UK economy praised

22 November 2000 - Whilst concluding that "The overall performance of the UK economy remains impressive" and labour market policies "continue to be exemplary" in comparison with other European countries there is still a problem with employee productivity.

The IMF praise government efforts to get people off welfare and into work and the drive on improving productivity but they say that "the UK's comparatively weak labour productivity performance...may be the Achilles' heel of an otherwise strong economy." But they also say that "as regards productivity growth, the authorities' approach to this complex issue - combining a stable policy environment with key structural reforms - is certainly appropriate in terms of direction and emphasis."

Extracts from United Kingdom - 2000 Article IV Consultation
Concluding Statement of the Mission

"1. The overall performance of the U.K. economy remains impressive. Output is growing at a brisk pace, the unemployment rate is at its lowest level in a quarter century (...) These achievements reflect ... sound macroeconomic policies ... as well as a decade and a half of fundamental structural reform that should, in many respects, be an example for many other European countries. (...) some aspects of the economic performance remain disappointing. In particular, the U.K.'s comparatively weak labor productivity performance in relation to other countries-due mainly to past underinvestment in physical and human capital-may be the Achilles' heel of an otherwise strong economy.

" 2. Looking to 2001, the ongoing economic expansion appears set to continue with output growth in the range of 2 1/2 to 3 percent. Private demand growth may slow down, but total domestic demand would still be buoyed by a sizeable increase in government spending. (...)

"3. Given these broadly favorable economic developments, (...) uncertainty stems from two sources: first, how much further the unemployment rate can fall before setting off wage pressure; and second, how fast productivity can grow on a sustained basis. On the first, the moderate behavior of wages in 2000 is suggestive of a substantial fall in the economy's structural rate of unemployment since the mid-1990s. However, this moderate behavior could also reflect, at least in part, pressures from the appreciation of sterling in recent years as well as a lag in the response to the increase in headline inflation this year. On the second, productivity gains in recent quarters are tantalizing, but cannot necessarily be extrapolated forward. Thus, we agree with the authorities that further efforts must be made to increase labor supply and the trend growth in productivity. (...)

"6. Turning to medium- and long-term issues, the authorities have set their policies with the broad purpose of enhancing the economy's productive potential. The strategy is rightly multifaceted. Macroeconomic and financial sector stability underpinned by strong policy frameworks should continue to make an important contribution to raising both productivity and private investment. This is complemented by many targeted initiatives to enhance productivity as well as investment and private saving, encompassing medium-term fiscal plans to increase public investment in human and physical capital, policies to enhance prospects for the "New Economy", labor market reform, pension reform, deregulation, and measures to promote competition-including in the provision of financial services. While we support the broad thrust of these initiatives, some adjustments in specific areas would be desirable.

"7. (...) areas such as education-where there is a clear need to improve the U.K.'s relative performance-may benefit more from well-targeted, cost-effective reforms (e.g., to address low skill levels) than from greatly increased spending.

"10. Turning to structural issues, we broadly agree with the priority areas identified by the authorities for fostering productivity growth: promoting innovation and research and development (R&D); strengthening competition; and encouraging enterprise. (...).

"11. An important aspect of the productivity issue is the potential for accelerated gains from the production and use of ICT as illustrated by the "New Economy" experience of the United States. The productivity growth of some ICT-intensive sectors in the United Kingdom provides some early, circumstantial evidence that the New Economy may be taking hold following years of relatively high rates of ICT investment on par with those of the United States. However, we would caution against relying too heavily in the next few years on the effects of ICT investment to raise economy-wide productivity given the difficulty of determining the timing of potential productivity gains associated with the use of ICT equipment. Preliminary evidence suggests that the productivity gains realized to date in the United Kingdom come mainly from increases in the ratio of ICT capital per worker, underscoring the need to maintain high rates of growth in private investment accompanied by improving skill levels. The multifaceted approach envisaged by the authorities to enhance productivity growth in general will, of course, also enhance the development of ICT. However, there may be a need for more targeted measures, such as the recent decision to set up ICT learning centers. A good example would also be the removal of existing hindrances to low cost connections to the Internet. Looking ahead, given the recent sharp decline in equity prices in the high-tech sector, care should also be taken to ensure that avenues remain open for financing viable enterprises.

"12. The labor market is an area where - particularly by comparison with most other European countries - U.K. policies continue to be exemplary. The targeted measures adopted over the past three years, including various New Deal initiatives and in-work benefits for low-income workers, appear to have created further incentives for and facilitated transitions from both unemployment and nonemployment to work. In many respects, these measures have complemented and built upon the reforms initiated in the 1980s and early 1990s. Yet, some concerns remain. While employment and activity rates have continued rising for women, these measures have been declining for men, indicating the increasing marginalization of men with low skills. Moreover, notwithstanding recent progress, the nonemployment rates for some groups such as lone parents remain very high. Hence, more emphasis is needed on integrating various components of the welfare and unemployment benefits systems; programs directed towards raising participation rates of specific groups such as lone parents and those on disability benefits; and measures to increase the supply of workers with vocational and intermediate skills-an area where the United Kingdom remains deficient. Furthermore, unemployment benefits could be tapered in a manner that increases disincentives for rotating through the different options of the New Deal while remaining unemployed over long periods. An important concern going forward is that, although the National Minimum Wage (NMW) appears not to have affected employment or inflation thus far, significant increases in the NMW or changes that would bring the youth rate up to the standard NMW could have adverse implications for the prospects of integrating low-skill and younger workers into the workforce."

The IMF comments follow another positive report from the OECD pointing to recent sustained growth in the UK economy and noting government labour market policy. This report can be seen at http://www.oecd.org/publications/outlook68.

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