United Kingdom

   

Economic Policies

#18
Key Findings
With Brexit-driven concerns undermining economic stability, the United Kingdom falls into the upper-middle ranks (rank 18) in the area of economic policy. Its score on this measure has improved by 0.4 points relative to 2014.

The looming uncertainty of Brexit has overshadowed the country’s development. Economic growth has remained positive since the referendum vote, but slowed after 2017, reaching 1.4% in 2019. The export sector remains weak, and the lack of clarity regarding future UK-EU relations, especially financial-sector access to the continent, has weighed on the economy.

The labor market has remained strong, with unemployment rates falling to 3.8% in mid-2019, and the employment rate at 75.7% in 2018. However, this has come at the cost of weak productivity growth. Youth unemployment rates are considerably higher. The minimum wage has increased. A new “digital tax” on technology companies with UK users is being imposed.

The leading parties have declared that “austerity is over,” with higher levels of public spending planned to defray difficulties associated with Brexit. Financial regulation is expected to remain closely aligned with EU standards, but the European Banking Agency has moved to Paris. The future relationship between UK and EU research programs and initiatives remains unclear.

Economy

#23

How successful has economic policy been in providing a reliable economic framework and in fostering international competitiveness?

10
 9

Economic policy fully succeeds in providing a coherent set-up of different institutional spheres and regimes, thus stabilizing the economic environment. It largely contributes to the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
 8
 7
 6


Economic policy largely provides a reliable economic environment and supports the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
 5
 4
 3


Economic policy somewhat contributes to providing a reliable economic environment and helps to a certain degree in fostering a country’s competitive capabilities and attractiveness as an economic location.
 2
 1

Economic policy mainly acts in discretionary ways essentially destabilizing the economic environment. There is little coordination in the set-up of economic policy institutions. Economic policy generally fails in fostering a country’s competitive capabilities and attractiveness as an economic location.
Economic Policy
7
The UK economic framework was substantially reformed after 1979 in a market-friendly direction and most of these reforms were maintained after the election of the Labour government in 1997, albeit with some rebalancing toward labor interests – notably through the introduction of a minimum wage. The UK economy grew steadily from the early 1990s up to 2007, but then endured a deep recession during the financial crisis before recovering from 2013 onwards, despite weak demand from the euro zone, the United Kingdom’s largest export market. There are concerns that the economy is too reliant on consumers’ expenditure, fueled by overly high household debt and sustained by very loose monetary policy.

The change in government in 2010 led to the adoption of an economic policy framework ostensibly focused on budgetary consolidation, but there has been a substantial watering down of the fiscal rules put in place by previous governments; targets for returning to fiscal balance have repeatedly been pushed to later dates. This has meant the squeeze on public spending has been less than is often claimed because the government also chose to protect key areas of public services, such as healthcare spending. The corollary, especially as service charges on government debt increased, was that cuts in other areas of public spending had to be even deeper. Insufficient public investment is reflected in creaking infrastructure and skills shortages.

The economy initially appeared to shake off the political shock of the “leave” vote in the June 2016 EU referendum, with the fall in the exchange rate helping to absorb the shock. In 2017, however, economic growth slowed such that the United Kingdom shifted from being one of the most rapidly growing mature western economies to one of the slowest. The labor market has remained buoyant, with the employment rate rising to 75.9% in comparison to 75.7% in 2018, which was already the highest employment rate since the beginning of comparable estimations. This labor-market performance partly reflects a job-friendly economic policy. The average pay grew up by 3.7%, which is the highest growth rate since June 2008. Inflation is projected to remain stable around 2%. Moreover, disappointing productivity figures have led the independent Office of Budget Responsibility to reduce its estimate for the long-term growth potential of the economy and there is concern about how to boost productivity. The current account deficit exceeded 5% of GDP between 2013 and 2016, but decreased to 4.3% in 2018. In 2019, it increased slightly to 4.6%. This is indicative of the continuing export weakness of the UK economy. Uncertainty about future UK-EU relations and threats to the future access of UK financial services to the continental market are weighing on the economy.

Citations:
https://cdn.obr.uk/EFO_October-2018.pdf
https://www.bloomberg.com/news/articles/2018-09-28/u-k-current-account-deficit-widens-business- investment-falls

Labor Markets

#9

How effectively does labor market policy address unemployment?

10
 9

Successful strategies ensure unemployment is not a serious threat.
 8
 7
 6


Labor market policies have been more or less successful.
 5
 4
 3


Strategies against unemployment have shown little or no significant success.
 2
 1

Labor market policies have been unsuccessful and rather effected a rise in unemployment.
Labor Market Policy
8
After a period of remarkably good and stable labor-market performance in which the rate of unemployment was below that of the euro zone and the OECD average, conditions in the United Kingdom deteriorated in the wake of the 2008 crisis and the ensuing economic downturn. Underlying weaknesses (such as the comparatively high degree of working-age inactivity linked to the high number of claimants of disability-related benefits) came to the fore, and the unemployment rate rose to its highest rate since the mid-1990s. But after labor-market flexibility was increased through deregulation and the lowering of secondary-wage costs, the unemployment rate fell significantly from 8.3% at the end of 2012 to 3.8% in September 2019. In fact, recent labor-market performance has been so robust that the new government has declared full employment an official government objective. The UK labor market continues to attract substantial numbers of economic migrants.

However, the increase in employment has come at the cost of weakness in productivity, especially in manufacturing. Real wages only recently returned to their pre-crisis levels and started to rise in real terms, partly because of a moderating effect of immigration. An increase in the national minimum hourly wage to the level of the so-called living wage was announced and is supported across the political parties. From £7.20 for people aged over 25 in April 2016, it rose to £8.21 in April 2019 and is scheduled to rise faster than average wages over the coming years. This is expected to reduce sharply the de facto subsidy to employers provided by tax credits. There has also been criticism of other facets of labor-market flexibility. For example, the topic of zero-hour contracts gained substantial attention during the general election of 2015 but has not been effectively addressed yet, as Brexit continues to dominate the political agenda. Youth unemployment rose slightly to 11.8% from 10.9% a year before. Although this is a significantly higher number compared to the overall unemployment rate of 4%, it is comparatively low in relation to other major European economies (32.2% in Spain, 27.1% in Italy and 19.2% in France, with an EU average of 14.2%) a year before.

Citations:
Brinkley, I. (2013) “Flexibility or insecurity? Exploring the rise of zero-hours contracts” London: The Work Foundation

https://www.theguardian.com/uk-news/zero-hours-contracts

Taxes

#13

How effective is a country’s tax policy in realizing goals of revenue generation, equity, growth promotion and ecological sustainability?

10
 9

Taxation policy fully achieves the objectives.
 8
 7
 6


Taxation policy largely achieves the objectives.
 5
 4
 3


Taxation policy partially achieves the objectives.
 2
 1

Taxation policy does not achieve the objectives at all.
Tax Policy
7
The United Kingdom has a progressive income-tax system. The balance between direct and indirect taxes is reasonably fair, as measured in terms of horizontal equity. The system is, however, very complex. In relation to vertical equity, there are too many opportunities for tax avoidance, with the results bordering on evasion for the rich. Property taxes are high and have been increased for purchases of high value houses, but labor taxes are low compared with many other EU member states. The financial crisis and the ensuing economic downturn sharply reduced tax revenue with the squeeze on wages contributing to a lower yield from income tax. However, overall tax revenue has risen over recent years and was projected to be high enough to continue to narrow the public deficit over the course of the current parliament. A risk factor is, though, that the potential costs of leaving the European Union are still unclear and therefore not calculable yet.

The Autumn Budget 2018 included the introduction of a so-called digital tax, a form of taxation that has been discussed in many countries but has so far hardly been implemented. The United Kingdom will tax tech companies 2% of the revenue they make from UK users. It will come into force in April 2020 and is expected to raise around £400 million per year. Further, the government announced a new tax on the production and import of plastic packaging that contains less than 30% recycled plastic, which is due to come into force in April 2022, to set an incentive for the reduction of plastic waste. However, planned increases in fuel duties have repeatedly been postponed.

Citations:
World Economic Forum 2017: The Global Competitiveness Report 2017-2018.

Budgets

#26

To what extent does budgetary policy realize the goal of fiscal sustainability?

10
 9

Budgetary policy is fiscally sustainable.
 8
 7
 6


Budgetary policy achieves most standards of fiscal sustainability.
 5
 4
 3


Budgetary policy achieves some standards of fiscal sustainability.
 2
 1

Budgetary policy is fiscally unsustainable.
Budgetary Policy
7
The United Kingdom is fiscally a highly centralized state. As such, central government has considerable control over budgetary policy. Most public spending is directly or indirectly controlled by the central government, with few other influences compared to, for example, federal countries. This also means, however, that the central government has to shoulder the blame if things go wrong.

Under previous Labour governments, the “golden rule” of UK fiscal policy was to limit deficit spending to investment over the business cycle. However, public spending as a proportion of GDP increased during the 2000s and, in hindsight, was too pro-cyclical. In 2009, adherence to these fiscal rules was abandoned to cope with the consequences of the crisis. There is now a fiscal council, the Office for Budget Responsibility (OBR), and looser fiscal rules, including provision for surpluses in “good times,” were included in a Charter for Budget Responsibility.

Since the crisis years, UK chancellors have ostensibly focused on reducing the national debt and borrowing – a goal that was supported by moderate but steady economic growth. Initially, the aim of the 2010 coalition government was to balance the net position of public finances by 2015, although in practice the deadline was repeatedly extended. Yet, 2019 may mark a turning point for this policy with announcements by the leading parties that “austerity is over.” Despite some risks associated with lower economic growth, the main political parties have pledged to boost public spending and mitigate uncertainties around Brexit.
In addition to the slowing economy, both Prime Minister Johnson and the leader of the opposition, Corbyn, made enormous spending pledges. The Conservatives under Boris Johnson have promised an overall increase of £13.9bn until 2024, consisting of investments and tax reductions, with their biggest single item being an additional £900m per year to the NHS in order to hire more nurses. Under Jeremy Corbyn, Labour’s spending plans even add up to the impressive £230.7bn until 2024.

The European Commission’s 2019 autumn forecasts show the UK growing at the EU average rate of 1.4% in 2019 and edging upwards in 2020. OBR analyses suggest the United Kingdom’s underlying growth rate has declined to around 1.5%, implying future governments will need to exercise restraint in promises to boost public spending. Experience suggests rather extravagant promises in the 2019 election campaign will be fudged.

Citations:
Autumn Statement 2018: https://www.gov.uk/government/publications/budget-2018-documents
https://www.gov.uk/government/speeches/budget-2018-philip-hammonds-speech
https://www.ons.gov.uk/economy/grossdomesticproductgdp
https://www.bbc.com/news/election-2019-50545673

Research, Innovation and Infrastructure

#14

To what extent does research and innovation policy support technological innovations that foster the creation and introduction of new products?

10
 9

Research and innovation policy effectively supports innovations that foster the creation of new products and enhance productivity.
 8
 7
 6


Research and innovation policy largely supports innovations that foster the creation of new products and enhance productivity.
 5
 4
 3


Research and innovation policy partly supports innovations that foster the creation of new products and enhance productivity.
 2
 1

Research and innovation policy has largely failed to support innovations that foster the creation of new products and enhance productivity.
R&I Policy
7
The United Kingdom’s tradition of being an active player in research and innovation dates back to the Industrial Revolution. The country’s clusters of pre-eminent universities have for a long time played an important role in linking cutting-edge academic research with industries such as biotechnology or information and communications technology (ICT). Performance has been weaker in terms of overall R&D spending, which continues to fall well short of EU targets, as well as in the conversion of innovation into sustainable, large-scale production, which holds the potential for long-term profitability. However, it is important to emphasize that the UK economy does not have the industrial base to support a large-scale R&D effort, so it is necessary to look at other indicators, such as ICT spending (which matters more for service industries), to better understand trends in innovation in the United Kingdom.

Over the decades, attempts have been made by successive governments to improve this situation, for example, by targeting weaknesses in technical education on various levels. Recent government initiatives have focused on extending tax credits for R&D, setting up regional Technology and Innovation Centers, investing in digital infrastructure and new university research facilities, as well as establishing Innovate UK to promote economic growth through science and technology.

Despite tentative agreement that the United Kingdom will remain involved in EU research programs, there is still uncertainty about how this will evolve after Brexit and the status of researchers who are EU nationals working in the United Kingdom. This could have an adverse effect on UK universities, although they are lobbying intensively to prevent a negative outcome. While the potential loss of EU funds is not huge, and it has to be recalled that the United Kingdom has always been a net contributor to the EU budget, researchers are more apprehensive about barriers to collaboration with counterparts in the European Union. This all comes despite a year-long debate about how best to attract highly skilled immigrants to the UK science sector. Yet, the number of EU students applying to UK universities increased by 3% in 2018. University officials interpret the upturn either as a last-minute rush before Brexit or as a sign that the attractiveness of UK universities simply outshines the grim political prospects.

The challenge facing the UK government will be how to maintain its research and innovation effort if obstacles arise to collaboration with other EU member states. This could affect not only the university sector, but also the corporate sector – for example in areas like life sciences and pharmaceuticals where the United Kingdom maintains a prominent research role – if the supply networks of UK research facilities are disrupted.

Citations:
https://www.theguardian.com/education/2018/feb/05/uk-universities-rise-in-applications-eu-students (31.10.18)

Global Financial System

#18

To what extent does the government actively contribute to the effective regulation and supervision of the international financial architecture?

10
 9

The government (pro-)actively promotes the regulation and supervision of financial markets. It demonstrates initiative and responsibility in such endeavors and often acts as an international agenda-setter.
 8
 7
 6


The government contributes to improving the regulation and supervision of financial markets. In some cases, it demonstrates initiative and responsibility in such endeavors.
 5
 4
 3


The government rarely contributes to improving the regulation and supervision of financial markets. It seldom demonstrates initiative or responsibility in such endeavors.
 2
 1

The government does not contribute to improving the regulation and supervision of financial markets.
Stabilizing Global Financial System
7
The City of London is home to one of the world’s main financial hubs. Consequently, governments in the United Kingdom have traditionally tried to protect the interests of the City of London against more intrusive regulation whether national, European or global. Governments have often argued that the special characteristics of London as a financial center are not given sufficient attention by Brussels in particular.

At the international level, successive governments have taken a prominent role in attempts to improve the international regulatory framework through international bodies, such as the Financial Stability Board (chaired by the governor of the Bank of England) and the Bank for International Settlements, as well as through the prominent role of the Bank Governor in the European Systemic Risk Board. The United Kingdom has had substantial influence on EU financial reforms, both through government action and in the form of initiatives from the City of London.

Continued uncertainty regarding future relations between the United Kingdom and the European Union could affect the United Kingdom’s stance on global financial regulation, although the expectation is that UK financial regulation will remain closely aligned with European Union and international standards.

The European Banking Agency has moved from London to Paris which could have ramifications for the United Kingdom’s proximity to centers of decision-making.
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