHousing starts 
 
 
3.2. Financial sector and housing 

(EUR 1.13 billion)  of  lending 
to  SME  house 
builders.  The  government  has  consulted  on 
proposals to allow housing to be more easily built 
above  commercial  premises,  or  in  their  place 
(MHCLG,  2018c).  The  ‘help  to  buy’  equity  loan 
scheme will be extended by a further two years, to 
2023.  By  increasing  the  amount  buyers  can 
borrow,  it  may  have  contributed  to  more  rapid 
price growth in new-build properties. 

The  government  has  relaxed  rules  on  local 
authority borrowing to build public housing. In 
its  2018  Autumn  Budget,  it  removed  the  caps  on 
the  amount  that  local  authorities  can  borrow 
through  ‘housing  revenue  accounts’.  This  is  a 
much  more  significant  measure  than  the  limited 
increase  in  the  caps  announced  in  2017.  Since 
2010,  local  authorities  have  been  constructing  an 
average of only around 1 500 homes a year (1 % of 
total building). The scope for increased borrowing 
will allow them to build more homes, but it is not 
yet  clear  on  what  scale  and  the  possible  financial 
risks  are  still  unclear.  The  government  estimates 
that  it  could  eventually  enable  local  authorities  to 
build up to 10 000 homes a year. However, not all 
local authorities have the necessary experience and 
skills to be able to  make  use  of this  new  freedom 
in the short term. 

A review was carried out  to address a growing 
gap  between  planning  permissions  and  house 
building  volumes.  Planning  permission 
for 
359 500  homes  was  given  in  2017-2018, but  only 
195 290 new homes were built. This gap has been 
getting  wider.  The  Independent  Review  of  Build 
Out, published alongside the 2018 Autumn Budget 
(HM Government,  2018),  found  no  evidence  that 
speculative  land  banking  by  major  house  builders 
is a driver of slow build-out rates. It concluded that 
the binding constraint on build-out rates by profit-
maximising house builders is the rate at which the 
market  would  absorb  new  homes  of  a  particular 
type  on  a  large  site.  Greater  differentiation  in  the 
types  and  tenures  of  housing  delivered  on  large 
accelerate 
sites 
the 
construction.  The  government  welcomed 
review  and  will 
its 
to 
recommendations shortly. 

therefore 

formally 

respond 

could 

help 

to 

as  renters  for  longer.  Average  household  sizes 
have stagnated in England, while continuing to fall 
in most of the rest of the developed world. 

The  scope  for  faster  house  building  is  also 
limited  by  skills  shortages.  The  construction 
sector  lost  much  of  its  skills  base  in  the  bust 
following  the  financial  crisis.  Output  per  hour  in 
construction  has  fallen  over  the  last  decade  (see 
Graph  3.4.2)  and  the  sector  has  the  lowest  labour 
productivity  of  any  major  sector  in  the  UK 
economy (ONS, 2018f). Construction employment 
increased  by  3.8 %  in  2017  (ibid.)  and  the 
Construction  Industry  Training  Board  estimates 
that  building  companies  need  an  extra  35 000 
people a year. One  means of  mitigating skills and 
capacity  shortages  may  be  to  make  greater  use  of 
modern construction methods. 

The government’s policy response 

(iv) 

and 

in 
providing 

The  government  is  implementing  a  range  of 
policy  initiatives  to  boost  housing  supply.  Its 
2017  white  paper,  Fixing  Our  Broken  Housing 
Market  (DCLG,  2017),  set  out  four  broad  policy 
objectives for housing. These are: (i) increasing the 
supply  of  land  available  for  house  building;  (ii) 
accelerating  the  rate  of  house  completions;  (iii) 
the  building 
encouraging  more  diversity 
industry; 
to 
support 
homebuyers.  A  revised  National  Planning  Policy 
Framework (NPPF) is in place. Further updates to 
included  a  standardised 
the  NPPF 
methodology to determine minimum housing need 
in  each  local  authority  area.  There  has  been 
progress  in  issuing  more  residential  planning 
permissions,  with  permission  for  359 500  housing 
units  granted  in  the  year  to  September  2018 
(MHCLG, 2018b). The government is increasingly 
focusing  direct  public  support  for  house  building 
on  areas  with  the  highest  housing  demand  and 
prices. 

in  2018 

largely 

Recent  measures  have 
involved 
extending  and  revising  existing  policies.  The 
Housing  Infrastructure  Fund  supports  the  funding 
and  planning  of  infrastructure  linked  to  housing 
developments. In the 2018 Autumn Budget, it was 
increased  by  GBP 500 million  (EUR 566 million) 
to  GBP 5.5 billion  (EUR 6.22 billion),  to  be  used 
by 2022-2023. The British Business Bank (see Box 
3.4.1) will deliver a new scheme that will provide 
to  GBP 1 billion 
guarantees 

supporting  up 

23 

 
3.3.  LABOUR MARKET, EDUCATION AND SOCIAL POLICIES 

3.3.1.  LABOUR MARKET 

labour  market 

Despite  positive 
figures, 
challenges  persist.  The  activity  rate  continued  to 
rise  steadily,  to  81.5 %  in  Q3  -2018  (as  against 
78.4 % in the EU). Employment remains at record 
levels (78.6 % in Q3-2018) and unemployment has 
fallen further, to 4.1 % in Q3-2018. The long-term 
unemployment rate was 1.1 % in Q3-2018. Labour 
market  conditions  appear  more  nuanced  when 
taking 
high 
underemployment,  issues as regards the quality of 
jobs,  and  gender  and  disability  employment  gaps. 
Furthermore,  while there are no significant spatial 
disparities  in  employment,  regional  differences  in 
productivity  and  living  standards  are  large  (see 
Section 3.4.3). 

relatively 

account 

into 

the 

showing 

(CLASS,  2018) 

There has been an increase of precarious work 
and  zero  hour  contracts.  Recent  evidence  from 
the  Trade  Union  Confederation  (TUC,  2017) 
estimates that 3.2 million (one in ten) UK workers 
face insecurity at work, either because of contracts 
that  do  not  guarantee  regular  hours  or  income,  or 
because of low-paid self-employment (earning less 
than  the  National  Living  Wage (13)).  This  number 
has  risen  by  27 %  over  the  last  five  years,  with 
research  by  the  Centre  for  Labour  and  Social 
clear 
Studies 
correlation  between  insecure  work  and  lower 
productivity.  Precarious  and  insecure  work  also 
offers  substantially  lower  social  and  employment 
protection,  fewer  rights  and  often  diminished 
employee  power  of  representation.  The  lack  of  a 
long-term 
and 
commitment  between 
workers,  and  the  use  of  temporary  contracts,  lead 
to lower investment by firms in skills and training, 
impact  on 
turn,  has  a  negative 
which 
productivity  growth 
(European  Commission 
2018e).  It  remains  to  be  seen  how  far  the  Good 
Work  Plan,  a  package  of  measures  to  support  the 
most vulnerable workers issued in December 2018, 
will address this. 

firms 

in 

a 

Improving  the  quality  of  employment  would 
help  to  raise  productivity.  As  discussed  in 

(13)  The National Living Wage is an obligatory minimum wage 
payable  to  workers  in  the  UK.  As  of  April  2018,  it  is 
GBP 7.83  per  hour  for  those  aged  25  and  over,  GBP 7.38 
for those aged 21–24, GBP 5.90 for ages 18–20, GBP 4.20 
for under 18s and GBP 3.70 for apprentices. 

Section 3.4.1, productivity has been stagnant since 
the beginning of the crisis and is now over a sixth 
below  its  pre-crisis  trend  (ONS,  2018f).  This  has 
weighed on real wage growth, which remains low 
while UK employment has been growing strongly. 
The  government’s  Review  of  Modern  Working 
Practices  (Taylor,  2017)  sought  to  address  this 
challenge by setting out a list of five principles to 
underpin the quality of work in the future: overall 
worker  satisfaction,  good  pay,  participation  and 
progression,  wellbeing,  safety  and  security  and 
voice  and  autonomy.  The  Industrial  Strategy 
Council,  established  in  October  2018,  is  tasked 
with providing advice on measuring  the quality of 
work. 

Career  progression  is  still  hard  to  achieve  for 
workers  on  low  wages.  Real  wages  have  been 
stagnant  or  declining  for  almost  a  decade  (see 
Section  1).  With  constant  pressure  on  household 
budgets,  many  workers are turning to second jobs 
or  quick  access  to  credit  to  plug  shortfalls.  A 
recent survey among UK workers found that 20 % 
of sampled workers have taken on a second job to 
try to  make ends  meet,  while a further 20 % have 
either  tried  or  contemplated  it  (CLASS,  2018).  In 
addition, of those who are working outside normal 
office  hours  or  during  weekends,  almost  70 %  do 
not  receive  extra  pay.  These  factors,  combined 
with the rise of precarious employment, mean that 
career  advancement  prospects  and 
improved 
quality  of  work  remain  unattainable  for  a  large 
proportion of UK workers. 

The  proportion  of  businesses  reporting  labour 
shortages  is  relatively  high  compared  to  other 
Member States. It has increased since the start of 
the  recovery,  from  11.4 %  in  2013  to  23.7 %  in 
2017  (European  Commission,  2018d).  Reported 
shortages  are  higher  in  services  (25 %  in  2017) 
than  in  industry  (21.9 %)  and  the  building  sector 
in 
(15.4 %).  They  are  particularly  noticeable 
transport,  accommodation,  food  and  beverage 
services,  employment  activities,  and  services  to 
buildings  and  landscape  activities.  These  are  also 
in 
the  sub-sectors  with 
shortages  in  recent  years.  Overall,  the  proportion 
of reported shortages remains below the pre-crisis 
level for the services and industrial sectors. 

the  biggest 

increase 

24 

 
 
                                                           
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  is  designed  as  a  compass  for  a  renewed  process  of 
upward  convergence  towards  better  working  and  living  conditions  in  the  European 
Union (1). It sets out twenty essential principles and rights in the areas of equal opportunities and 
access to the labour market; fair working conditions; and social protection and inclusion. 

The  UK  performs  relatively  well  on  a 
the  Social 
number  of 
indicators  of 
the  European 
Scoreboard  supporting 
Pillar  of  Social  Rights,  but 
some 
labour  market 
challenges  remain.  The 
displays 
terms  of 
in 
figures 
robust 
participation rates, employment creation and 
youth- 
unemployment. 
long-term 
However, there are an increasing number of 
underemployed  people  who  would  like  to 
work more hours in their jobs but are unable 
to do so. There has been a considerable rise 
of 
are 
levels  of  social 
characterised  by 
protection, 
and 
productivity. 

contracts,  which 
lower 

progression 

zero-hour 

skills 

and 

Despite  the  decline  in  poverty  and  social 
exclusion  overall,  certain  groups  remain 
at  a  higher  risk.  Circa  14  million  people 
live  under  the  poverty  line.  The  proportion 
of people with disabilities who are at risk of 
poverty or social exclusion is higher than the 
EU average. Child poverty is high, and it  is 
projected  to  rise.  Rates  of  in-work  poverty 
for  parents. 
are  also  up,  particularly 
including 
Furthermore, 
among  children,  has  increased  considerably 
and  is  predicted  to  continue  rising  in  the 
coming years.  

homelessness, 

Upskilling  of  the  adult  workforce  is  being  strengthened.  The  National  Retraining  Scheme 
provides career advice and job-specific training. Although uptake remains slow, the reform of the 
apprenticeship  system  is  on-going  and  has  been  boosted  by  new  government  investment  in  the 
levy scheme and greater employer involvement.  

(1)  The European Pillar of Social Rights was proclaimed on 17 November 2017 by the European Parliament, the Council 

and the European Commission. 

The  gender  employment  gap  remains  a 
challenge. Despite some improvements in the  last 
few years, the activity rate among women remains 
10.4 pps  lower  than  that  among  men  (76.4 %  vs 
86.8 % in Q3-2018). A main driver seems to be the 
difficulty  in  reconciling  professional  and  caring 
responsibilities,  which 
the 
shortfall  in  care  services  (see  sub-section  on 

is  aggravated  by 

in 

have 

2017) 

(38.4 % 

healthcare).  A  significant  proportion  of  inactive 
caring 
women 
responsibilities  that  prevent  them  from  seeking 
work  (Graph 3.3.1).  These  figures  are  more 
striking for the 25-49 age group, where up to 61 % 
family 
of 
responsibilities.  In  addition,  41.5 %  of  women 
working part-time (in 2017) do not work more due 

inactive  women  ascribe 

this 

to 

25 

 
 
3.3. Labour market, education and social policies 

to caring responsibilities. These rates are amongst 
the  highest  in  the  EU,  despite  the  fact  that  the 
government  maintained  investment  in  childcare 
the  financial  crisis  and  more  recently 
after 
extended the  30-hour entitlement to free childcare 
for 0-3 year olds. 

Graph 3.3.1:  Inactive population aged 20-64 by reason, in 

percentage, 2017 

GBP 100 million  (EUR  113  million)  for  the  first 
phase of the National Retraining Scheme in 2019. 
This  will  include  a  new  careers  guidance  service 
with  expert  advice  to  help  people  identify  work 
opportunities in their area, and courses combining 
online learning with traditional classroom teaching 
to develop key transferable skills. Phase two of the 
the 
National  Retraining  Partnership  between 
government, the Confederation of British Industry 
and  the  Trade  Union  Congress  will  focus  on 
job-specific retraining. 

is 
Implementing  the  apprenticeship  reform 
proving a challenge, with registrations down on 
previous  years.  The  Apprenticeship  Levy 
introduced in 2017 is a charge on employers which 
can  be  used  to  fund  apprenticeship  training. 
Provisional figures show that the number of people 
who  started  an  apprenticeship 
in  July  2018 
(25 300)  was  up  20 %  on  July  2017  (just  two 
months  after  the  levy  came  in),  but  down  when 
compared  to  the  same  time  in  previous  years 
(-43 %  compared  to  July  2016).  Just  8 %  of  levy 
funds  collected  in  the  first  year  were  spent.  A 
recent report (CIPD, 2018) shows that there is still 
considerable  confusion  and  uncertainty  about  the 
Apprenticeship 
employers, 
particularly  SMEs.  The  reform  of  the  vocational 
training  system  will  involve  new  classroom-based 
training 
work-based 
apprenticeships  known  as  ‘T-levels’.  However,  of 
15  T-level  qualifications  being  developed,  only 
three will be available by 2020. 

programmes 

among 

Levy 

and 

A 

total 

A further  package of  measures was announced 
in  the  2018  Autumn  Budget  to  complete  the 
apprenticeship 
of 
reforms. 
GBP 450 million (EUR 510 million) will be made 
available  to  enable  levy-paying  employers  to 
transfer  up  to  25 %  of  their  funds  to  pay  for 
apprenticeship  training.  The  government  will  also 
provide up to GBP 240 million (EUR 270 million), 
to  halve  the  co-investment  rate  for  apprenticeship 
training 
further  GBP 5 million 
(EUR 5.7 million)  in  2019-2020  will  help  the 
Institute  for  Apprenticeships  and  the  National 
Apprenticeship  Service  to  identify  gaps  in  the 
training  provider  market  and  increase  the  number 
of  employer-designed  apprenticeships.  As  skills 
policy  is  a  devolved  matter,  these  administrations 
will  be  free  to  choose  how  to  spend  the  funds 
raised  from  the  levy.  Local  Industrial  Strategies 
will  further  complement  regional  apprenticeship 

to  5 %.  A 

Source: Eurostat 

3.3.2.  SKILLS AND EDUCATION 

Skills 

at 

low 

remain 

Skills  mismatches 
the 
macroeconomic  level.  Disparities  between  the 
employment  rates  of  low-,  medium-,  and  high-
skilled  workers  were  among  the  lowest  in  the  EU 
in  2017  (Graph  3.3.2).  However,  skills  shortages 
as  measured  by  employer  surveys  are  high  (see 
above),  and  there  is  a  relatively  high  share  of 
mismatch between the skills workers have and the 
requirements of their jobs.  

Graph 3.3.2:  Relative dispersion of employment rates by 

education level, 2010, 2014 and 2017 

Source: Own calculations based on Eurostat. Annual 
average based on the average of four quarters. 

Measures  have  been  put  in  place  for  in-work 
upskilling.  The  2018-2019  budget  allocates 

26 

01020304050Think no work is availableOther family or personalresponsibilitiesIn education or trainingOtherRetiredOwn illness or disabilityLooking after children orincapacitated adultsFemalesMales0.00.10.20.3UKPTNLDKEEATDELVCZSIFISECYEU…LUELMTESROPLHULTFRSKIEITBGHRBE201720142010 
 
 
3.3. Labour market, education and social policies 

the  country 
(House  of  Commons,  2018a). 
Initiatives for training and recruiting teachers have 
been launched in England, Wales and Scotland. 

student 

teaching 

prospects.  According 

Potential  changes  to  the  UK’s  immigration 
policy could have a negative impact on research 
and 
to 
Universities UK (2018), over 400 000 international 
students  came  to  study  in  the  UK  in  2016-2017, 
representing  19 %  of  all  students.  On  average, 
every 
from  another  Member  State 
generated (through expenditure on tuition fees and 
(EUR 24 900)  gross 
subsistence)  GBP 22 000 
added  value  and  GBP 5 000  (EUR 5 650)  in  tax 
receipts.  International  staff  made  up  20 %  of  all 
university  staff  and  30 %  of  all  academic  staff  in 
2017  (up  to  43 %  for  some  subjects  such  as 
engineering)  (ibid.).  Around  11 %  of  the  UK 
Higher  Education 
sector’s  GBP 7.9 billion 
(EUR 8.9 billion)  research  income  in  2016-2017 
was  from  European  sources,  the  majority  (9 %  of 
the total) coming from EU funding. 

Participation  in  tertiary  education  is  widening 
but  equal  access  is  an  obstacle.  The  UK  tertiary 
educational  attainment  rate  reached  48.3 %  in 
2017, one of the highest in the EU and well above 
the  EU  average  of  39.9 %.  The  National  Audit 
Office  has  looked  at  the  impact  of  student  loans 
and  course  fees 
in  a  context  of  widening 
participation  (NAO,  2017).  While  students  from 
disadvantaged backgrounds are now more likely to 
they  remain 
in  higher  education, 
participate 
underrepresented  and  most  are  enrolled  by  lower-
ranked 
institutions.  The  Scottish  and  Welsh 
governments  are  adopting  several  measures  to 
encourage students from a deprived background to 
study for a degree. 

Mental  health  and  wellbeing  among  students 
are  concerns.  Levels  of  mental  illness,  mental 
distress  and  low  wellbeing  among  students  in 
higher education are increasing. Nearly  five times 
as  many  students  as  10  years  ago  disclosed  a 
mental  health  condition 
their  university 
(Thorley, 2017). Universities UK has established a 
‘Student  Mental  Health  Services  Task  Group’ 
acknowledging  that  higher  education  needs  to  do 
more to cope with the rising level of mental health 
issues reported by 94 % of universities. 

to 

investment policies to meet employers skills needs. 
The  expected  impact  of  these  measures  will  be 
more  flexible  training  tailored  to  employers’  real 
needs,  resulting  in  greater  involvement  in  the 
scheme by the business community. 

Education 

Government  expenditure  on  education  fell  in 
2016 compared to 2015, but remains in line with 
the EU average. Education spending dropped as a 
share  of  GDP,  from  4.9 %  in  2015  to  4.7 %  in 
2016 (equal to the EU average), and as a share of 
total government expenditure from 11.5 % in 2015 
to  11.2 %  in  2016  (still  above  the  EU  average  of 
10.2 %). The most significant budget cuts affected 
higher  education  (from  7.1 %  to  4.8 %  of  total 
general  government  expenditure).  In  England,  an 
increasing  number  of  schools  are  in  deficit  and 
finding  it  difficult  to  remain  financially  viable. 
Nevertheless,  according  to  Canton  et  al.  (2018), 
the efficiency of public spending — measured with 
respect  to  tertiary  educational  attainment,  PISA 
scores  and  the  proportion  of  young  people  not  in 
employment,  education  or  training  (NEET)  —is 
relatively high.  

The  rate  of  early  leavers  from  education  and 
training is close to the 2020 benchmark of 10 %, 
but  with  significant  regional  variations.  The 
UK’s average rate dropped from 14.9 % in 2011 to 
10.6 %  in  2017,  the  same  as  the  EU  average. 
However, at regional level rates range from 6 % in 
London  to  13.9 %  in  Yorkshire  and  the  Humber 
and  the  East  of  England.  Unlike  in  other  EU 
countries,  the  early  school  leaving  rate  is  lower 
among  students  born  abroad  (9.5 %)  than  those 
born in the UK (10.8 %). Boys are  more likely to 
leave school early than girls (12.1 % vs. 9 %). 

Concerns persist over the training, recruitment 
and retention of teachers. Teacher recruitment in 
England has not  kept pace  with increases in pupil 
numbers  (Sibieta,  2018).  Up  to  40 %  of  new 
teachers  leave  the  state  school  sector  after  five 
years and there are shortages of maths, physics and 
modern  foreign  language  teachers  across  schools 
in England (Stiell et al., 2018). In addition, poorly 
performing  schools  find  it  hard  to  recruit  well-
qualified teachers. The House of Commons Public 
Accounts  Select  Committee  has  called  for  action 
plans to address the problem  of retaining teachers 
and the variations in the quality of teaching across 

27 

 
3.3. Labour market, education and social policies 

also  has  a  much  wider  employment  rate  gap 
between  people  with  and  without  disabilities  than 
the  EU  (33.5 pp.  vs  the  EU  average  of  25.8 pps). 
This is linked to high levels of early school leaving 
among people with disabilities (15). The Disability 
Employment Strategy addresses some employment 
issues, but it is not targeted at reducing poverty or 
social  exclusion  for  people  with  disabilities  who 
are unable to integrate into the labour market. The 
‘Improving  Lives:  the  future  of  work,  health  and 
disability’  strategy  (DWP  &  DoH,  2017)  will 
involve 
and  more  personalised 
employment support for people with disabilities. 

intensified 

Graph 3.3.3:  At risk of poverty or social exclusion rate, age 

groups 

Source: Eurostat 

living 

Child  poverty  is  high  and  predicted  to  rise 
further  (Graph  3.3.3).  The  number  of  children  in 
poverty in the UK has increased by 100 000 since 
2017,  to  4.1 million  in  July  2018.  30 %  of  all 
children  are 
in  relative  poverty  after 
household  costs.  Children  remain  the  most  likely 
segment of the population to be in relative poverty, 
compared to 21 % of working-age adults and 16 % 
of pensioners experiencing poverty. Child poverty 
rates  are  highest  in  large  cities,  particularly 
London,  Birmingham  and  Manchester.  The  IFS 
predicts a 7 % rise in child poverty between 2015 
and  2022,  and  other  sources  predict  child  poverty 
rates to reach 40 % (IFS, 2017). The Equality and 
Human  Rights  Commission 
(EHRC,  2018) 
forecast  that  another  1.5 million  children  will  fall 

3.3.3.  SOCIAL INDICATORS AND POLICIES 

High  market  income  inequality  is  mitigated  by 
an effective tax and benefits system, but wealth 
inequality is high. Income inequality is among the 
highest  in  the  EU  before  taxes  and  transfers  are 
taken  into  account  (market  income  inequality).  In 
2016,  the  market  income  of  the  richest  20 %  was 
over  16  times  that  of  the  poorest  20 %  (ONS, 
2018g).  However,  the  impact  of  the  income  tax 
system  and  social  transfers  reduces  disposable 
income 
the  EU 
average.  On  the  other  hand,  the  top  10 %  of  the 
population owned 44 % of the UK’s wealth (ibid.). 

to  slightly  above 

inequality 

The  risk  of  poverty  or  social  exclusion  has 
declined in line with the recovery but challenges 
lie ahead. In 2017, 22 % of the population was at 
risk of poverty or social exclusion (AROPE), down 
from  a  high  of  24.8 %  in  2013. The  fall  has  been 
driven  by  substantial  decreases  in  the  percentage 
of  the  population  experiencing  severe  material 
deprivation, which reached a new low of 4.1 % in 
2017. In the South East of England, just 12 % were 
at risk of poverty in 2016-2017, and the figure was 
only slightly higher in the South West (13 %) and 
London (14 %) (House of Commons, 2018b). This 
contrasts  with  rates  of  around  20 %  in  Wales, 
Northern Ireland and the three regions in the North 
of  England  (14).  Since  2015,  the  UK  has  had  no 
official measure of poverty and there is no national 
poverty  eradication  strategy.  However,  a  recent 
study  by  the  Joseph  Rowntree  Foundation  found 
that more than one in five people in the UK (22 %) 
are  in  poverty  (JRF  2018).  This  is  equivalent  to 
14.3 million  people:  8.2 million  working-age 
adults,  4.1 million  children  and  1.9 million 
pensioners. Eight million people live in poverty in 
families  where  at  least  one  person  is  in  work. 
Research by the Social Metrics Commission using 
a  different  methodology  comes  to  very  similar 
findings (SMC, 2018).  

People  with  disabilities  are  at  a  higher  risk  of 
poverty  and  exclusion.  The  proportion  of  people 
with  disabilities  who  are  at  risk  of  poverty  or 
social exclusion in the UK is 32.2 % (EU average: 
30.1 %).  The  AROPE  gap  between  people  with 
and  without  disabilities  is  wider  than  the  EU 
average  (14.6 pps  vs  9.2 pps  in  the  EU).  The  UK 

(14)  The North of England includes the North East, North West, 

and Yorkshire and Humber. 

(15)  At  14.1  pps.in  2016,  the  gap  in  early  school  leaving 
between  those  with  and  without  disabilities  is  wider  than 
the EU average of 12.6 pps. 

28 

0510152025303505060708091011121314151617% of populationUKChildren (<18y)Working age (18-64)Elderly (65+) 
                                                           
 
                                                           
3.3. Labour market, education and social policies 

phases  and  more  will  be  needed  as  rollout 
progresses. 

the  Government  has 
In  January  2019, 
announced  a  series  of  changes  to  make  the 
Universal  Credit  system  fairer.  These  include 
not  applying  the  two  child  limit  on  UC  to  any 
children  born  before  April  2017,  a  measure 
expected  to  benefit  around  15 000  families,  and  a 
pilot  scheme  to  support  10 000  benefit  claimants 
on to the new UC system before a vote takes place 
on  migrating  all  claimants.  Other  issues  to  be 
reviewed  include  increasing  the  frequency  of  the 
payments  to  claimants,  making  budgeting  easier 
and supporting women. 

Homelessness  figures  are  on  the  rise  and  show 
no sign of abating. A shortage of housing supply 
and  low  levels  of  construction  by  local  councils 
have  driven  up  rents  and  limited  access  to 
to 
affordable  and  social  housing.  According 
research  by  the  housing  charity  Shelter,  at  least 
320 000  people  are  homeless  in  the  UK  (Shelter, 
2018). This year-on-year increase of 13 000 (4 %) 
comes  despite  pledges  to  tackle  the  crisis.  The 
Homeless Reduction Act, which came into force in 
April  2018,  provides  a  new  legislative  framework 
for  local  authorities  to  refocus  their  work  on 
preventing  homelessness.  The  government  has 
committed  to  maintaining  Housing  Benefit  for  all 
supported housing and halving rough sleeping (17) 
by  2022,  and  eliminating  the  phenomenon  by 
2027, in line with the Rough Sleeping Strategy. 

Childcare provision 

The 
implementation  of  childcare  provision 
reforms  has  slowed  down  but  investment  has 
been  maintained.  September  2017 
reforms 
involved  the  full  roll-out  of  30  hours  per  week  in 
school  term-time  of  free  childcare  for  three  and 
four  year-olds  whose  parents  are  working  (House 
of Commons, 2018d), and the launch of ‘tax-free’ 
childcare.  At  the  end  of  September  2018,  the 
government  closed  the  childcare  voucher  scheme 
to  new  entrants,  despite  not  having  analysed 

(17)  People  sleeping,  about  to  bed  down  (sitting  on/in  or 
standing next to their bedding) or actually bedded down in 
the  open  air  (such  as  on  the  streets,  in  tents,  doorways, 
parks, bus shelters or encampments). People in buildings or 
other places not designed for habitation (such as stairwells, 
barns,  sheds,  car  parks,  cars,  derelict  boats,  stations,  or 
‘bashes’). 

into  poverty  by  2021-2022,  raising  the  child 
poverty rate to 41 %. A number of sources (House 
of  Commons,  2018b,  p22),  including  the  IFS, 
concur  that  the  main  drivers  of  the  projected 
increase  in  child  poverty  are  linked  to  cuts  in 
public  expenditure  resulting  from  the  rollout  of 
Universal  Credit  and  associated  means-tested 
(see  below).  Huge  under-
family 
investment  by  central  Government  in  children’s 
social care services over the last decade has led to 
considerable overspending by local councils in this 
area.  According 
the  Local  Government 
Association (LGA), 132  out  of 153 local councils 
in  England,  (88 %)  overspent  in  2017-2018,  with 
the number of children in care at a ten year high. 

support 

to 

show 

calculations 

Universal Credit rollout continues to encounter 
delays  and  it  will  not  be  fully  implemented 
before  2023.  Universal  Credit  (UC)  is  a  new 
integrated  system  of  welfare  benefits  and  in-work 
support that will replace six separate means-tested 
benefits  and  tax  credits.  It  will  ultimately  pay  out 
more  than  GBP 60 billion  (EUR 68 billion)  a  year 
to  around  7 million  families.  Its  design  and 
implementation have proven controversial. Recent 
IFS 
that  UC  will  be 
GBP 1 billion  (EUR 1.13 billion)  less  generous 
than  the  system  it  is  replacing  (IFS,  2018b).  This 
may  affect  the  adequacy  of  benefits (16).  A  recent 
(October  2018)  report  of  by  the  Commons  Select 
Committee (House of Commons, 2018c) has found 
that the UC IT system is under-performing and the 
administration  is  causing  hardship  for  claimants 
and  additional  burdens  for  local  organisations. 
According  to  the  IFS,  most  single  parents,  low-
earning  self-employed  people,  and  those  in  work 
and with savings are expected to fare less well than 
under  the  previous  system.  One-earner  couples 
with  children  and 
rented 
accommodation  will  fare  better.  The  Department 
of Work and Pensions will be outsourcing many of 
the  application  support  functions  to  non-welfare-
related  organisations  such  as  public  libraries  and 
Citizens  Advice  Bureaus.  This  could  entail  risks 
mainly on data protection but also on the handling 
of  the  claims  and  will  require  adequate  resources 
and  cooperation  with  delivery  partners.  Regular 
evaluations  have  been  conducted  during  the  pilot 

low  earners 

in 

(16)  The  adequacy  of  minimum  income  benefits  in  the  UK 
exceeds  the  EU  average,  according  to  SPC  Committee’s 
Benchmarking  Framework  on  Minimum  Incomes.  For 
details,  see  the  draft  Joint  Employment  Report  2019 
(COM(2018) 761 final). 

29 

 
                                                           
                                                           
3.3. Labour market, education and social policies 

fell  by  17 %  from  2011-2012  to  2015-2016 
(Glendinning, 2018), despite a significant increase 
in  the  population  aged  65  and  over.  Unmet  need 
for  social  care  services  also  affects  hospital  bed 
use,  with  a  significant  proportion  of  delayed 
patient  discharges  caused  by  the  unavailability  of 
social  case  services  (NHS  England,  2018).  At  the 
same  time,  the  number  of  family  carers  has  been 
growing and fifth of them are themselves aged 65 
or older (Glendinning, 2018). 

to  meet 

targets  such  as 

The  rising  demand  for  health  services  across 
the UK has outpaced resources in recent years, 
affecting the performance of the health system. 
As demand outstrips available financing, hospitals 
are  struggling 
the 
percentage  of  patients  who  start  cancer  treatment 
within  62  days  of  referral  or  who  need  to  be 
admitted,  transferred  or  discharged  within  four 
hours  of  arrival  at  accident  and  emergency 
departments (NAO, 2018a). All four nations of the 
UK  aim  to  reform  their  health  systems  with  more 
efficient  models  of  care.  In  Scotland,  Integrated 
Care  Partnerships  have  been  formed  to  integrate 
health  and  social  care  services.  In  England,  early 
evidence from the Vanguards scheme suggests that 
its  new  care  models  can  moderate  the  rise  in 
emergency admissions to hospitals (NAO, 2018b). 
However,  challenges  are  encountered  when  it 
comes  to  scaling  up  these  models  across  England 
(NAO,  2018c),  not 
funding 
earmarked  to  support  the  transition  has  instead 
been  partly  diverted  to  plug  deficits  in  health 
providers’ budgets. 

least  because 

The health sector faces staff shortages. The UK 
has  fewer  doctors  and  nurses  per  person  than  the 
EU  average.  There  are  2.8  practising  doctors  per 
1 000  population  against  an  average  of  3.6  in  the 
EU  (OECD/EU,  2018).  In  particular,  there  is  a 
shortage of primary care providers, as the number 
of  general  practitioners  per  1 000  population  has 
dropped  since  2010.  In  2017,  around  45 000 
clinical  posts,  including  36 000  nursing  vacancies 
in  NHS  England  were  not  filled  (Public  Health 
England,  2017).  Approximately  80 %  of  these 
vacancies  are  being  covered  by  a  combination  of 
temporary  staff.  It  is  estimated  that  the  NHS  in 
England  will  probably  require  64 000  more 
hospital doctors and 171 000 more nurses over the 
next  15  years  (IFS  &  The  Health  Foundation, 
2018).  However,  there  are  problems  with  the 
retention  of  health 
supply, 

recruitment  and 

winners  and  losers  as  suggested  by  the  Treasury 
Select  Committee.  Universal  Credit  limits  help 
with  childcare  costs  to  working  parents,  but  this 
has been extended to those working under 16 hours 
and  to  a  higher  percentage  of  costs  (up  to  certain 
ceilings).  The  2018  Childcare  Survey  found  that 
the ‘confusing hotchpotch of seven different types 
of support’ means parents are at risk of missing out 
on  help  (Family  and  Childcare  Trust,  2018). 
Raising the childcare costs ceiling under Universal 
Credit  and  facilitating  upfront  payments  for 
childcare would make it easier for parents to move 
the 
Similarly, 
into 
administrative  procedures 
for 
childcare  benefits  would  result  in  more  efficient 
and successful payment claims. 

simplifying 

applying 

work. 

for 

Childcare  supply  varies  across  regions  with 
after-school care insufficient in most of the UK. 
Childcare  and  early  years  education  are  devolved 
policy  areas.  The  2018  Childcare  Survey  found 
that  86 %  of  councils  in  Scotland  had  enough 
places  for  parents  working  full-time  to  access  the 
three  and  four-year-old  entitlement,  but 
this 
applied  to  only  50 %  in  Wales  and  England 
(Family and Childcare Trust, 2018). Scotland plans 
to double free childcare for all three and four-year-
olds  to  30  hours/week  in  term-time  by  2020. 
Taking Wales Forward (Welsh Government, 2016) 
commits  the  Welsh  Government  to  providing  30 
hours/week of government-funded early education 
and  care  for  working  parents  of  three  and  four-
year-olds, for up to 48 weeks of the year. This has 
been  available  in  more  ‘early  implementer’  local 
authority  areas,  or  parts  of  them,  since  mid-2018 
but  take-up  has  been  lower  than  budgeted  for.  In 
Northern 
legal 
requirement  to  meet  childcare  demand  (Skinner, 
2016). The majority of UK local authorities do not 
have  enough  capacity  to  address  after-school  care 
needs  for  children  with  disabilities  or  children 
whose parents work outside normal office hours. 

there  has  been  no 

Ireland 

Health care 

Shortfalls in the provision of social care services 
are  placing  an 
increasing  burden  on  the 
National Health Service (NHS) and on informal, 
family carers. While competence for social care is 
devolved,  access  to  social  care  is  becoming 
increasingly restricted in all four UK countries. In 
England,  spending  on  adult  social  care,  which  is 
largely  delivered  through  local  authority  budgets, 

30 

 
3.3. Labour market, education and social policies 

professionals.  In  2014,  the  number  of  nursing 
graduates  per  100 000  population  was  well  below 
the EU average and it has not increased since then. 
According  to  the  Nursing  &  Midwifery  Council 
(NMC), there were fewer nurses and midwives on 
the  NMC  register  in  March  2018  than  in  March 
2017, with a clear decrease in the number of nurses 
and  midwives  from  European  Economic  Area 
(EEA) countries (NMC, 2018). 

The government is taking actions to address the 
challenges.  It  has  announced  a  25 %  increase  in 
medical  school  places  from  2018-2019  and 
funding  for  25 %  more  student  nurse  places  from 
2018.  This  could  translate  to  an  extra  26 000 
trained  nurses  by  2027,  while  the  additional 
graduate  doctors  are  expected  to  become  general 
practitioners  or  consultants  around  2030-32 
(Public  Health  England,  2017).  Nevertheless,  to 
fill the gaps in the coming years, the UK will have 
to  continue  recruiting  doctors  and  nurses  from 
abroad.  Health  Education  England  aims  to  recruit 
over 1 000 nurses a year from overseas from 2018-
2019 onwards (DoH, 2018). 

31 

 
3.4. COMPETITIVENESS REFORMS AND INVESTMENT 

3.4.1.  PRODUCTIVITY AND INNOVATION 

Productivity 

in 

UK  productivity  has  long  been  quite  low,  due 
partly  to  low  investment.  The  UK  is  an  open 
economy  with  a  high  employment  rate  and  a 
business  environment  featuring  many  positive 
aspects,  including  relatively  free  and  efficient 
product, labour and capital markets. It ranks ninth 
among  140  countries 
the  World  Bank’s 
classification  of  the  ‘friendliness’  of  national 
(World  Bank,  2019). 
business  environments 
However, these positive microeconomic conditions 
do not seem sufficient to improve UK productivity, 
which  is  significantly  lower  than  that  of  other 
developed economies. Large parts of the economy 
perform  comparatively  poorly  on 
the  main 
potential  drivers  of  productivity  —  skills  (see 
Section  3.3),  R&I  (see  below),  investment  (see 
and 
Section 
implementation  of  efficient  business  processes. 
The UK is an outlier for its low private investment 
as  a  proportion  of  GDP  (ONS,  2017).  There  are 
also  impediments  to  the  efficient  allocation  of 
capital  and  labour,  including  a  tightly  regulated 
land  market  and  associated  housing  shortage  (see 
Section 3.2.2). 

adoption 

3.4.2) 

and 

the 

Graph 3.4.1:  Trends in UK productivity and real wages 

Source: European Commission 

Since the financial crisis, the UK’s productivity 
performance  has  been  among  the  worst  in  the 
EU  and  the  G7.  Output  per  hour  is  barely  above 
the  level  before  the  pre-crisis  level  (Graph  3.4.1). 
Forecasts of a sustained productivity recovery have 
failed  to  materialise  and  —  while  there  is  no 

comprehensive  explanation  of  this  ‘productivity 
puzzle’  —  the  problem  appears  structural.  Robust 
job  creation  (see  Sections 1  and  3.3)  has  been 
sectors, 
concentrated 
especially  services.  Higher  labour  productivity 
growth  would  be  needed  to  sustain  higher  living 
standards and wages (Haldane, 2018). 

low-productivity 

in 

High-productivity  sectors  have  experienced 
relative decline. The finance and insurance sector 
was  a  disproportionate  driver  of  productivity 
growth until 2008. After the crisis, its contribution 
to GDP growth fell sharply. As Graph 3.4.2 shows, 
this  was  due  both  to  lower  labour  productivity  in 
finance  and  a  7.3 %  fall  in  financial  sector 
employment as a share of the total. Employment in 
the  relatively  high-productivity  manufacturing 
sector  fell  by  39 %  between  2007  and  2016,  and 
manufacturing  productivity  growth  was  also 
subdued.  Manufacturing  now  employs  less  than 
10 %  of  the  workforce,  one  of  the  lowest  shares 
industrialised  economies.  A  detailed 
among 
breakdown 
telecommunications, 
that 
finance, mining and quarrying, electricity and gas, 
pharmaceuticals  and  computer  programming 
account for 60 % of the UK’s productivity shortfall 
(Riley et al., 2018).  

shows 

Graph 3.4.2:  Productivity levels and change in employment 
for aggregated sectors 2007-2016 

Source: Eurostat. Note: the size of the circles is proportional 
to the share of GVA in 2018. Blue balloons indicate where 
productivity has decreased in this period. Gold balloons 
show sectors in which labour productivity has increased. 

Services  sectors  with  low  productivity  have 
absorbed  more  resources.  Accommodation  and 
food, and administration and support services now 
total 
account 

proportions 

bigger 

for 

of 

32 

7580859095100105110115120989900010203040506070809101112131415161718Index Q1-08 =100Real wagesOutput per hourPre-crisistrend of productivity growth Mining, energy and waterManufacturingWholesale & RetailConstructionTransportation & storageAccommodation & food servicesInformation and communicationFinance and insuranceProfessional, scientific and technical activitiesAdministrative & support services-20%-15%-10%-5%0%5%10%15%20%25%30%0102030405060708090100% Change in employment 2007/2016Labour Productivity (GVA per hour worked) 2016 
 
 
 
3.4. Competitiveness reforms and investment 

this may be hampering UK productivity. There are 
also  substantial  differences  in  the  quality  of 
management across UK firms, with foreign-owned 
firms  tending  to  benefit  from  better  management 
practices.  While  the  2018  Innovation  Scoreboard 
(European Commission, 2018e) presents the UK as 
a  ‘leading  innovator’,  UK  businesses  have  not 
capitalised  on  a  strong  science  base,  due  to  low 
R&D 
institutional 
infrastructure  to  support  innovation  diffusion  (see 
below).  The  Digital  Transformation 
Index 
(European  Commission,  2018f)  points  to  below-
average  digital  infrastructure  and  ‘entrepreneurial 
culture’  as  barriers  to  the  digitalisation  of  the  UK 
economy and associated innovation. 

investment  and  a 

lack  of 

The high price and strict regulation of land can 
impair  the  allocation  of  resources 
in  the 
broader economy. As discussed in Section 3.2 the 
UK land market is strictly regulated. In addition to 
driving a shortage of housing, this has contributed 
to  driving  up  land  values  and  commercial  and 
residential property prices, especially in successful 
local  economies.  The  price  of  land  alone  now 
accounts for more than half of total UK net worth 
(IPPR, 2018). This shifts savings and credit flows 
away from productive investment towards existing 
assets and land. The development of growth poles 
can  be  constrained  and  firms  and  workers  are 
deterred  from  locating  where  they  can  be  most 
productive.  Expensive  and  tightly  regulated  land 
also hampers cost-effective  and timely investment 
in infrastructure (see Section 3.4.2). 

relative 

In  May  2018,  the  Chancellor 
launched  a 
Business  Productivity  Review  to  establish  the 
causes of and find solutions to the ‘productivity 
puzzle’.  This  review  is  part  of  the  Industrial 
Strategy (HM Government, 2017) and “is focused 
on  improving  the  productivity  of  businesses  with 
lower productivity, sometimes described as a ‘long 
tail’,  that  lag  behind  the  leading  firms  and 
underperform 
and 
international benchmarks” (BEIS, 2018a, p.4). The 
Industrial  Strategy,  which has a significant spatial 
dimension  (see  Section  3.4.3),  is  also  aimed  at 
concluding  long-term  sectoral  deals  with  industry 
and  addressing  broad  challenges  such  as  artificial 
intelligence,  ageing,  clean  growth  and  mobility. 
The  ‘National  Productivity  Investment  Fund’ 
(NPIF) 
GBP 37 billion 
providing 
(EUR 42 billion) of capital funding between 2017-
2018  and  2023-2024  for  infrastructure  linked  to 

domestic 

to 

is 

employment., while ‘…firms in the bottom 10% of 
the productivity distribution were predominantly in 
services  industries;  businesses  in  the  distribution, 
hotels  and  restaurants  industries…accounted  for  a 
third of all firms in this group in 2015’ (Ardanaz-
Badia et al., 2017) (18). 

Graph 3.4.3:  Productivity differences within sectors. Ratio 
between labour productivity of the top 10 % 
and the median of the firm distribution 

Source: ONS 

across 

and  within 

Differences  in  firm  productivity  growth  are 
widening 
sectors 
(Kierzenkowski  et  al.,  2018a).  As  Graph  3.4.3 
shows, in the electricity and gas sector the ratio of 
the productivity of the top 10 % of firms relative to 
the  median  increased  by  a  factor  of  four  (from 
over 3  to  over 12)  between  2010  and  2016.  The 
ratio tripled in air transport (from 6 to 18) over the 
same  period.  As  discussed  in  Section  3.4.3, 
productivity  levels  and  growth  rates  vary  widely 
between regions and cities.  

Markets  are  competitive  but  management  and 
technology  diffusion  are  relatively  weak.  The 
‘churn  rate’  (i.e.  the  proportion  of  all  firms 
entering and leaving markets) is higher than in the 
US,  entry  and  exit  barriers  are  low  and  markets 
remain  competitive.  Nevertheless,  many 
loss-
making  firms  remain  in  the  market.  Available 
higher 
international 
management  standards  in  the  US  and  Germany 
than in the UK (Bloom  & van Reenen, 2007) and 

comparisons 

suggest 

(18)  Productivity  measurements  in  services  should  be  treated 
with caution (see Mason et al., 2018). The OECD estimate 
that  the  UK-US  productivity  gap  has  previously  been 
overestimated by 8 pps (OECD, 2018). 

33 

02468101214161820Air transportElectricity, gas,steam and airconditioningManufactureofwearing apparelManufacture of cokeand refinedpetroleumManufacture ofleather and relatedproductsManufacture of basicpharmaceuticalproductsInsurance,reinsurance andpension fundingManufacture ofcomputer, electronicand optical productsManufacture of foodproductsProductivity in Top 10% of firms compared to the median 2010-201620102016 
 
                                                           
3.4. Competitiveness reforms and investment 

global 

research 

scientific  outputs 

as 
excellent 

are 
innovation  diffusion.  UK  universities 
powerhouses 
regarded 
(19). 
producing 
However, the business sector does not seem to be 
able  to  capitalise  on  this  scientific  strength. 
Science-business linkages are relatively weak, both 
terms  of  scientific  co-production (20)  and 
in 
business-funded  public  R&D (21).  As  a  result,  the 
UK  scores  poorly  on  knowledge  diffusion  in 
international rankings (22). There have been calls to 
strengthen 
the  existing  knowledge  diffusion 
infrastructure  (Haldane,  2018)  ‘by  creating  some 
stronger and longer diffusion spoke’ to address the 
‘long  tail’  of  companies  suffering  from  low 
productivity  growth  (see  above).  Recent  policy 
action  to  address  these  weaknesses  includes  the 
creation of UK Research and Innovation, bringing 
all  support  schemes  for  research  and  innovation 
under  one  umbrella,  and  the  creation  of  the 
Industrial Strategy Challenge Fund. 

3.4.2.  INVESTMENT 

Investment trends 

its 

low, 

The  UK  could  boost 
stagnant 
productivity  by  addressing  shortfalls  in  its 
investment in both physical capital and people. 
The UK has long been an outlier among advanced 
economies  for  its  low  investment  rate.  Over  the 
last  20  years,  the  UK’s  average  ‘gross  physical 
capital formation to GDP’ ratio of 16.7 % was the 
lowest (by almost 3 pps) among a group of over 30 
advanced  EU  and  non-EU  economies.  As  Graph 
3.4.4  shows,  UK 
investment  fell  particularly 
sharply  in  the  financial  crisis.  Shortfalls  in  both 
physical  and  human  capital  investment  contribute 
to weak productivity. On the physical capital side, 
the  UK  has  a  broad-based  challenge  to  deliver  a 
higher 
in  equipment, 
infrastructure (see below) and housing (see Section 
3.2), and to bring down project costs. On the skills 
and human capital side, the challenge is as much to 

investment 

level  of 

(19)  In  2015,  15.3 %  of  UK  scientific  publications  ranked 
among the top 10 % most cited publications worldwide. 
(20)  The  UK  ranks  10th  in  the  EU  in  terms  of  the  number  of 
public-private  co-publications  as  a  percentage  of  total 
publications. 

(21)  Public expenditure on business-funded R&D was 0.021 % 

of GDP in 2015, less than half the EU average. 

(22)  According  to  the  Global  Innovation  Index  by  Cornell 
University,  INSEAD  and  WIPO,  the  UK  ranks  only  38th 
globally in terms of knowledge diffusion. 

growth and productivity. The UK could establish a 
National  Productivity  Board,  an  objective,  neutral 
and  independent  institution  to  investigate  the 
productivity challenge and contribute to evidence-
based  policy  making.  The  UK  has  not  addressed 
the  2016  Council  Recommendation 
(2016/C 
349/01)  and  has  decided  not  to  establish  a 
Productivity  Board,  considering  it  would  bring 
limited value added. 

Research, development and innovation 

UK R&D investment intensity has been around 
1.7 % of GDP for the past decade, below the EU 
average.  In  2017,  it  rose  to  1.69 %  of  GDP,  still 
well  below  the  EU  and  OECD  averages  (2.07 % 
and  2.4 %  respectively).  Private  R&D  intensity 
rose  steadily  from  1.02 %  of  GDP  in  2012  to 
1.13 %  in  2017.  This  is  partly  thanks  to  public 
support  through  direct  schemes  managed  by  UK 
Research  and  Innovation  and  indirect  schemes 
such  as  differentiated  R&D  tax  incentives  for 
SMEs  and  large  companies.  Together  these  were 
estimated  to  total  more  than  0.25 %  of  GDP  in 
2015.  However,  public  R&D  investment  dropped 
from  0.57 %  of  GDP  in  2013  to  0.51 %  in  2017. 
As  part  of  its  Industrial  Strategy  (see  above),  the 
government  aims  to  increase  R&D  investment 
intensity  to  2.4 %  of  GDP  by  2027.  This  would 
require public and private  sector R&D investment 
to 
increase  by  around  half.  An  additional 
GBP 1.6 billion  (EUR 1.8 billion)  of  public  R&D 
spending  was  announced  in  the  2018  Autumn 
Budget.  Further  plans  on  how  to  meet  the  targets 
are under development.  

investment 

R&D  investment  is  concentrated  in  a  limited 
number  of  companies  and  regions.  Three 
quarters  of  all  private  R&D 
is 
concentrated in 400 companies (HM Government, 
2017).  South-East  England  and  East  England  are 
responsible for 20 % and 17 %, respectively, of all 
R&D  investment  in  the  UK,  with  current  R&D 
intensities  (2.4 %  and  3.4 %)  at  or  above  the 
proposed  2027 
target.  In  contrast,  Northern 
Ireland,  Wales  and  North-East  England  each 
account  for  barely  2 %  of  UK  R&D  investment, 
with R&D intensity currently around 1 % of GDP 
in the latter two regions (ONS, 2018h & Eurostat, 
2018).  

Despite  an  excellent  research  base,  relatively 
hamper 
weak 

science-business 

linkages 

34 

 
                                                           
3.4. Competitiveness reforms and investment 

increasingly 

investment  is  projected  to  average  2.2 %  of  GDP 
over  the  next  few  years.  In  recent  years,  the 
such 
government  has 
the 
investment  on  network 
expense  of  education  and  healthcare  facilities.  As 
part  of  the  2019  Spending  Review,  it  will  set 
priorities  for  public  investment  for  the  following 
years,  drawing  on  the  National  Infrastructure 
Assessment (see below). 

infrastructure,  at 

focused 

Graph 3.4.5:  Equipment and dwellings investment in the UK 

and the EU-27 (% of GDP) 

Source: European Commission 

Infrastructure 

The government has made institutional reforms 
to  tackle  long-term  infrastructure  challenges. 
The UK has a significant challenge in the form of 
growing  capacity  pressures  in  road,  rail  and 
aviation  networks,  and  the  need  for  new  and 
greener  energy  generation  and  supply  capacity. 
Significant  investment  in  infrastructure  is  also 
needed  to  meet  rising  demand  for  healthcare  and 
support  the  transition  to  new  care  models.  The 
government  is  increasing  public  infrastructure 
investment,  which has historically been quite low. 
However,  annual  investment  from  the  public  and 
private sector needs to grow substantially over the 
next  decade  to  deliver  all  the  projects  that  are 
planned. The government has therefore set up two 
agencies  to  provide  a  more  stable  and  long-term 
investment.  The 
infrastructure 
framework  for 
Infrastructure  and  Projects  Authority 
(IPA), 
established  in  2015,  is  in  charge  of  monitoring 

improve the effectiveness of systems in areas such 
as  basic  and  technical  skills  as  it  is  to  increase 
funding  (see  Section  3.3).  Box  3.4.1  summarises 
UK  investment  trends  and  sets  out  the  principal 
barriers to higher investment. 

Graph 3.4.4:  G7 investment shares, quarterly data 

Source: OECD  

the  wider 

The  post-crisis  recovery  in business  investment 
has  stalled.  UK  business  investment  recovered 
robustly  until  2015.  A  cyclical  recovery  in  other 
EU and global economies is ongoing, although it is 
projected  to  continue  moderating  into  2019  and 
2020.  In  contrast,  in  a  context  of  heightened 
uncertainty  private  investment  growth  has  stalled 
in the UK. Business investment fell 3.7 % between 
Q4-2017 and Q4-2018, despite low unemployment 
and  capacity  pressures  (see  Sections  1  and  3.3). 
Although  the  UK  has  cut  headline  corporate  tax 
rates, 
create 
disincentives  to  investment  (see  Section  3.1).  The 
UK’s  low  equipment  investment  (Graph  3.4.5)  is 
only  partly  accounted  for  by  the  relatively  small 
weight  of  capital-intensive  production  industries. 
In  specific  sectors,  fixed  investment  by  UK  firms 
is  relatively  low.  Weak  equipment  investment  is 
also  linked  to  evidence  that  the  boost  to  net  trade 
from the depreciation of sterling in 2016 is tailing 
off.  While  UK  dwellings  investment  recovered 
earlier and more strongly than in the rest of the EU 
following  the  financial  crisis,  the  UK  house 
building  sector  has  also  lost  momentum  (see 
Section 3.2). 

system  may 

tax 

Public  capital  expenditure  is  slightly  below  the 
EU  average  but  rising.  Total  public  sector  net 

35 

14161820222426Q2 05Q2 06Q2 07Q2 08Q2 09Q2 10Q2 11Q2 12Q2 13Q2 14Q2 15Q2 16Q2 17Q2 18% GDPJPCAFRUKITDEUS0123456780405060708091011121314151617181920% of GDPUK equipmentUK dwellingsEU-27 equipmentEU-27 dwellingsforecast 
 
 
3.4. Competitiveness reforms and investment 

projects and helping to deliver them. The National 
Infrastructure  Commission 
an 
independent  body  established  in  2016  to  conduct 
long-term infrastructure planning, for the economy 
as a whole and for selected key projects.  

(NIC) 

is 

in, 

participating 

and  winning, 

UK  infrastructure  has  tended  to  be  costly  and 
slow  to  deliver.  The  UK  is  one  of  the  leaders  in 
Europe  in  aggregating  purchasing  power  across 
public  bodies  and  bundling  contracts  (McKinsey, 
2018). Foreign firms are also relatively prominent 
in 
public 
construction  tenders  in  the  UK.  Nevertheless,  the 
UK has often struggled to deliver infrastructure in 
a timely and cost-effective way, with higher capital 
costs  than  elsewhere.  The  causes  include  short 
termism  and  fragmented,  stop-start  decision-
making  (NIC,  2018),  and  the  structure  of  the  UK 
2016).  The 
construction 
government’s 
Infrastructure 
Transforming 
Performance programme sets out a 10-year plan to 
improve infrastructure productivity (IPA, 2017). 

industry 

(PWC, 

the  assumption 

In  July  2018,  the  National  Infrastructure 
Commission  published  a  wide-ranging,  long-
term  assessment  of  the  UK’s  infrastructure 
needs.  The 
Infrastructure 
first  National 
Assessment  (NIC,  2018)  sets  out  analysis  and 
recommendations for infrastructure investment and 
management to 2050. The NIC was asked to work 
on 
that  annual  government 
spending on economic infrastructure would be 1.0-
1.2 %  of  GDP  between  2020  and  2050,  which  is 
broadly  in  line  with  current  levels.  The  main 
themes  of  its  recommendations  include  tackling 
urban  congestion  by  prioritising  devolved,  stable 
long-term  funding,  improving  the  capacity  of  the 
UK's  water  supply  and  digital  infrastructure,  and 
reducing carbon emissions by leading moves to an 
energy  system  powered  mainly  by  renewable 
energy  sources  such  as  solar  and  wind.  The 
government gave an interim response to the NIC’s 
assessment alongside the 2018 Autumn Budget. It 
will  publish  a  full  response  in  2019  in  a  National 
Infrastructure Strategy. 

Securing 
funding 
the  amount  of  private 
required in the government’s projections will be 
a  challenge.  The  November  2018  National 
Infrastructure  and  Construction  Pipeline  (IPA, 
2018) 
GBP 600 billion 
(EUR 680 billion) of public and private investment 
projects that are planned across the economy over 

over 

out 

set 

the  next  decade.  Around  half  of  the  value  of  the 
pipeline  requires  private  funding,  including  in 
privatised  utilities  subject  to  economic  regulation. 
In  the  2018  Autumn  Budget  the  government 
announced  that  in  future  it  would  not  enter  into 
any new Private  Finance Initiative (PFI) contracts 
to  deliver  or  maintain  infrastructure  and  public 
services,  having  concluded  that  the  model  was 
inflexible  and  overly  complex  (HM  Treasury, 
2018).  The  European  Investment  Bank  (EIB)  has 
also had an important role in funding UK projects, 
particularly  in  infrastructure.  The  government  has 
for 
announced 
infrastructure  finance,  with  a  view  to  ensuring  it 
meets market needs following Brexit. 

review  of 

support 

its 

a 

Transport and telecommunications 

to 

linked 

While  transport  investment  has  increased,  the 
UK has to address a legacy of underinvestment. 
In its assessment of the UK’s future infrastructure 
needs (NIC, 2018), the NIC highlighted a range of 
problems with the quality and capacity of existing 
transport  infrastructure,  including  high  levels  of 
long-term 
congestion.  These  are 
underinvestment and  negatively affect perceptions 
of road and rail infrastructure quality. According to 
the  World 
Forum’s  Global 
Competitiveness Report (WEF,  2018), perceptions 
of UK road quality and overall road infrastructure 
are  relatively  poor. The  UK  is  currently  investing 
significantly  in  inter-urban  transport  links.  The 
(NIC,  2018)  has 
that 
NIC 
investment 
improving 
shift 
should 
intra-urban  connectivity  to  relieve  congestion  and 
deliver greater benefits from agglomeration. 

recommended 
towards 

Economic 

There  are  significant  issues  with  the  reliability 
of  rail  services,  reflected  in  low  customer 
satisfaction.  In  the  2018  Market  Performance 
Indicator (European Commission, 2018g), the UK 
scored  70.1  for  train  services,  below  the  EU 
average  of  76.8.  In  the  Global  Competitiveness 
Report (WEF, 2018) UK travellers also gave quite 
a  low  perception  score  for  rail  efficiency  (60.1) 
and overall rail infrastructure (80.1). Ticket prices 
are  also  often  high.  A  major  overhaul  of  rail 
timetables  across  many  operating  companies  in 
mid-2018  led  to  mass  delays  and  cancellations  in 
the north and south-east of England. The Office of 
Rail  and  Road’s  investigation  of  the  incident 
highlighted  a  range  of  failings  (ORR,  2018).  The 
east coast rail franchise was renationalised in May 

36 

 
3.4. Competitiveness reforms and investment 

Despite  a  well-functioning  broadband  market, 
challenges  regarding  deployment  persist.  The 
penetration  of  full-fibre  services  remains  low,  at 
1.8 million  (6 %)  of  premises  (Ofcom,  2018).  On 
28 March 2018, the government set out the design 
of  the  broadband  regulatory  universal  service 
obligation  (USO)  to  be  implemented  by  2020. 
Everyone  in  the  UK  will  have  a  legal  right  to  an 
affordable  connection  of  at  least  10 Mbps  from  a 
designated  provider,  no  matter  where  they  live  or 
work,  up  to  a  cost  threshold  of  GBP 3 400  per 
premise 
(enabling  coverage  of 
around 99.8 % of premises). 

(EUR 3 850) 

the 

recommendation 

On 23 July 2018, the Government published the 
Future  Telecoms 
Infrastructure  Review 
(DCMS,  2018).  The  review  set  out  a  long-term 
strategy  to  support  the  development  of  full-fibre 
networks  and  5G.  The  government’s  target  –  to 
have  15 million  connections  by  2025  with 
coverage  of  all  parts  of  the  country  by  2033  –  is 
consistent  with 
the 
National  Infrastructure  Assessment  (NIC,  2018) 
that  the  UK  should  aim  for  nationwide  full-fibre 
broadband by 2033. The total investment required 
for the national rollout of full fibre is estimated at 
around GBP 30 billion (EUR 34 billion). However, 
full fibre will most likely require subsidy in some 
more  remote  areas.  At  the  end  of  2018,  the 
Government 
a  GBP 200 million 
(EUR 226 million)  Rural  Gigabit  Connectivity 
scheme  to  test  out  approaches  to  full  fibre  rollout 
in rural areas from 2019-2020. 

launched 

in 

Energy infrastructure 

The UK needs to deliver significant new energy 
generation  and  supply  capacity.  The  Contracts 
for  Difference  (CfD)  scheme  (23)  is  the  key 
mechanism  to  incentivise  investment  in  the  UK’s 
electricity  generation  assets.  The  government  is 
preparing  for  the  third  allocation  round  in  2019, 
the  draft  budget  for  which  provides  for  an  annual 
budget  of  GBP 60 million  (EUR 68 million)  for 
the  delivery  years  2023-2024  and  2024-2025, 
subject to a total capacity cap of 6 GW. 

(23)  CfD  is  a  scheme  to  provide  renewable  energy  providers 
with income guarantees. If an agreed ‘strike price’ is higher 
than the market price, the government-owned Low-Carbon 
Contracts  Company  must pay  the  renewable  generator  the 
difference  between  the  two  prices.  If  the  opposite  is  true, 
the renewable generator must pay back the difference. 

2018  when 
difficulties. 

its  operator 

ran 

into 

financial 

In  response  to  these  problems,  the  government 
has  announced  a  large-scale  review  of  how  the 
privatised railway system operates. The opening 
of ‘Crossrail’, a new underground rail link linking 
east  and  west  London  and  the  surrounding  area, 
has  been  delayed  from  December  2018  to  2020. 
The project had previously been progressing well, 
but  now  requires  additional  funding.  Construction 
work  has  recently  begun  on  the  first  phase  of  the 
‘High  Speed  2’  rail  line  between  London  and 
Birmingham. In the next Rail Control Period (CP6, 
2019-2024)  the  government  plans  a  greater  focus 
on  the  renewal  of  ageing  infrastructure  within  the 
funding 
(EUR 54 billion) 
GBP 48 billion 
envelope. 

total 

Road  congestion  levels  are  significantly  above 
the  EU  average.  The  Commission  (European 
Commission, 2018h) estimated that car users in the 
UK spent on average 45.2 hours in road congestion 
in 2017, which is among the highest figures in the 
EU.  A  National  Roads  Fund  of  GBP 28.8 billion 
(EUR 32.6 billion) from 2020-2025 will be funded 
by  hypothecating  English  Vehicle  Excise  Duty  to 
roads  spending.  Within  this,  the  government’s 
second  Roads  Investment  Strategy  (RIS)  sets  out 
plans  for  GBP 25.3 billion  (EUR 28.6 billion)  of 
investment  in  the  major  roads  network  in  2020-
2025.  The  National  Roads  Fund  will  also  fund 
investment in a new major roads network and large 
local  major  road  schemes.  Pressure  on  local 
authority  budgets  has  squeezed  spending  on  the 
maintenance of local roads and degraded roads can 
exacerbate  congestion.  Central  government  has 
responded  by  increasing  funding  for  local  repairs 
by  GBP 420 million 
in 
2018-2019.  

(EUR 475 million) 

the 
In  June  2018,  parliament  approved 
government’s  Airports  National 
Policy 
Statement,  including  a  new  north-west  runway 
at Heathrow Airport. Heathrow’s plans now face 
substantial  legal  and  environmental  challenges, 
including  a  judicial  review  launched  by  London 
councils, the London mayor and non-governmental 
organisations.  It  currently  plans  to  start  extensive 
engagement  with 
public 
stakeholder  groups  in  spring  2019  as  part  of  the 
preparation  for  its  Development  Consent  Order 
application. 

consultations 

and 

37 

 
                                                           
3.4. Competitiveness reforms and investment 

framework 
deployment of small modular reactors (SMRs). 

the  development  and 

to  support 

The  UK  currently  has  an  interconnection  level 
of  about  6 %  of  installed  electricity  generating 
capacity.  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  low  levels  of  interconnection  with  the  rest  of 
Europe.  By  contrast,  the  Northern  Irish  electricity 
market  is  fully  integrated  with  the  Republic  of 
Ireland (see Ireland country report). New rules on 
the  Integrated  Single  Electricity  Market  entered 
into force in October 2018. The NEMO link (BE-
UK 
in 
December 2018.  A 
total  of  12  further  new 
interconnectors  have  been  labelled  ‘projects  of 
common  interest’  and  are  currently  at  various 
stages  of  planning  or  development.  The 
government's  projections 
future  see 
interconnections  playing  an  important  role  in 
maintaining energy security. 

interconnector)  was 

inaugurated 

the 

for 

The  UK’s  wholesale  electricity  market 
is 
relatively liquid due to its early efforts in energy 
market liberalisation. However, wholesale prices 
are  above  the  EU  average  (EUR 51.74/MWh  in 
2017)  (ACER,  2018)  due  to  the  generation  mix 
and relatively low level of interconnection. At the 
same time, wholesale prices increased by only 5 % 
in  2017,  much 
in  neighbouring 
countries (24).  Following  a  competitive  procedure, 
a  capacity  market  pays  providers  in  return  for  a 
commitment 
reliable  sources  of 
electricity  to  maintain  system  reliability  when 
needed.  In  2017,  capacity  costs  were  less  than 
EUR 0.5/MWh (ACER, 2018). 

to  provide 

than 

less 

Technical problems have hampered the roll-out 
of  smart  meters,  a  pre-condition  for  engaging 
consumers  in  the  market.  To  date,  13.5  million 
smart  meters  have  been  installed  across  Great 
Britain, of which 92 % are in households, against a 
government ambition of 50 million by 2020. 

Climate, energy and environment 

The  UK  is  on  track  to  meet  its  Europe  2020 
target for greenhouse gas emissions not covered 
by  the  EU  Emissions  Trading  Scheme  (ETS). 

(24)  22 %  in  France  and  the  Netherlands  and  16 %  in  the 

all-Irish market. 

on 

further 

nuclear 

to  be  uncertain.  As  shown 
the  government  envisages 

The delivery of new nuclear generating capacity 
in 
continues 
Graph 3.4.6, 
the 
construction  of  substantial  new  nuclear  capacity 
over  the  next  15-20  years.  Construction  of  two 
1 630 MWe units at Hinkley Point C is proceeding 
and is on target for connection to the grid in 2025. 
However,  no  investment  decisions  have  yet  been 
taken 
capacity.  Two 
international  investors  have  abandoned  plans  for 
three large new-build projects — two of which are 
in  northern  England  and  one  in  Wales  —  and  are 
closing or suspending their UK nuclear businesses. 
The  government 
funding 
mechanisms  including  the  regulated  asset  base 
model.  It  is  also  in  discussion  with  a  potential 
investor  regarding  state  investment  in  a  project 
alongside 
has 
recommended  that  the  government  support  no 
more than one further nuclear power station before 
2025,  due  to  cost-effectiveness  concerns  (NIC, 
2018). 

capital.  The  NIC 

is  examining  new 

private 

Graph 3.4.6:  Projected electricity generation by source 

Source: Department for Business, Energy & Industrial Strategy 

In  June  2018,  the  government  published  a 
Nuclear  Sector  Deal  (BEIS,  2018b).  This  paper 
sets a number of sectoral targets, including a 30 % 
reduction in the cost of new build projects by 2030 
of 
in 
20 % 
and 
decommissioning 
current 
(compared  with 
estimates)  by  2030.  It  also  sets  out  a  new 

savings 

cost 

the 

of 

38 

0204060801001201401601802002017201820192020202120222023202420252026202720282029203020312032203320342035TWhCoalGasOilNuclearRenewablesImports 
 
                                                           
3.4. Competitiveness reforms and investment 

in 

40 000  premature  deaths 
the  UK  were 
attributable  to  concentrations  of  fine  particulate 
matter,  nitrogen  dioxide  (NO2)  and  ozone  (EEA, 
2018). This corresponds to over 400 000 life-years 
lost due to air pollution in total, or more than 600 
life-years  per  100 000  inhabitants.  In  2016,  NO2 
levels  exceeded  EU  standards  in  37  air  quality 
zones, although in 36 of these the latest emissions 
data  show  slight  improvements.  The  persistent 
breaches  of  NO2  air  quality  requirements  are 
subject  of  a  European  Commission  infringement 
procedure. 

3.4.3.  REGIONAL DISPARITIES 

are 

large 

particularly 

regional 
There 
differences  in  living  standards  in  the  UK.  The 
coefficient  per  capita  GDP  variation  was  67 %  in 
2016, more than double the EU average (29.7 %). 
The  gap  between  the  best  performing  region  and 
the  average  is  higher  than  in  any  other  Member 
State. GDP per capita in Wales is only 41 % of the 
Greater  London  level.  This  is  driven  mainly  by 
stark inter-regional differences in productivity (Gal 
& Egeland, 2018). The productivity of an average 
firm in  London is double that of one  in the North 
East.  The  concentration  of  finance  and  other 
knowledge-intensive  sectors  is  reflected  in  higher 
productivity  in  London  and  other  big  cities. 
However, 
of 
productivity 
individual firms actually has a greater influence on 
differences in average productivity than the sector 
mix (ONS, 2018h). 

distribution 

the 

Regional  productivity  differentials  are  also 
growing  wider.  Differences 
in  productivity 
between the leading and the less advanced regions 
are 
increasing  year  by  year.  Productivity 
dispersion  is  increasing  and  the  less  productive 
regions are not catching up (Graph 3.4.7). In 2010-
2016,  the  coefficient  of  per  capita  GDP  variation 
grew by 22 %, one of the  highest increases  in the 
EU. If productivity in less productive regions does 
not  catch  up,  income  inequality  will  tend  to 
increase over time (Bachtler, 2017). 

According  to  approximated  data,  UK  greenhouse 
gas  emissions  were  21 %  lower  in  2017  than  in 
2005.  Projections  based  on  existing  measures 
indicate that emissions from  non-ETS sectors  will 
be 
2020, 
2005 
over-achieving the 16 % target under Europe 2020. 
However,  without  additional  measures  the  UK 
may miss its 2030 target by 7 pps. 

below 

levels 

26 % 

by 

target 

(15 %) 

remains 

The  renewable  energy  share  in  the  UK  was 
10.2 %  in  2017,  in  line  with  the  2017-2018 
indicative trajectory (10.2 %). Still, reaching the 
challenging, 
2020 
particularly  as  progress  in  the  transport  sector  is 
lagging  behind  the  planned  trajectory  under  the 
national  renewable  energy  action  plan.  The  NIC 
has  recommended  that  half  of  the  UK’s  power 
should  come  from  renewables  by  2030  (NIC, 
2018).  Final  energy  consumption  in  the  UK 
slightly  decreased  in  2017,  after  increasing  in 
2016.  This  jeopardises  the  achievement  of  the 
national  2020  energy  efficiency  target  unless  the 
UK makes additional efforts. 

The UK’s National Energy and Climate Plan is 
to be adopted by 31 December 2019 in line with 
the  Regulation  on  the  Governance  of  the 
Energy  Union  and  Climate  Action  (European 
Commission,  2018i).  The  plan  will  provide  an 
overview of the UK’s investment needs until 2030 
for the different dimensions  of the  Energy  Union, 
including  renewable  energy,  energy  efficiency, 
security  of  supply,  and  climate  mitigation  and 
adaptation. The information provided, including in 
the  draft  plan  submitted  on  21 December 2018, 
will  help  with  identifying  and  assessing  the  UK’s 
energy  and  climate-related 
investment  needs. 
According  to  the  draft  plan,  the  government  has 
allocated  GBP 2.5 billion  (EUR 2.8  billion)  to 
investment in low-carbon innovation in 2015-2021 
(BEIS, 2019). Further pledges have been made for 
as 
specific 
investments 
improvements in the energy efficiency of buildings 
(around  GBP 3.6 billion)  (EUR 4.1 billion)  and 
innovative 
technologies 
(GBP 4.5 billion)  (EUR 5.1 billion).  Analysis  for 
the  Committee  on  Climate  Change  has  suggested 
that the UK’s low-carbon economy could grow by 
around 11 % a year between 2015 and 2030. 

low-carbon 

areas, 

such 

heat 

in 

There has been no significant progress on poor 
urban  air  quality.  The  European  Environment 
Agency  has  estimated  that  in  2015  more  than 

39 

 
3.4. Competitiveness reforms and investment 

Graph 3.4.7:  Productivity levels of top, average and bottom 
NUTS2 Region in the UK 2004-2016 

Source: ONS 

there 

outside  London.  While 

Agglomeration  effects  play  a  relatively  minor 
role 
are 
agglomeration effects in Northern England and the 
Midlands,  their  impact  is  limited  despite  the 
presence  of  big  cities  such  as  Birmingham, 
Manchester  and  Leeds  (Ahrend  et  al.,  2017). 
Clusters  and  the  relative  proximity  of  production 
centres  also  seem  to  have  little  impact  on  firms’ 
performance (Harris et al., 2018). Shortcomings in 
the quality and capacity of transport networks (see 
lack  of  sufficient  and 
Section  3.4.2)  and  a 
affordable  housing 
the  right  places  (see 
in 
Section 3.2.2)  limit  workers’  choices  and  the 
development of positive agglomeration effects.  

Four  variables  seem  to  explain  most  of  the 
variation  in  productivity  performance  across 

regions  (European  Commission,  2017b).  These 
are  innovation,  market  size,  higher  education  and 
life-long learning, and infrastructure. Disparities in 
innovation  performance  across  regions  are  linked 
to  disparities  in  R&D  investment  (see  Section 
3.4.1). ‘Sales of  new-to-the-market or new-to-the-
firm  innovations’  and  ‘business  expenditure  in 
R&D’  are  subject  to  the  maximum  dispersion 
across UK regions according to the 2017 Regional 
Innovation Scoreboard. Good transport and digital 
infrastructure can mitigate  some of the difficulties 
resulting 
and 
the  UK  has 
agglomeration  economies,  but 
shortcomings in both areas (see Section 3.4.2). The 
deficit  of  digital  infrastructure  may  be  acting  as  a 
barrier  to  the  diffusion  of  new  technologies  and 
development  of  new  business  models  in  some 
regions.  

limited  market 

from 

size 

The Industrial Strategy (see Section 3.4.1) has a 
significant  regional  and  local  dimension.  There 
is  a  lively  debate  as  to  whether  the  UK’s 
centralised  governance  limits  lagging  regions’ 
to  address 
take  effective  action 
capacity 
to 
the 
disparities.  For 
productivity 
example, 
methodology  used 
select  and  prioritise 
to 
infrastructure  projects  has  been  accused  of 
contributing  to  the  concentration  of  infrastructure 
investment  around  London  (Coyle  &  Sensier, 
2018). The Industrial Strategy focuses on regional 
projects  such  as  the  “Northern  Powerhouse”  and 
“Midlands  Engine”.  Local  industrial  strategies, 
which  aim  to  create  alliances  to  develop  local 
development  potential,  are  the  latest  step  in  the 
more decentralised approach initiated in 2010 with 
City Deals, Devolution Deals and Local Enterprise 
Partnerships. 

40 

15202530354045502004200520062007200820092010201120122013201420152016Productivity per hour in £GVA per hour worked (£) NUTS 2   2004 -2016 
 
3.4. Competitiveness reforms and investment 

Box 3.4.1: Investment challenges and reforms in the UK 

Macroeconomic perspective 

Total  physical  investment  in  the  UK  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  and  there  are  shortcomings  in  transport  infrastructure  (see  Section 3.4). 
Private  investment  is  significantly  below  the  EU  average,  despite  a  recovery  from  a  post-crisis  trough. 
Equipment investment is particularly low. Relatively low housebuilding has contributed to the UK’s housing 
shortage (see Section 3.2). Heightened uncertainty is weighing on investment (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  for  non-agricultural  land.  The  land 
prices and 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  its  weak  productivity.  Skills  shortages  are 
often most acute in occupations linked closely to capital investment, such as engineering and tradespeople. 
The  UK  is  implementing  a  reform  of  vocational  training  to  introduce  classroom-based  ‘T-level’ 
qualifications and work-based apprenticeships. A total of 15 T-level qualifications are to be developed with 
the first three (education and childcare, construction and digital) available in 2020. Registration numbers for 
this new twin-track system  are plunging and, although an apprenticeship levy has been introduced to help 
employers, uptake remains low and some employers find the application procedures confusing. 

The  government-owned  British  Business  Bank  seeks  to  improve  finance  markets  for  smaller  businesses, 
including through loans and mentoring for entrepreneurs, and loan guarantees for SME house builders.  

41 

 
 
ANNEX A: OVERVIEW TABLE 

Commitments 

Summary assessment (25) 

2018 country-specific recommendations (CSRs) 

CSR 1: 

Ensure  that  the  nominal  growth  rate  of  net  primary 
government  expenditure  does  not  exceed  1.6  %  in 
2019-2020,  corresponding  to  an  annual  structural 
adjustment of 0.6 % of GDP. 

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

CSR 2: 

The  UK  has  made  some  progress 
addressing CSR 2: 

in 

Boost housing supply, particularly in areas of highest 
demand,  including  through  additional  reforms  to  the 
planning system. 

the 

recovery 

Annual  net  housing  supply  has  increased 
significantly  from  post-crisis  lows.  However, 
in  house 
since  mid-2017, 
building  has  lost  momentum,  and  it  is  now 
stabilising  at  a  level  below  what  would  be 
necessary  to  meet  estimated  demand.  Real 
house prices are stabilising, and real rents are 
now  falling  slightly,  but  the  cost  of  housing 
remains  high.  The  government  has  recently 
extended  and  revised  a  number  of  existing 
housing  policies,  including  updating  spatial 
planning  rules.  The  rules  on  local  authority 
borrowing  to  build  public  housing  have  been 
relaxed,  but  wholly  new 
initiatives  have 
otherwise been limited. 

(25)  The following categories are used to assess progress in implementing the 2018 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. 

42 

 
 
                                                           
CSR 3:  Address  skills  and  progression  needs  by 
setting targets for the quality and the effectiveness of 
apprenticeships  and  by  investing  more  in  upskilling 
those already in the labour force. 

Europe 2020 (national targets and progress) 

Employment rate target: None 

R&D target: None 

A. Overview Table 

The  UK  has  made  some  progress 
addressing CSR 3: 

in 

The  government  has  introduced  a  series  of 
initiatives  that  seek  to  invest  in  the  skills 
levels  of  the  workforce  thus  helping  advance 
career  progression.  The  National  Retraining 
to  provide  career 
Scheme,  which  seeks 
guidance  and  advice 
job 
line  with 
in 
experience,  has  been  launched.  The  newly 
tripartite  National  Retraining 
established 
Partnership  comprising 
the  Government, 
Employers  and  the  Trade  Unions  will  deliver 
job  specific  training,  in  order  to  meet  labour 
demand needs and increase productivity whilst 
reducing  skills  mismatches.  The  on-going 
reform  of  the  Vocational  Training  system 
plans  to  introduce  15  ‘T-level’  qualifications, 
but  only  three  will  be  available  by  2020. 
Registration  numbers  for  this  new  twin-track 
system  are  far  lower  than  expected  and 
although  an  apprenticeship  levy  has  been 
introduced  to  provide  funding  to  employers, 
uptake remains low. 

78.2 %  of  the  population  aged  20-64  was 
employed in 2017. 

R&D  intensity  rose  marginally  to  1.69 %  in 
2017.  Public  R&D  intensity  was  0.51 %  and 
business R&D intensity 1.13 %. 

The  UK  is  below  the  EU  average  of  2.07 % 
for  R&D  intensity.  EU  average  public  R&D 
intensity  was  0.69 %  and  business  R&D 
intensity 1.36 %. 

43 

 
A. Overview Table 

National greenhouse gas (GHG) emissions target: 

2020 target: -16 % 

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 2017 target: -14 % 

to  preliminary  estimates, 

According 
the 
change  in  non-ETS greenhouse gas emissions 
between  2005  and  2017  was  -21 %,  therefore 
the target is expected to be achieved. 

At a level of 10.21 % in 2017, the UK is still 
some  distance  away  from  its  2020  target  of 
15 %,  even  though  it  is  in  line  with  its 
indicative national trajectory. 

With  a  5.05 %  share  of  renewable  energy 
sources in transport in 2017, the UK is almost 
halfway  towards  the  binding  10 %  target  in 
transport  to  be  achieved  by  2020.  The  UK’s 
slow  uptake  of  renewables  in  the  transport 
sector has been driven by the restriction in the 
use  of  biofuels  with  high  indirect  land-use 
change implications. 

The  UK  has  already  met  its  2020  primary 
energy  consumption  target  but  remains  3.2 % 
above  its  2020  final  energy  consumption 
target. The UK has to increase its effort to cut 
final  energy  consumption  by  the  required 
levels.  

The  rate  of  early  school  leavers  declined  by 
2.8 pps. between 2012 and 2017, from 13.4 % 
to  10.6 %,  which  is  on  par  with  the  EU 
average. 

The tertiary attainment rate of 30-34 year olds 
reached  48.3 %  in  2017,  a  small  increase  on 
the  2016  rate  of  48.2 %. This  is  significantly 
above the EU average of 39.9 %. 

The  ‘at  risk  of  poverty  or  social  exclusion 
rate’  stood  at  22 %  in  2017, a  small  decrease 
from the 2016 figure of 22.2 %. 

-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: 

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 

44 

 
 
 
ANNEX B: COMMISSION DEBT SUSTAINABILITY ANALYSIS AND 

FISCAL RISKS 

45 

General Government debt projections under baseline, alternative scenarios and sensitivity tests2017201820192020202120222023202420252026202720282029Gross debt ratio87.486.084.582.681.179.778.577.576.675.875.074.473.9Changes in the ratio (-1+2+3)-0.5-1.4-1.5-1.8-1.5-1.4-1.2-1.1-0.9-0.8-0.8-0.7-0.5of which(1) Primary balance (1.1+1.2+1.3)0.91.11.41.41.31.10.90.80.70.60.70.70.5(1.1) Structural primary balance (1.1.1-1.1.2+1.1.3)0.40.71.11.21.11.10.90.80.70.60.70.70.5(1.1.1) Structural primary balance (bef. CoA)0.40.71.11.21.21.21.21.21.21.21.21.21.2(1.1.2) Cost of ageing0.10.20.40.50.60.70.70.70.8(1.1.3) Others (taxes and property incomes)0.00.00.10.10.10.10.10.10.1(1.2) Cyclical component0.50.50.30.20.10.10.00.00.00.00.00.00.0(1.3) One-off and other temporary measures0.00.00.00.00.00.00.00.00.00.00.00.00.0(2) Snowball effect (2.1+2.2+2.3)-0.5-0.30.0-0.3-0.3-0.2-0.2-0.3-0.2-0.1-0.10.00.0(2.1) Interest expenditure2.72.52.42.32.32.32.32.32.42.42.52.62.7(2.2) Growth effect-1.5-1.1-1.0-1.0-1.0-0.9-1.0-1.1-1.1-1.1-1.1-1.2-1.2(2.3) Inflation effect-1.7-1.6-1.4-1.6-1.6-1.6-1.6-1.5-1.5-1.5-1.5-1.5-1.5(3) Stock-flow adjustments0.90.1-0.2-0.20.00.00.00.00.00.00.00.00.0Note: For further information, see the European Commission Fiscal Sustainability Report (FSR) 2018. b. For the medium-term, the risk category (low/medium/high) is based on the joint use of the S1 indicator and of the DSA results. The S1 indicator measures the fiscal adjustment required (cumulated over the 5 years following the forecast horizon and sustained thereafter) to bring the debt-to-GDP ratio to 60 % by 2033. The critical values used are 0 and 2.5 pps. of GDP. The DSA classification is based on the results of 5 deterministic scenarios (baseline, historical SPB, higher interest rate, lower GDP growth and negative shock on the SPB scenarios) and the stochastic projections. Different criteria are used such as the projected debt level, the debt path, the realism of fiscal assumptions, the probability of debt stabilisation, and the size of uncertainties. c. For the long-term, the risk category (low/medium/high) is based on the joint use of the S2 indicator and the DSA results. The S2 indicator measures the upfront and permanent fiscal adjustment required to stabilise the debt-to-GDP ratio over the infinite horizon, including the costs of ageing. The critical values used are 2 and 6 pps. of GDP. The DSA results are used to further qualify the long-term risk classification, in particular in cases when debt vulnerabilities are identified (a medium / high DSA risk category). [2]Thechartspresentaseriesofsensitivitytestsaroundthebaselinescenario,aswellasalternativepolicyscenarios,inparticular:thehistoricalstructuralprimarybalance(SPB)scenario(wheretheSPBissetatitshistoricalaverage),theStabilityandGrowthPact(SGP)scenario(wherefiscalpolicyisassumedtoevolveinlinewiththemainprovisionsoftheSGP),ahigherinterestratescenario(+1pp.comparedtothebaseline),alowerGDPgrowthscenario(-0.5pp.comparedtothebaseline)andanegativeshockontheSPB(calibratedonthebasisoftheforecastedchange).Anadversecombinedscenarioandenhancedsensitivitytests(ontheinterestrateandgrowth)arealsoincluded,aswellasstochasticprojections. Detailed information on the design of these projections can be found in the FSR 2018.UK - Debt projections baseline scenario[1]Thefirsttablepresentsthebaselineno-fiscalpolicychangescenarioprojections.Itshowstheprojectedgovernmentdebtdynamicsanditsdecompositionbetweentheprimarybalance,snowballeffectsandstock-flowadjustments.Snowballeffectsmeasurethenetimpactofthecounteractingeffectsofinterestrates,inflation,realGDPgrowth(andexchangerates in some countries). Stock-flow adjustments include differences in cash and accrual accounting, net accumulation of assets, as well as valuation and other residual effects.[3] The second table presents the overall fiscal risk classification over the short, medium and long-term. a. For the short-term, the risk category (low/high) is based on the S0 indicator. S0 is an early-detection indicator of fiscal stress in the upcoming year, based on 25 fiscal and financial-competitiveness variables that have proven in the past to be leading indicators of fiscal stress. The critical threshold beyond which fiscal distress is signalled is 0.46. 606570758085909510020162017201820192020202120222023202420252026202720282029Debt as % of GDP -UKBaselineEnhanced lower GDP growth scenarioAdverse combined scenarioEnhanced higher interest rate scenario6070809010020162017201820192020202120222023(% of GDP)Stochastic debt projections 2019-2023 -UKp10_p20p20_p40p40_p60p60_p80p80_p90p50Baseline606570758085909510020162017201820192020202120222023202420252026202720282029Debt as % of GDP -UKBaselineHistorical SPB scenarioSGP scenario606570758085909510020162017201820192020202120222023202420252026202720282029Debt as % of GDP -UKBaselineHigher interest rate scenarioNegative shock on the SPBLower GDP growth scenarioBaselineHistorical SPBLower GDP growthHigher interest rateNegative shock on SPBStochastic projectionsRisk categoryMEDIUMHIGHMEDIUMMEDIUMMEDIUMLOWDebt level (2029)73.996.978.377.676.5Debt peak year20182029201820182018Percentile rank36.0%75.0%Probability debt higher17.0%Dif. between percentiles19.3HIGHLong termDSAHIGHDebt sustainability analysis (detail)Medium termHIGHMEDIUMShort termLOW(S0 = 0.4)(S1 = 1.3)S2MEDIUM(S2 = 3)S1 
 
ANNEX C: STANDARD TABLES 

Table C.1: 

Financial market indicators 

(1) Latest data Q3 2018. Includes not only banks but all monetary financial institutions excluding central banks. 
(2) Latest data Q2 2018. 
(3) Quarterly values are annualised. 
* Measured in basis points. 
Source: European Commission (long-term interest rates); World Bank (gross external debt); Eurostat (private debt); ECB (all 
other indicators). 

46 

201320142015201620172018Total assets of the banking sector (% of GDP)1)428.9393.3358.2370.0385.7379.5Share of assets of the five largest banks (% of total assets)43.738.937.035.536.9-Foreign ownership of banking system (% of total assets)2)27.937.137.238.837.738.0Financial soundness indicators:2)              - non-performing loans (% of total loans)-3.3-1.91.51.3              - capital adequacy ratio (%)19.3-19.520.820.520.4              - return on equity (%)3)2.23.83.22.14.310.2Bank loans to the private sector (year-on-year % change)1)-4.71.97.6-9.11.52.5Lending for house purchase (year-on-year % change)1)-0.89.79.6-10.80.62.6Loan to deposit ratio2)-90.8105.989.886.380.5Central Bank liquidity as % of liabilities1)------Private debt (% of GDP)172.8166.0164.8170.0169.0-Gross external debt (% of GDP)2) - public25.626.227.729.830.428.8    - private121.1125.5102.097.5103.2101.6Long-term interest rate spread versus Bund (basis points)*45.797.7129.8113.186.3100.5Credit default swap spreads for sovereign securities (5-year)*34.921.818.432.720.617.9 
 
 
 
 
 
C. Standard Tables 

Table C.2: 

Headline Social Scoreboard indicators 

(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) Long-term unemployed are people who have been unemployed for at least 12 months. 
(4) Gross disposable household income is defined in unadjusted terms, according to the draft Joint Employment Report 2019. 
(5) 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). 
(6) Average of first three quarters of 2018 for the employment rate, long-term unemployment rate and gender employment 
gap. Data for unemployment rate is annual (except for DK, EE, EL, HU, IT and UK data based on first three quarters of 2018). 
Source: Eurostat. 

47 

201320142015201620172018 6Equal opportunities and access to the labour marketEarly leavers from education and training (% of population aged 18-24)12.411.810.811.210.6:Gender employment gap (pps)11.111.311.211.010.39.9Income inequality, measured as quintile share ratio (S80/S20)4.65.15.25.15.4:At-risk-of-poverty or social exclusion rate1 (AROPE)24.824.123.522.222.0:Young people neither in employment nor in education and training (% of population aged 15-24)13.211.911.110.910.3:Dynamic labour markets and fair working conditions†Employment rate (20-64 years)74.876.276.877.578.278.6Unemployment rate2 (15-74 years)7.56.15.34.84.44.1Long-term unemployment rate3 (as % of active population)2.72.21.61.31.11.1Gross disposable income of households in real terms per capita4 (Index 2008=100) 99.7100.0104.4103.5102.7:Annual net earnings of a full-time single worker without children earning an average wage (levels in PPS, three-year average)27910282552877029177::Annual net earnings of a full-time single worker without children earning an average wage (percentage change, real terms, three-year average)-1.8-0.60.30.9::Public support / Social protection and inclusionImpact of social transfers (excluding pensions) on poverty reduction547.242.943.343.441.8:Children aged less than 3 years in formal childcare30.028.930.428.433.2:Self-reported unmet need for medical care1.62.12.81.03.3: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 and education indicators 

* Non-scoreboard indicator 
(1) 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. 
(2) PISA (OECD) results for low achievement in mathematics for 15 year-olds. 
(3) Impact of socio-economic and cultural status on PISA (OECD) scores. Values for 2012 and 2015 refer respectively to 
mathematics and science. 
(4) Average of first three quarters of 2018 for the activity rate, employment growth, employment rate, part-time employment, 
fixed-term employment. Data for youth unemployment rate is annual (except for DK, EE, EL, HU, IT and UK data based on first 
three quarters of 2018). 
Source: Eurostat, OECD 

48 

Labour market indicators201320142015201620172018 4Activity rate (15-64)76.476.776.977.377.677.8Employment in current job by durationFrom 0 to 11 months13.514.615.315.015.1:From 12 to 23 months9.910.311.011.611.5:From 24 to 59 months18.018.118.219.519.9:60 months or over57.556.154.753.152.7:Employment growth* (% change from previous year)1.22.41.71.41.01.1Employment rate of women(% of female population aged 20-64)69.370.671.372.173.173.7Employment rate of men (% of male population aged 20-64)80.481.982.583.183.483.6Employment rate of older workers* (% of population aged 55-64)59.861.062.263.464.165.3Part-time employment* (% of total employment, aged 15-64)25.625.325.225.224.824.5Fixed-term employment* (% of employees with a fixed term contract, aged 15-64)6.16.36.16.05.65.4Participation in activation labour market policies(per 100 persons wanting to work)::::::Transition rate from temporary to permanent employment(3-year average)55.457.758.657.1::Youth unemployment rate (% active population aged 15-24)20.717.014.613.012.111.4Gender gap in part-time employment (aged 20-64)30.130.229.929.729.529.0Gender pay gap1 (in undadjusted form)21.020.921.021.0::Education and training indicators201320142015201620172018Adult participation in learning(% of people aged 25-64 participating in education and  training)16.616.315.714.414.3:Underachievement in education2::21.9:::Tertiary educational attainment (% of population aged 30-34 having successfully completed tertiary education)47.447.747.948.248.3:Variation in performance explained by students' socio-economic status3::10.5::: 
 
 
 
 
 
C. Standard Tables 

Table C.5: 

Product market performance and policy indicators 

(1) Value added in constant prices divided by the number of persons employed. 
(2) Compensation of employees in current prices divided by value added in constant prices. 
(3) The methodologies, including the assumptions, for this indicator are shown in detail here: 
http://www.doingbusiness.org/methodology. 
(4) 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 75% and above, two if received below 75%, three if refused or rejected and treated as missing values if the 
application is still pending or don't know. 
(5) Percentage population aged 15-64 having completed tertiary education. 
(6) Percentage population aged 20-24 having attained at least upper secondary education. 
(7) 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 
(8) Aggregate OECD indicators of regulation in energy, transport and communications (ETCR). 
Sources: European Commission; World Bank — Doing Business (for enforcing contracts and time to start a business); OECD (for 
the product market regulation indicators); SAFE (for outcome of SMEs' applications for bank loans). 

49 

Performance indicators201220132014201520162017Labour productivity per person1 growth (t/t-1) in %Labour productivity growth in industry-4.00-0.051.32-0.101.411.00Labour productivity growth in construction-6.081.475.281.850.323.47Labour productivity growth in market services0.720.900.720.730.791.27Unit Labour Cost (ULC) index2 growth (t/t-1) in %ULC growth in industry4.795.53-1.170.710.852.46ULC growth in construction10.091.80-6.17-0.99-2.79-2.56ULC growth in market services-0.043.14-0.190.561.361.87Business environment201220132014201520162017Time needed to enforce contracts3 (days)437437437437437437Time needed to start a business3 (days)11.511.56.04.54.54.5Outcome of applications by SMEs for bank loans4:0.760.570.350.330.48Research and innovation201220132014201520162017R&D intensity1.591.641.661.671.681.67General government expenditure on education as % of GDP5.705.105.004.904.70:Employed people with tertiary education and/or people employed in science and technology as % of total employment515253535455Population having completed tertiary education5353637383839Young people with upper secondary education6828384868586Trade balance of high technology products as % of GDP-0.87-0.95-1.13-1.12-1.28-1.15Product and service markets and competition200320082013OECD product market regulation (PMR)7, overall1.101.211.08OECD PMR7, retail2.152.181.79OECD PMR7, professional services0.960.820.82OECD PMR7, network industries81.300.980.79 
 
 
 
 
 
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 (Europe 2020-2030)(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 use in industry (in kgoe) divided by gross value added of industry, including construction 
(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 use in transport sector including international aviation, (in kgoe) divided by transport 
industry gross value added (in 2010 EUR) 
Transport carbon intensity: GHG emissions in transport sector divided by gross value added of the transport activities 
Energy import dependency: net energy imports divided by gross inland energy consumption plus consumption of 
international maritime bunkers  
Aggregated supplier concentration index: Herfindahl-Hirschman index for net imports of crude oil and NGL, natural gas and 
hard coal. Smaller values indicate larger diversification and hence lower risk. 
Diversification of the energy mix: Herfindahl-Hirschman index of the main energy products in the gross inland consumption of 
energy 
* European Commission and European Environment Agency 
Sources: European Commission and European Environment Agency (Share of GHG emissions covered by ETS); European 
Commission (Environmental taxes over labour taxes); Eurostat (all other indicators) 

50 

Green growth performance201220132014201520162017MacroeconomicEnergy intensity kgoe / €0.110.100.090.090.090.09Carbon intensity kg / €0.300.290.260.250.23-Resource intensity (reciprocal of resource productivity)kg / €0.30.30.30.30.30.28Waste intensity kg / €0.13-0.14-0.13-Energy balance of trade % GDP-1.2-1.1-0.8-0.6-0.5-0.6Weighting of energy in HICP%10.208.808.007.606.706.50Difference between energy price change and inflation %5.24.62.9-3.3-3.71.1Real unit of energy cost% of value added13.113.111.111.411.6-Ratio of environmental taxes to labour taxesratio0.190.190.200.200.19-Environmental taxes% GDP2.42.52.42.42.42.39Sectoral Industry energy intensity kgoe / € 0.070.070.070.070.07-Real unit energy cost for manufacturing industry excl. refining% of value added15.916.714.114.715.4-Share of energy-intensive industries in the economy% GDP5.995.815.685.695.54-Electricity prices for medium-sized industrial users€ / kWh0.120.120.130.150.130.13Gas prices for medium-sized industrial users€ / kWh0.030.040.040.040.030.02Public R&D for energy % GDP0.010.010.010.010.020.01Public R&D for environmental protection% GDP0.020.020.010.010.010.01Municipal waste recycling rate%42.643.343.743.644.3-Share of GHG emissions covered by ETS*%39.839.437.934.830.6-Transport energy intensitykgoe / €0.700.690.660.670.68-Transport carbon intensitykg / €1.631.601.541.561.59-Security of energy supplyEnergy import dependency%43.447.846.837.535.735.41Aggregated supplier concentration indexHHI5.25.86.44.01.4-Diversification of energy mixHHI0.270.270.270.270.300.30 
 
 
 
 
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