Two areas which have been identified as having the potential for efficiency gains are the education and healthcare systems. Together, these absorb around 25% of general government expenditure. A recent study by the European Commission suggests that, as far as tertiary education is concerned, the same level of output could be attained with 44% of the present level of expenditure per student. 9 The equivalent figure for the healthcare sector stands at 38%. On this basis the study concludes that even incremental efficiency gains in these two areas can lead to substantial savings. No doubt, other spending categories offer similar possibilities. As for spending priorities, the choice needs to be guided by some important criteria, such as the delivery of a minimum social safety net for those who are genuinely in need; the ending of benefits that discourage participation in the labour market; the elimination of excess demand for, and waste of, free public goods and services; and a greater focus on policies and programmes that would promote innovation and encourage entrepreneurship and investment, and thus generate long-term economic growth. The room for retrenchment may be limited in the short-term, but in the long-term all expenditure categories should come under close scrutiny. Since the outcome of such an exercise will inevitably entail a departure from established practices and the loss of acquired rights, it should ideally be based on a broad consensus among the social partners. Conclusion In conclusion, the economy has come a long way since 2004, and is now much more diversified and market-oriented.

Greatly increased financial openness, in part associated with EU membership, has made the UK financial system larger, more complex and more exposed to shocks from abroad. These developments reinforced domestically generated vulnerabilities in the run up to the Global Financial Crisis. The UK, along with many of its main international partners, lacked the institutions and tools for managing and addressing them when they crystallised. As a result, when the crisis hit, global shocks were transmitted virulently across borders, doing great damage to the financial systems and real economies of many countries. The UK was particularly affected given its high degree of financial openness. Most recently, challenges arising from European Monetary Union (EMU) have been particularly evident. Our ties are close. 40% of our exports go to the euro area, and major UK-owned banks have financial exposures to the euro area totalling almost twice their capital, worth a quarter of UK GDP. These figures underscore the importance to the UK of further building the resilience of the euro area as part of a strengthened European Union.9 In this regard, the progress made in recent years is particularly welcome. Nonetheless, as highlighted in the European Commission’s “Five Presidents’ Report”, the euro area remains “unfinished business.”10 Actions to complete European Monetary Union should be taken with regard to their impact on all members of the European Union. From the Bank of England’s perspective, steps to ensure financial stability for those within the euro area should not impede the achievement of financial stability for those without, including the United Kingdom.