Microeconomic Reform in Britain

Transcription

1 Microeconomic Reform in Britain

2 This page intentionally left blank

3 Microeconomic Reform in Britain Delivering Opportunities for All HM TREASURY Foreword by Gordon Brown Chancellor of the Exchequer Edited by Ed Balls, Chief Economic Adviser to the Treasury, Joe Grice, Chief Economist and Director, Public Services and Gus O Donnell, Permanent Secretary

4 Crown Copyright 2004 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No paragraph of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, 90 Tottenham Court Road, London W1T 4LP. Any person who does any unauthorised act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The authors have asserted their right to be identified as the authors of this work in accordance with the Copyright, Designs and Patents Act First published 2004 by PALGRAVE MACMILLAN Houndmills, Basingstoke, Hampshire RG21 6XS and 175 Fifth Avenue, New York, N.Y Companies and representatives throughout the world PALGRAVE MACMILLAN is the global academic imprint of the Palgrave Macmillan division of St Martin s Press LLC and of Palgrave Macmillan Ltd. Macmillan is a registered trademark in the United States, United Kingdom and other countries. Palgrave is a registered trademark in the European Union and other countries. ISBN ISBN (ebook) DOI / This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. A catalogue record for this book is available from the British Library. Library of Congress Cataloging-in-Publication Data Microeconomic reform in Britain : delivering opportunities for all / H.M. Treasury ; foreword by Gordon Brown ; edited by Ed Balls, Gus O Donnell, and Joe Grice. p. cm. Companion volume to : Reforming Britain s economic and financial policy. Includes bibliographical references and index. 1. Great Britain Economic policy Microeconomics. I. Balls, Edward. II. O Donnell, Gus, 1952 III. Grice, Joseph (Joseph W.) IV. Great Britain, Treasury. V. Reforming Britain s economic and financial policy. HC256.7.M dc

5 Contents List of Tables List of Figures Foreword by Gordon Brown, Chancellor of the Exchequer vii viii xi Introduction 1 1. Overview: Key Principles For Policy Making 5 Part 1 Raising Productivity in the UK 2. UK Productivity Gap and the Foundation for Government Policy Trend Growth Enterprise and Productivity Challenge: Government Policy to Date The Regional and Local Dimensions The Environment European Economic Reform 145 Annex 7.1 The EMU Assessment: Supporting Studies 167 Part 2 Full Employment and the Labour Market 8. Historical Performance of the UK Labour Market Welfare to Work Making Work Pay 208 Annex 10.1 The Economics of Tax Credits: Inactivity Participation and Labour Supply 227 Annex 10.2 The National Minimum Wage 232 Part 3 Tackling Poverty and Promoting Opportunity 11. Supporting Families and Children Promoting Saving Throughout Life Security and Independence in Retirement Tackling Poverty: A New Global Deal 298

6 vi Microeconomic Reform in Britain Part 4 World Class Public Services 15. Public Services Productivity: An Analysis Public Service Reform Public Investment and Capital Appraisal Conclusion: Constrained Discretion The New Model 379 Notes 388 Glossary of Key Microeconomic Terms 399 List of Abbreviations 404 Bibliography 408 Index 423

7 List of Tables 2.1 Decomposition of the productivity gap, Real GDP growth between 1972 and Labour productivity growth rates, Contributions to trend output growth Development and implementation of economic instruments Examples of government policies to address market failures National Minimum Wage rates since its introduction Comparison of levels of minimum wages across countries, end Adult minimum wages as a percentage of full-time median earnings, mid Number who stood to benefit from the introduction and subsequent increases in the NMW Weekly Minimum Income Guarantees The effect of the Government s reforms on high marginal deduction rates Individual characteristics from 1992 to 2000, by earnings level and pension choice in Correlation between housing wealth and pension status in Major public service reforms since Proceeds of sales of fixed assets, 1991/ / vii

8 List of Figures 2.1 Productivity gap with the US Output per worker International comparisons of productivity, The total factor productivity gap, Relative capital intensity, 1970 and Changes in labour input by hours and quality, Employees by skill level The enterprise gap, Economic (Business) cycle Trend and observed non-oil GVA Annual growth in average hours worked Annual growth in the employment rate Annual growth rates in population of working age Within-region dispersion in GDP per head Relative regional GDP per capita Decomposition of regional GDP per capita gap with UK Average, Employment and productivity in UK regions The regional productivity gap, ILO unemployment rate by region Highest qualification, Education by region Skill levels: disparities within/between regions Manufacturing capital expenditure per worker and manufacturing GDP per worker, Expenditure on R&D performed in UK businesses, Number of R&D firms in the South West by sub-region, Business start-ups by region per 10,000 resident adults Business start-ups (VAT registrations) in the North East Emissions of greenhouse gases, Days when air pollution was moderate or higher, (provisional) Total road traffic volume, Rivers of good or fair chemical quality, viii

9 List of Figures ix 6.5 Population of wild birds, Percentage of new homes built on previously developed land, GDP per person employed and employment rate, Total and female employment rates, Total and older worker (aged 55 64) employment rates, EU employment rates and the Lisbon Agenda targets The enterprise gap, R&D as per cent of GDP Percentage of firms reporting increased competition from elsewhere in the EU, as a result of the Single Market State aid to industry by Member State, Employment and ILO unemployment Lone parent employment rate by age of youngest child Working age claimants of incapacity-related benefits, Changes in the way households organise their work Claimant rate, UK regions, April Total and average hours worked, Long-term unemployment, youth and Employment and ILO unemployment Earnings and unemployment Total and average hours worked Lone parent employment rate Working age claimants of incapacity-related benefits, Percentage activity and employment rates for population of working age Children in workless households, Wage bill impact in the low paying sectors of the October 2001 Uprating of the NMW Average net gain from an increase in the National Minimum Wage to Gains to work for different households with one child Gains to work for people aged 25 and over without children A.1 Individual labour supply choice in the presence of a nonconvex and non-linear budget set A.2 Impact of the WTC on choice of labour supply: non worker A.3 Impact of the WTC on choice of labour supply: worker 230

10 x Microeconomic Reform in Britain 10A.4 The minimum wage in a competitive model A.5 The minimum wage in a monopsony model Percentage of children in low income households in the European Union Children in low income households by family type, 1979 and Gains for families with children as a result of tax credits and other children s measures introduced between 1997 and The widening mortality gap between social classes Investment in housing as a percentage of GDP Permanent dwellings completed in Great Britain Children in low income households Households savings ratio, Distribution of net financial wealth in State Second Pension accrual rates, compared to SERPS The Pension Credit Overall gains for pensioner families from pensioner policies, by income decile Healthy life expectancy within the UK s main competitors Health expenditure and life expectancy Distribution of service performance across local authorities Distribution of service performance by service area Local authorities use of resources and their services performance Operating costs for major Registered Social Landlords in England, Unit costs by probation area, Distribution of public sector assets, March Public sector net investment, Gross fixed capital formation, by government sector, The sustainable investment rule, Public investment in public services,

11 Foreword Gordon Brown Since 1997, our Government s central objective the heart of our vision for a prosperous Britain has been to promote opportunity and security for all. Our first priority was to address our country s chronic macroeconomic instability. And as the companion volume to this book, Reforming Britain s Economic and Financial Policy: Towards Greater Economic Stability, set out, putting in place a wholly new fiscal and monetary framework including the independence of the Bank of England and new fiscal rules was a crucial step towards meeting this goal and has already produced real benefits unemployment has fallen to levels not seen since the 1970s, while inflation and interest rates remain at historic lows, and Britain has experienced the longest period of sustained peacetime growth since records began over 130 years ago. But a sound macroeconomic framework is a necessary but not sufficient condition to achieve, in what is an increasingly competitive global economy, a Britain where there is opportunity and security not just for some but for all. That is why, since 1997, we have also introduced policies which aim to improve the supply-side of the economy. Our approach has been to make the UK more productive by promoting, on the one hand, competition, enterprise, science and skills while on the other hand, reforming the welfare system and public services as a route to a more efficient and fairer Britain in which every individual can realise their potential. This book focuses on the agenda for microeconomic reform in those areas setting out what has been achieved over the last seven years and the challenges for the way ahead. And it tackles important questions about the relationship between individuals, government and markets acknowledging that whilst in some areas it is clearly in the public interest for markets to have an enhanced role, in others market failures need to be addressed to make markets work better and in some cases markets cannot safeguard the public interest. Equally, we must put the case for a reformed and renewed public sector with clear and long-term objectives, devolution of power and transparent mechanisms for accountability. xi

12 xii Microeconomic Reform in Britain The context for this book is the growing competitive challenges of the global economy. Within twenty years half the worlds manufactured exports from cars and clothes to computers and microchips may be produced outside Europe, Japan and America in low wage developing countries. Up to five million British, European and American jobs could end up outsourced offshore in countries like China and India as they strive to become the world s second and third largest economies. And even today China s significance to the global economy is that every year it, on its own, is adding as much output as the whole of the G7 put together. For Britain this means recognising that there is no escape from uncompetitiveness by resorting to loss making subsidies, artificial barriers or protectionist shelters. Indeed, the price of failure is not a long period of slow decline but sectors going under altogether. And the opportunity for us is that as low cost, low value production comes under increasing pressure, the high valued added, high tech, high skilled, science-driven products and services are the key to wealth creation in the future. So to succeed in this modern global economy we need to enable markets to work better and create an environment in which firms can operate effectively and in which they have the certainty to invest in the future. At the same time, if we are to make the most of the potential of open trade, we also need greater flexibility as we respond to new technologies and adjust to shifts in consumer demand. The more we are internationally interdependent, and thus the more our regions face intense global competition, the more successful will be the regions and localities that have the flexibility to adapt to change. This new approach has led to fundamental changes in direction not just in macroeconomic policy but in microeconomic policy. Since 1997 by strengthening the competition regime we have encouraged firms to innovate and minimise costs, which advances the public interest through providing better quality goods and services for consumers. We have put in place a new industrial policy replacing the old centralisation of national champions, picking winners or offering special subsidies to loss makers with a level playing field for all. We are celebrating the entrepreneurial culture opening up opportunity for those with ideas and dynamism, and reducing regulation where is does not serve the public interest. Investment in science is now a central priority. And instead of the old protectionism, we advocate open markets and free trade. At the same time, the new realities of fast changing labour markets mean there is a constant need for retraining and up-skilling by the British workforce. Instead of thinking of employment policy as maintaining people in old jobs even when technological and other change is

13 Foreword xiii inevitable, it is by combining flexibility helping people move from one job to another with active intervention to provide skills, information and financial support that is the best route to full employment. As a result of the New Deal and our other employment programmes, there are 1.7 million more people in work now than in And the next stage of the New Deal is to help people move from low skilled work to higher skilled work including a second chance for adults without basic skills to learn through further education, distance learning or work-based training. A modern global economy also requires a more modern welfare state that responds to the needs of working families while protecting the most vulnerable, including children and pensioners. The world has moved on a great deal from when Beveridge set out his plans in 1942, but the principles which underpin the welfare state remain the same: opportunity for people to improve their circumstances and those of their families; security to protect people from undue hardship that can arise from life events; and the responsibility of everyone to make the most of the opportunities on offer. The new welfare system puts into practice these principles transforming the passive and reactive system of the past into one which provides support for all, alongside the right incentives for people to move into, and progress in, work. Taken together, these reforms are not only supporting but enhancing markets in the public interest. But we must also have the courage to recognise where markets do not work well and lead to outcomes which are inequitable, inefficient or both and hence where market failure can be dealt with best through public provision. But even when a market is inappropriate, old command and control systems of management are not the way forward. Instead, our significant and sustained investment in Britain s public services must be tied to reform and results and in doing this, we have to develop decentralised models for public provision that respond to people s needs, extend choice and get the balance right between efficiency and equity. The modern challenge is to move beyond old assumptions under which equity was seen to go hand in hand with uniformity; or diversity appeared to lead inevitably to inequality. Instead we should seek the maximum amount of diversity consistent with equity. As a result, we are now stepping up our efforts to pioneer decentralised public service delivery to ensure greater freedom and flexibility for local providers; and empowering Regional Development Agencies, local authorities and the private and voluntary sectors to deliver services in innovative ways which meet local needs.

14 xiv Microeconomic Reform in Britain All this opens up a challenging agenda for reform and one which is continually evolving as technology and rising expectations challenge each generation s vision of what is possible and best. But as this book suggests, it is an agenda which can meet the contemporary challenges of competitiveness and equity creating a Britain where instead of enterprise thriving at the cost of fairness or fairness at the cost of enterprise, we can advance both enterprise and fairness together and provide opportunity and security for all. Chancellor of the Exchequer