The British economy had started to recover at the time, at least according to the economic data. The outgoing Conservative Chancellor of the Exchequer, Kenneth Clarke, pleaded that “the feel good factor” would soon follow. But the people wanted change and swept Labour to victory.
Now, 13 years later, Mr Clarke is back in government, this time as lord chancellor and secretary of state for justice Again, a recession weary electorate wanted change, and change they got when David Cameron took over as prime minister at number 10 after another captivating general election this May. Mr Cameron is the youngest prime minister in nearly 200 years, while the Conservative-Liberal coalition government he leads with deputy prime minister, Nick Clegg, is the first full coalition in the UK since the Second World War.
The economic landscape could not be more different this time either. Britain’s economy has been struck hard by the crisis, with a burgeoning fiscal deficit, rising unemployment and deep market uncertainty.
Thankfully, the UK’s GDP is now rising, albeit slowly–the OECD forecasts growth of 1.3% this year, firming to 2.5% in 2011; these are about average for the EU, but lag behind the US and Japan. More effort is needed to shake off the crisis, and that, the new government realises, means reform. A compact new OECD report entitled United Kingdom: Policies for a Sustainable Recovery, issued in July, offers some useful guidance.
As Secretary-General Angel Gurría puts it, the challenge is to build a new growth model based on the country’s exceptional economic and social strengths, and that demands a strategy “to instil confidence and boost growth”.
The OECD report sets out a series of action plans based on its knowledge of the UK and experiences from other countries. The plans cover everything from financial markets and tax policies, through innovation and green growth, to education, employment and health care. Action plans are drawn up for governance and regional policy too.
Take financial markets for instance. The City of London is one of the most powerful, fast-growing financial centres in the world, with banking assets over five times UK GDP. But with such a global industry, policymakers have traditionally been wary of regulation that might undermine its competitiveness and see talent, and business, leaking abroad. But now, the crisis has underlined how important sound regulation and supervision are for financial institutions and the economy to thrive. The OECD report offers several recommendations, including strengthening capital adequacy standards to ensure banks have a cushion for risks to be undertaken, and requiring banks to hold enough capital for off-balance sheet risks. A leverage ratio should be a primary tool, argues the report. Also, there should be a “firewall” between higher risk investment banking and commercial banking, the report says, and it also emphasises the need to promote consumer protection through education.
In fact, education is one area the report would like to see more action, not just to improve value for money but to boost student performance. Perhaps the biggest challenge, the authors say, is to reduce the proportion of pupils leaving school without qualifications. Roughly a quarter of the country’s 15-19 year-olds are not in education, compared with an OECD average of 16%. Among the recommendations the report emphasises simplifying and stabilising vocational education and training, to enhance employer engagement and provide an attractive option for students to stay on.
Education underpins innovation, which, as the report notes, was behind most labour productivity gains in the UK in recent years. Interestingly, the UK performs pretty well in scientific research and learned publishing, and in attracting venture capital. But it should do better in transforming this know-how into productivity, and for this, the markets should be made to work better at rewarding innovators, the report says.
The OECD report does not claim to be armed with silver bullets for what are, after all, complex challenges in a major economy. But it nevertheless contains useful policy pointers for restoring long-term growth, and who knows, perhaps “the feel good factor”, too.
For more recent data on the United Kingdom and all OECD countries, see the latest OECD Economic outlook interim assessment here.
©OECD Observer No 280, July 2010