Track shipments

United Kingdom: Accelerate structural reforms to keep the recovery on track

03/08/2022 – After a strong post-pandemic recovery, the UK economy is facing slower growth with rising inflation and labor shortages exacerbated by Britain’s war of aggression Russia versus Ukraine.

According to a new report from the OECD, economic policy should focus on tackling long-standing structural problems such as low productivity growth, high inequalities of opportunity and achieving carbon neutrality.

The latest OECD Economic Survey of the UK highlights the importance of striking a balance between gradual fiscal adjustment and support for growth and investment. While taking steps to reduce the public deficit and debt, it is also important to provide temporary support through targeted income transfers to help low-income households meet the rising cost of living.

Greater business and public investments, improved skills across the workforce, and measures to facilitate greater labor mobility and increased participation of women in the workforce are needed to revive productivity growth.

“Like other economies around the world, the UK economy faces a number of headwinds, with pre-existing structural challenges amplified by the pandemic and Russia’s war of aggression against Ukraine,” said OECD Secretary General Mathias Cormann. “The key to stronger economic growth and better opportunities will be stronger productivity growth. This is why we welcome the government’s plans to invest on a large scale in infrastructure, skills and innovation.

The UK economy recovered to pre-pandemic levels at the end of 2021. However, this rebound was accompanied by supply and labor shortages following rising global demand and rising shipping costs. With inflationary pressures from significantly higher energy prices intensifying since Russia’s war of aggression against Ukraine, monetary policy should continue to be gradually tightened to ensure inflation returns to objective. The combination of high energy prices, rising global prices for tradable goods and services, and heightened uncertainty is clouding the economic outlook.

The aging of the population will require a greater use of labor resources to support economic growth and the sustainability of public finances. Significant public and private investment will be needed, in line with the government’s “race to the top” agenda, to address regional disparities in living standards, including employment opportunities, education and health. To accelerate the digital and green transitions, public investment – ​​which is expected to remain close to 2.5% of GDP in the coming years under the UK “Plan for Growth” – will need to be complemented by significantly higher private investment. This requires a political environment that provides stability and provides a transparent long-term strategy.

The UK is committed to achieving net zero greenhouse gas emissions by 2050, an ambition that enjoys broad political support, a strong institutional framework and pioneering work to integrate climate considerations in the financial sector. The UK has succeeded in reducing its greenhouse gas emissions in the past and exceeded its recent targets, but sustaining this rate of progress towards net zero will require substantial investment as well as the expansion of economy-wide pricing and well-designed sectoral regulations and subsidies. Uncertainty about future policy stringency is holding back investment and ensuring a predictable policy trajectory would better support the green transition.

See an overview of the survey with key results and graphs.

/Public release. This material from the original organization/authors may be ad hoc in nature, edited for clarity, style and length. The views and opinions expressed are those of the author or authors. See in full here.