Economic Policies
#16Key Findings
Forced to deal simultaneously with Brexit and the coronavirus, the United Kingdom falls into the upper-middle ranks (rank 16) in the area of economic policy. Its score on this measure has improved by 0.3 points relative to 2014.
The COVID-19 pandemic struck just as the country was adjusting to the new realities of Brexit. Growth in this highly services-based economy turned sharply negative in mid-2020, but bounced back later in the year. By the end of 2021, GDP had reached its pre-pandemic level. Strong spending on a furlough program meant that the unemployment rate peaked at just 5.1%, and fell to 4.1% by late 2021.
Government spending was on the rise even before the pandemic, with Prime Minister Johnson promising an end to austerity. Total debt jumped from 82.8% of GDP in 2019 to 95.9% in 2021. National Health Service contributions have been increased, and a tax on digital services has been imposed.
The formal completion of Brexit led to a number of difficulties, including friction at EU borders and supply-chain disruptions. Labor shortages are emerging in areas such as care and agriculture. Research cooperation with the EU has been disrupted, but the government is increasing its domestic science budget.
The COVID-19 pandemic struck just as the country was adjusting to the new realities of Brexit. Growth in this highly services-based economy turned sharply negative in mid-2020, but bounced back later in the year. By the end of 2021, GDP had reached its pre-pandemic level. Strong spending on a furlough program meant that the unemployment rate peaked at just 5.1%, and fell to 4.1% by late 2021.
Government spending was on the rise even before the pandemic, with Prime Minister Johnson promising an end to austerity. Total debt jumped from 82.8% of GDP in 2019 to 95.9% in 2021. National Health Service contributions have been increased, and a tax on digital services has been imposed.
The formal completion of Brexit led to a number of difficulties, including friction at EU borders and supply-chain disruptions. Labor shortages are emerging in areas such as care and agriculture. Research cooperation with the EU has been disrupted, but the government is increasing its domestic science budget.
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How successful has economic policy been in providing a reliable economic framework and in fostering international competitiveness?
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9
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.
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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.
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3
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
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.
The UK economic framework was substantially reformed after 1979 in a market-friendly direction. After the “leave” vote in the June 2016 EU referendum, the fall in the exchange rate helped to cushion the initial shock. But, in 2017, economic growth slowed and the United Kingdom shifted from being one of the fastest growing mature western economies to one of the slowest. Heading into 2020, however, the UK economy was on a modest economic growth path again (1.3% in 2019) and – following the clear general election victory of Prime Minister Johnson – renewed political stability was expected to improve economic growth prospects, even though ongoing negotiations with the European Union and the projected exit from the European Single Market still left areas of uncertainty.
The UK economy contracted sharply in 2020 as a result of lockdown measures. However, current projections suggest it has recovered more rapidly than had been expected as recently as the spring of 2021 and the economy has now overtaken its pre-pandemic level of GDP. In parallel, the formal completion of the Brexit process led to a number of difficulties, such as friction at EU borders and disruptions to supply chains. As in many other countries, inflation has surged, but it remains unclear whether this is a temporary or more enduring phenomenon. In the medium and long term, the government faces a substantial challenges. In particular, the government will have to find solutions to the country’s labor market problems (where there are shortages in areas such as care and agriculture), the continuing export weakness of the UK economy, the challenge of reducing the pandemic-induced increase in the budget deficit and formulating policies for “leveling- up” to reduce regional disparities (Begg, 2021).
Citations:
https://obr.uk/download/october-2021-economic-and-fiscal-outlook-executive-summary/
https://committees.parliament.uk/oralevidence/2980/pdf/
https://www.instituteforgovernment.org.uk/blog/levelling-up-white-paper-delay
Begg, I. (2021) ‘Rethinking UK economic policy’ https://www.cesifo.org/DocDL/CESifo-Forum-2021-6-begg-restart-after-covid-19-november.pdf
The UK economy contracted sharply in 2020 as a result of lockdown measures. However, current projections suggest it has recovered more rapidly than had been expected as recently as the spring of 2021 and the economy has now overtaken its pre-pandemic level of GDP. In parallel, the formal completion of the Brexit process led to a number of difficulties, such as friction at EU borders and disruptions to supply chains. As in many other countries, inflation has surged, but it remains unclear whether this is a temporary or more enduring phenomenon. In the medium and long term, the government faces a substantial challenges. In particular, the government will have to find solutions to the country’s labor market problems (where there are shortages in areas such as care and agriculture), the continuing export weakness of the UK economy, the challenge of reducing the pandemic-induced increase in the budget deficit and formulating policies for “leveling- up” to reduce regional disparities (Begg, 2021).
Citations:
https://obr.uk/download/october-2021-economic-and-fiscal-outlook-executive-summary/
https://committees.parliament.uk/oralevidence/2980/pdf/
https://www.instituteforgovernment.org.uk/blog/levelling-up-white-paper-delay
Begg, I. (2021) ‘Rethinking UK economic policy’ https://www.cesifo.org/DocDL/CESifo-Forum-2021-6-begg-restart-after-covid-19-november.pdf
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How effectively does labor market policy address unemployment?
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Successful strategies ensure unemployment is not a serious threat.
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Labor market policies have been more or less successful.
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3
4
3
Strategies against unemployment have shown little or no significant success.
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1
Labor market policies have been unsuccessful and rather effected a rise in unemployment.
Given the high share of services in output (almost 80% of the economy) and its integration in the world economy, the United Kingdom was among the most affected OECD economies during the COVID-19 crisis due to extended periods of lockdown. Nevertheless, as a result of the rapid introduction of cushioning measures, unemployment did not rise much in 2020, peaking at 5.1%. A key reason was government support for the wages of up to 10 million “furloughed” workers, close to a third of the workforce. After lockdown restrictions were eased in the summer of 2021, unemployment fell to 4.1% at the end of 2021, while vacancies reached a record high.
Citations:
Taylor, H. et al. (2020): Post-Brexit Labour Supply and Workforce Planning: Key questions for policymakers, London: The Work Foundation
OECD (2020) Economic Survey United Kingdom October 2020, Paris: OECD
Citations:
Taylor, H. et al. (2020): Post-Brexit Labour Supply and Workforce Planning: Key questions for policymakers, London: The Work Foundation
OECD (2020) Economic Survey United Kingdom October 2020, Paris: OECD
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How effective is a country’s tax policy in realizing goals of revenue generation, equity, growth promotion and ecological sustainability?
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Taxation policy fully achieves the objectives.
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7
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Taxation policy largely achieves the objectives.
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Taxation policy partially achieves the objectives.
2
1
1
Taxation policy does not achieve the objectives at all.
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, although steps have been taken to clamp down on some of the more egregious avoidance schemes. Property taxes are high and have been increased for purchases of high value houses, but labor taxes are low compared with many 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 rarely been implemented. Since April 2020, the United Kingdom taxes tech companies 2% of the revenue they make from UK users, which is expected to raise around between £400 and £500 million per year.
In September 2021, the government announced that from April 2022 it would increase national insurance contributions (NIC), which is a tax on labor, by 1.25 percentage points to help pay for the NHS and social care. This measure, which is expected to raise £12 billion a year, was politically controversial, as it contradicted a direct manifesto pledge not to raise NIC. The Autumn Budget 2021 resulted in a further net tax rise, amounting to £16.7 billion a year by 2026/27, as tax cuts only partially offset tax increases from the March 2021 budget. Overall, the recent tax rises will raise the tax burden from 33.5% of GDP before the pandemic to 36.2% by 2026/27, the highest since the early 1950s, according to Office for Budget Responsibility projections. In part, this arises from freezing thresholds for the different rates of income, a phenomenon referred to by economists as “fiscal drag.”
Citations:
https://obr.uk/docs/dlm_uploads/Executive_summary_Economic_and_fiscal_outlook_October_2021.pdf
https://www.theguardian.com/politics/2021/sep/07/boris-johnson-unveils-12bn-a-year-tax-rise-to-pay-for-nhs-and-social-care
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 rarely been implemented. Since April 2020, the United Kingdom taxes tech companies 2% of the revenue they make from UK users, which is expected to raise around between £400 and £500 million per year.
In September 2021, the government announced that from April 2022 it would increase national insurance contributions (NIC), which is a tax on labor, by 1.25 percentage points to help pay for the NHS and social care. This measure, which is expected to raise £12 billion a year, was politically controversial, as it contradicted a direct manifesto pledge not to raise NIC. The Autumn Budget 2021 resulted in a further net tax rise, amounting to £16.7 billion a year by 2026/27, as tax cuts only partially offset tax increases from the March 2021 budget. Overall, the recent tax rises will raise the tax burden from 33.5% of GDP before the pandemic to 36.2% by 2026/27, the highest since the early 1950s, according to Office for Budget Responsibility projections. In part, this arises from freezing thresholds for the different rates of income, a phenomenon referred to by economists as “fiscal drag.”
Citations:
https://obr.uk/docs/dlm_uploads/Executive_summary_Economic_and_fiscal_outlook_October_2021.pdf
https://www.theguardian.com/politics/2021/sep/07/boris-johnson-unveils-12bn-a-year-tax-rise-to-pay-for-nhs-and-social-care
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To what extent does budgetary policy realize the goal of fiscal sustainability?
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Budgetary policy is fiscally sustainable.
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Budgetary policy achieves most standards of fiscal sustainability.
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Budgetary policy achieves some standards of fiscal sustainability.
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Budgetary policy is fiscally unsustainable.
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 the Labour government between 1997 and 2008, 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 the Charter for Budget Responsibility.
After the global financial crisis, UK chancellors ostensibly focused on reducing 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.
After Boris Johnson became prime minister, the government promised an end to austerity policies and committed itself to higher spending, especially on health and social care. After securing a large majority in the 2019 general election, other spending priorities were added, notably to promote “leveling-up” and to invest in infrastructure. Despite these promises, the government sought to further consolidate public finances.
As elsewhere across the developed world, the coronavirus pandemic altered the situation, with the chancellor promising to do “whatever it takes” to cushion the economic crash, initially committing to fiscal interventions worth £280 billion. As a result both of the pandemic and a deviation from classically Conservative fiscal prudence, the government is on track to increase both the tax take and the size of government spending to levels not seen for decades, with public spending rising from 39.8% of GDP before the pandemic to 41.6% in 2026/27 – the highest share of GDP since the late 1970s. Since this will be balanced by higher taxes, however, net borrowing will conform with prior plans. The recovery in economic growth during 2021 and the projection that economic growth will continue during 2022 should ease the task of ensuring fiscal sustainability.
Citations:
Autumn Statement 2021: https://www.gov.uk/government/publications/autumn-budget-and-spending-review-2021-documents
https://www.imf.org/en/Topics/imf-and-covid19/Policy-Responses-to-COVID-19#U
https://obr.uk/docs/dlm_uploads/Executive_summary_Economic_and_fiscal_outlook_October_2021.pdf
Under the Labour government between 1997 and 2008, 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 the Charter for Budget Responsibility.
After the global financial crisis, UK chancellors ostensibly focused on reducing 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.
After Boris Johnson became prime minister, the government promised an end to austerity policies and committed itself to higher spending, especially on health and social care. After securing a large majority in the 2019 general election, other spending priorities were added, notably to promote “leveling-up” and to invest in infrastructure. Despite these promises, the government sought to further consolidate public finances.
As elsewhere across the developed world, the coronavirus pandemic altered the situation, with the chancellor promising to do “whatever it takes” to cushion the economic crash, initially committing to fiscal interventions worth £280 billion. As a result both of the pandemic and a deviation from classically Conservative fiscal prudence, the government is on track to increase both the tax take and the size of government spending to levels not seen for decades, with public spending rising from 39.8% of GDP before the pandemic to 41.6% in 2026/27 – the highest share of GDP since the late 1970s. Since this will be balanced by higher taxes, however, net borrowing will conform with prior plans. The recovery in economic growth during 2021 and the projection that economic growth will continue during 2022 should ease the task of ensuring fiscal sustainability.
Citations:
Autumn Statement 2021: https://www.gov.uk/government/publications/autumn-budget-and-spending-review-2021-documents
https://www.imf.org/en/Topics/imf-and-covid19/Policy-Responses-to-COVID-19#U
https://obr.uk/docs/dlm_uploads/Executive_summary_Economic_and_fiscal_outlook_October_2021.pdf
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To what extent does research and innovation policy support technological innovations that foster the creation and introduction of new products?
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Research and innovation policy effectively supports innovations that foster the creation of new products and enhance productivity.
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Research and innovation policy largely supports innovations that foster the creation of new products and enhance productivity.
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Research and innovation policy partly supports innovations that foster the creation of new products and enhance productivity.
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Research and innovation policy has largely failed to support innovations that foster the creation of new products and enhance productivity.
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, and information and communications technology (ICT). Performance has been weaker in terms of overall R&D spending – around 1.74% of GDP in the years prior to the pandemic, well short of the norm set for EU member states – 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 manufacturing contributes to a smaller share of UK GDP than in most OECD countries, and other indicators, such as ICT spending (which matters more for service industries), have to be taken into account to understand trends in innovation in the United Kingdom.
Over recent decades, successive governments have attempted to improve this situation, for example, by targeting weaknesses in technical education at 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.
After leaving the European Union, the UK government must address the challenge of maintaining its research and innovation effort. The government chose to end UK participation in the European Union’s Erasmus program, replacing it with the somewhat less ambitious Turing scheme, but is expected to continue to participate in the European Union’s Horizon program after projects currently in progress end. However, although the Trade and Cooperation Agreement (TCA) between the European Union and the United Kingdom provides for the United Kingdom to be associated with Horizon, the precise terms are yet to be confirmed and there has been friction between the United Kingdom and European Union over this matter, as with other aspects of implementing the TCA.
The United Kingdom has significantly increased its own science budget. However, for reasons of fiscal prudence, a decision in the November 2021 budget about reaching the target level of £22 billion per annum means it will take longer than previously expected, as explained in a BBC report. Nevertheless, many of the fears of UK universities and the country’s corporate sector about the impact of Brexit have been allayed. In life sciences and pharmaceuticals where the United Kingdom maintains a prominent research role (as witnessed by the rapid development of the Oxford-AstraZeneca COVID-19 vaccine), UK research efforts remain especially strong. The revenue of some universities may, however, be affected by a sharp decline in applications by EU students since Brexit. This is partly because all EU students will, in future, have to pay the higher foreign student fees instead of the domestic rates they were entitled while the United Kingdom was an EU member state.
Citations:
https://ifs.org.uk/uploads/publications/bns/BN283-Drop-in-international-students-would-imperil-university-finances.pdf
https://www.politico.eu/article/eu-applications-uk-university-ucas-brexit-tuition-fees/
https://www.thetimes.co.uk/article/universities-hire-planes-to-fly-in-china-students-gfq2cc9j0
https://www.bbc.co.uk/news/science-environment-59068487
Over recent decades, successive governments have attempted to improve this situation, for example, by targeting weaknesses in technical education at 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.
After leaving the European Union, the UK government must address the challenge of maintaining its research and innovation effort. The government chose to end UK participation in the European Union’s Erasmus program, replacing it with the somewhat less ambitious Turing scheme, but is expected to continue to participate in the European Union’s Horizon program after projects currently in progress end. However, although the Trade and Cooperation Agreement (TCA) between the European Union and the United Kingdom provides for the United Kingdom to be associated with Horizon, the precise terms are yet to be confirmed and there has been friction between the United Kingdom and European Union over this matter, as with other aspects of implementing the TCA.
The United Kingdom has significantly increased its own science budget. However, for reasons of fiscal prudence, a decision in the November 2021 budget about reaching the target level of £22 billion per annum means it will take longer than previously expected, as explained in a BBC report. Nevertheless, many of the fears of UK universities and the country’s corporate sector about the impact of Brexit have been allayed. In life sciences and pharmaceuticals where the United Kingdom maintains a prominent research role (as witnessed by the rapid development of the Oxford-AstraZeneca COVID-19 vaccine), UK research efforts remain especially strong. The revenue of some universities may, however, be affected by a sharp decline in applications by EU students since Brexit. This is partly because all EU students will, in future, have to pay the higher foreign student fees instead of the domestic rates they were entitled while the United Kingdom was an EU member state.
Citations:
https://ifs.org.uk/uploads/publications/bns/BN283-Drop-in-international-students-would-imperil-university-finances.pdf
https://www.politico.eu/article/eu-applications-uk-university-ucas-brexit-tuition-fees/
https://www.thetimes.co.uk/article/universities-hire-planes-to-fly-in-china-students-gfq2cc9j0
https://www.bbc.co.uk/news/science-environment-59068487
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To what extent does the government actively contribute to the effective regulation and supervision of the international financial architecture?
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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.
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The government contributes to improving the regulation and supervision of financial markets. In some cases, it demonstrates initiative and responsibility in such endeavors.
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The government rarely contributes to improving the regulation and supervision of financial markets. It seldom demonstrates initiative or responsibility in such endeavors.
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The government does not contribute to improving the regulation and supervision of financial markets.
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 were 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 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. One issue over which the United Kingdom is susceptible to accusations of double standards is in relation to inflows of capital from questionable sources. While money laundering standards are applied with some vigor, there is a perception that the United Kingdom, through the agency of the City of London, is too lax on the super-rich.
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 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. One issue over which the United Kingdom is susceptible to accusations of double standards is in relation to inflows of capital from questionable sources. While money laundering standards are applied with some vigor, there is a perception that the United Kingdom, through the agency of the City of London, is too lax on the super-rich.