Cautious thumbs-up for UK economy

The UK is still not wholly business-friendly, the OECD says

The British economy has slowed over the past 12 months, but remains among the strongest in the developed world, a report has said.

The Organisation for Economic Co-operation and Development (OECD), which groups together the world's most advanced economies, said the UK was better placed to weather the downturn than its other 29 members.

UK economy pros and cons

Pros:

Solid growth prospects

Low unemployment

Low inflation

Sound government finances

Better expenditure planning

Cons:

High external risks

Over-strong pound

Too many spending targets

Low productivity

Regulatory muddle

Outmoded company law

But the OECD warned that substantial external risks remained, notably the strength of the pound, which makes British exports uncompetitive on world markets.

The report will be a boost to Chancellor Gordon Brown, who is due to present the government's plans for the economy in his pre-Budget report on Tuesday.

Less welcome, however, will be the OECD's criticisms of certain aspects of government policy, in particular its reliance on target-based expenditure, and the country's outmoded laws on business.

In its examination of Britain's business climate, the OECD argued that the UK is still dangerously bureaucratic, and that both public and private sectors were not productive enough.

Bouncing back

The main headline growth forecasts showed that Britain is among the most resilient developed economies, even taking into account the effects of the 11 September attacks.

Chancellor Gordon Brown will be broadly pleased

The OECD forecast that the UK's economic output growth, or GDP, would dip from 2.3% this year to just 1.7% in 2002.

While below the UK's long-term growth rate of around 2.25%, the growth figure for 2002 is higher than that other developed economies are thought likely to achieve.

Last week, the OECD announced that its members' economies as a whole were shrinking for the first time in 20 years.

After next year's dip, the OECD forecasts that the British economy will bounce back to 2.5% growth in 2003.

One key element in this rebound will be the value of the pound, which has been extremely strong in recent years, to the chagrin of British exporters.

The OECD agreed that sterling was broadly over-valued, but admitted that manipulating the currency downwards was not in the direct power of central government.

Fruits of reform

The main cause for this resilience, the OECD argued, was that Britain has a largely deregulated economy, with significantly low unemployment.

In addition, it praised Mr Brown for helping refocus government finances, paving the way for sensible increases in spending that could help cushion the economy in coming months.

And low inflation means that Britain can continue to cut interest rates without danger.

In particular, the Labour government has placed far more emphasis on long-term economic planning, eliminating the swings previously seen in departmental budgets, Monday's report said.

Also, government finances have become more transparent, and anchored by a "golden rule" which insists that spending should be funded through current revenues, while investment can be financed by debt.

Reservations remain

But the OECD was not whole-hearted in its assessment of government policy.

As regards spending, the report was mildly critical of the government's addiction to linking expenditure to quantifiable targets, rather than less tangible benefits.

For example, the government has come under fire for targeting reductions in waiting lists in the National Health Service, while reportedly allowing overall standards to wane.

The OECD recommended that the government strengthen the process under which the effectiveness of spending is audited, as well as provide financial incentives for departments to perform well.

The report was also only cautiously positive about the government's record in public-private partnerships, which aim to split the cost of major public service projects with the private sector.

Although it acknowledged some positive experiences in this area, it counselled that the government should more "carefully weigh the pros and cons" of such agreements.

Business problems

But the OECD reserved its harshest criticism for Britain's business environment, which it said still lags the government's ambitions.

"In addition to the need to raise the effectiveness of the public sector, the UK also faces the challenge to increase the low level and modest growth of productivity in the private sector - issues that are intertwined," the report said.

A separate report pulbished on Monday by Proudfoot Consulting calculated that British firms lose the equivalent of 117 working days each year from time wasted by unproductive workers.

Too many conflicting government initiatives have muddied the thrust of policy, and investment in human capital and technology have been insufficient.

As a result, the UK economy is not as open to competition as it should be, the OECD argued, and there are conflicting signals from regulators, resulting in much unnecessary red tape.

Risky business

Although British entrepreneurs face a better environment than their counterparts in many other countries, the report highlighted "various institutional factors that discourage risk-taking."

Setting up businesses in Britain remains more difficult than it should be, and the evolution of company law has been worryingly piecemeal.

While the OECD welcomed the government's plans to shake up company law, it strongly recommended that legal reforms should be combined into a new body of law - in particular, planning rules should be made more business-friendly.

Current company law, the OECD said, "has become arcane and out-of-date."