## BREXIT: SECTORAL IMPACT AND POLICIES ## Source details **Canonical URL:** [BREXIT: SECTORAL IMPACT AND POLICIES](https://www.imf.org/-/media/files/publications/cr/2018/cr18317.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2018/cr18317.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2018/cr18317.pdf.json) --- ### Executive summary and main findings - The paper estimates the long-run economic impact of Brexit under two illustrative post-Brexit relationship scenarios between the United Kingdom and the European Union: a typical Free Trade Agreement (FTA) scenario and a World Trade Organization (WTO) scenario. - FTA scenario: level of output likely to fall by between about 2½ and 4 percent relative to a no-Brexit scenario, with an average of about 3 percent. - WTO scenario: level of output likely to fall by between about 5 and 8 percent relative to a no-Brexit scenario, with an average of about 6 percent. - The estimated ranges reflect substantial uncertainty driven by difficulty quantifying non-tariff trade costs and choosing model specifications; these uncertainties are only partially captured by the reported ranges. ### Scenarios, methods, and channels analyzed - Scenarios analyzed: - Free-trade agreement (FTA) scenario: illustrative, not a prediction. - WTO scenario: illustrative, not a prediction. - Channels quantified: - Higher trade barriers: quantified using a standard multi-country and multi-sector computable general equilibrium (CGE) model and different versions following Costinot and Rodriguez-Clare (2014). - Restricted EU migration and reduced foreign direct investment (FDI): impacts based on previous studies and literature relationships between migration, inward FDI, and output. - Comparative approach: complements studies such as Dhingra and others (2017a), Vandenbussche and others (2017), Felbermayr and others (2018), and Latorre and others (2018), and incorporates an additional migration/FDI channel. ### Modeling approach, data inputs, and scenario parameterization - CGE model variants used: - Perfect competition (Armington-type). - Monopolistic competition without firm-level heterogeneity (Krugman-style). - Monopolistic competition with firm-level heterogeneity (Melitz-style). - Data and parameter sources: - World Input-Output Database (WIOD) for 2011, aggregated to 34 countries plus rest of world, and 31 sectors. - Trade elasticities: goods elasticities from Felbermayr and others (2018); services elasticity set at 5 (Costinot and Rodriguez-Clare, 2013). - Bilateral preferential and MFN tariffs: World Integrated Trade Solutions and WTO Integrated Database. - Non-tariff barriers (NTBs): estimates from Felbermayr and others (2018), interpreted as tariff-equivalent trade cost increases. - Scenario parameterization for trade costs: - FTA Scenario: - Tariffs on goods remain at zero. - Non-tariff costs rise to half of the estimated non-tariff trade costs eliminated due to UK’s EU membership (Felbermayr and others, 2018). - Numerically equivalent to about 10 percent, on average, increase in tariff-equivalent non-tariff trade costs for all sectors. - WTO Scenario: - UK and EU apply MFN tariffs on goods trade with each other. - Non-tariff trade costs rise by the full amount of the estimated non-tariff trade costs reduced due to UK’s EU membership. - Numerically equivalent to an average of 20 percent increase in tariff-equivalent non-tariff trade costs for goods and services sectors. ### Quantitative headline results (exact figures preserved) - FTA scenario: output reduction between about 2½ and 4 percent (average about 3 percent) relative to no-Brexit. - WTO scenario: output reduction between about 5 and 8 percent (average about 6 percent) relative to no-Brexit. - Additional explicit estimates: - UK’s real output would be between 2.6 and 3.9 percent lower under the FTA scenario than under a scenario of continued EU membership. - UK’s real output would be between 5.2 and 7.8 percent lower under the WTO scenario than under a no-Brexit scenario. - Aggregate output changes (average across three models): - FTA scenario: UK output falls by 2.5 percent, on average. - Model-specific FTA impacts: 3.3 percent loss (Melitz), about 2 percent loss (Krugman or perfect competition). - WTO scenario: UK output falls by 4.8 percent, on average. - Model-specific WTO impacts: 6.4 percent loss (Melitz), 4.2 percent loss (Krugman), 3.8 percent loss (perfect competition). ### Sectoral heterogeneity and regional implications - Sectoral impacts vary significantly: - Considering only the trade channel under the FTA scenario: - Average output loss in manufacturing: about 1 percent. - Much larger losses in chemicals, electrical, optical and transport equipment manufacturing. - Service sectors face an average loss of about 4 percent, with a range from relatively unaffected hotel and restaurants to a 15 percent loss in financial intermediation. - Sectoral examples and concentrations: - Financial services account for over 15 percent of London’s GVA compared with the national average of about 7 percent. - Manufacturing of coke and chemicals account for greater share of GVA in North East, North West and Yorkshire. - Transport equipment manufacturing concentrated in West Midlands. - Services industries account for 80 percent of output in South East. - Supply-chain integration: - UK intermediates’ value added in gross exports (forward linkages) increased by 31 percent; foreign value added in UK exports (backward linkages) increased by 37 percent. - Nearly half of the UK’s intermediate goods imports and exports are with other EU countries. - The EU supply chain sources about 10 percent of EU intermediate goods exports and imports from the UK. - Participation in international production chains is dominated by manufacturing sectors (around 60 percent). - Transport equipment sector has the most significant reliance on intermediate inputs from the EU, followed by chemicals and pharmaceuticals. ### Financial intermediation — scope and channels of impact - Direct exposure: - "about 25 percent of annual financial services revenues in the UK is related to business with the EU" (Oliver Wyman (2016)). - "about 35 percent of London wholesale banking is related to EU27 clients (equivalent to about 17 percent of all UK banking assets)" (Bruegel (2017)). - Knock-on and general equilibrium effects: - Oliver Wyman (2016) estimated the broader impact on the financial system is just as large as the direct impact. - Model estimates incorporate general equilibrium effects from lower aggregate demand. - Uncertainty and heterogeneity: - The impact of non-tariff barriers is more uncertain in financial services. - Firms will have to set up new entities and relocate staff, with heterogenous cost impacts across firms. - Equivalence regimes are narrower than passporting, can be revoked, and are potentially politicized. - Box 1 key facts (preserved numbers): - Financial services industry constitutes around 7 percent of UK GDP. - Direct employment: 1.1 million people in 2013 with around two-thirds outside London. - When related professional services are considered, UK workforce in financial services numbers nearly 2.2 million. - The sector contributed 12 percent of PAYE income tax and national insurance, and 15 percent of onshore corporation tax received by Exchequer (2011–12). - About a quarter of the GB£200 billion revenue comes from activities related to the EU and another quarter with the rest of the world. - UK-located banks underwrite around half of debt and equity issued by EU businesses and are counterparties to over half of the over-the-counter interest rate derivatives trade by EU companies and banks; about GBP£1.4 trillion of assets are managed in the UK on behalf of European clients. ### Migration — assumptions, elasticities, and projected impacts - Policy assumptions (FTA vs WTO scenarios): - FTA scenario: preferential lower minimum income requirement equivalent to "GB£20,500 salary threshold" for EU migrants relative to non-EU migrants; phased in gradually reaching a "difference in annual net migration inflows of 40,000 people per year in 2030." - WTO scenario: "net migration falling to 100,000 in 2030, i.e. about 40 percent below the ONS baseline projection." - Migration and productivity elasticities: - Boubtane and others (2015): "for the UK, a 1 percentage point increase in the migrant share of working age population leads to a 0.4–0.5 percent increase in productivity." - Jaumotte and others (2016): "a 1 percent increase in the migrant share in the adult population results in an increase in GDP per capita and productivity of about 2 percent." - Projected quantitative effects by 2030: - UK adult population projected "to be about 55 million in 2030 under the ONS baseline population projection." - FTA scenario: cumulative reduction in migration of "220,000 by 2030" reduces adult population share and migrant share in labor force by "0.3 percent and 0.3 percentage points, respectively"; using average elasticities this "would reduce GDP per capita by about 0.4 percent and GDP by 0.6 percent." - WTO scenario: "GDP per capita falls by about 0.7 percent and GDP by 1 percent." ### Inward investment — assumptions and effects - Literature background: - UK’s inward FDI "increased by about 28 percent owing to its membership to the EU." - Scenario assumptions: - No reductions in FDI assumed in the FTA scenario. - WTO scenario: assume inward FDI falls by about 5 percent compared to the pre-Brexit WEO projection and the decline lasts for a period of 5 years (equivalent to a reversal of about 20 percent of the increase in FDI inflows attributable to EU membership). - Calibration: assume FDI inflow as share of GDP of 2.4 percent and financial market development proxy takes a value of 46 percent of GDP in the UK. - Estimated output impact: - Fall in FDI reduces output (real income) by about 0.4 percent under the WTO scenario. ### Aggregate results across channels (trade, migration, FDI) - WTO scenario: - "output falls by between 5.2 and 7.8 percent in the WTO scenario, with an average of 6.2 percent." - FTA scenario: - "output falls by between 2.6 and 3.9 percent, with an average of 3.1 percent." - Comparison with other studies: - IMF staff trade-channel estimates slightly larger than Dhingra and others (2017a) and Felbermayr and others (2018) and greater than Vandenbussche and others (2017) due to model structure and assumed NTBs. ### Labor reallocation and adjustment dynamics - Empirical evidence: - The UK labor market is flexible at the macro level but sectoral reallocation speed is middling. - Empirical model: dynamic panel error correction model (ECM) for sectoral labor allocation across 14 high-income economies and 10 sectors (1960–2012). - Estimated speed of adjustment: - "The estimated average adjustment speed is -0.17 across the 14 high-income economies in our full sample." - Interpretation: average economy reallocates about 17 percent of the distance between current and desired long run allocation within one year. - UK-specific result: - UK estimated 휆 = "-0.09***" — UK reallocation speed about 9 percent per year, positioned in the middle of the 14-country distribution. - Comparative context: Singapore fastest (27 percent a year); Italy and Spain not statistically significant with speed around "just 1 percent." - Additional regression outputs (selected): - ecm term (speed of adj.): -0.17*** (full sample), -0.09*** (UK). - Relative GVA growth: 0.07*** (full sample), 0.04 (UK). - Relative sectoral price growth: 0.05** (full sample), 0.12*** (UK). - Observations: 5,306 (full sample), 441 (UK). - R-squared: 0.08 (full sample), 0.14 (UK). - Interpretation: slow sectoral labor reallocation can contribute materially to productivity slowdowns; examples cited suggest substantial portions of past productivity slowdowns attributable to slower reallocation. ### Policy recommendations to facilitate structural transformation - General coordination: - Policies should be coordinated to speed adjustment and limit welfare costs to displaced workers. - Product market policies: - Remove barriers to entry to promote competition. - UK already has one of the least restricted product markets (Koske and others, 2013). - Financial support for entrepreneurship: - Make finance available to support entrepreneurship and help workers upgrade skills and promote new entry. - Evidence: New Entrepreneur Scholarships program cited as helpful. - Labor market policies: - Protect workers not jobs; emphasize active labor market policies such as retraining. - Expenditure on labor market training in the UK is among the lowest in the OECD; scaling up targeted training could improve reallocation. - Recent policy: National Retraining scheme includes a new career guidance service. - Housing supply reforms: - Boost housing supply to help worker mobility. - 2016/17 housing stock increase: around "217,000" residential dwellings vs estimated need of "240–250,000" new homes annually. - House of Lords recommendation: at least "300,000" new homes annually. - Government pledges: deliver "1 million homes by the end of 2020" and "half a million more by the end of 2022." - Recommended measures: ease planning restrictions, mobilize unused publicly-owned lands, provide incentives for local authorities. ### Uncertainties and limits of inference - Major sources of uncertainty: - Wide range of potential post-Brexit UK–EU relationships. - Empirical estimates of trade elasticity and non-tariff trade costs used as model inputs. - Lack of precise historical analogues; reported numeric ranges capture only part of the true uncertainty. - Model sensitivity: - Melitz-model results most negative because higher trade barriers reduce selection pressure, allowing lower-productive firms to survive and lowering aggregate productivity. - Results presented as ranges across the three CGE model specifications. ### Sectoral case studies and boxes - Box 1 — Financial Sector (key facts and implications): - Financial services ≈ "7 percent of UK GDP"; direct employment "1.1 million" (2013); workforce in financial services and related professional services nearly "2.2 million". - Fiscal contributions (2011–12): 12 percent of PAYE income tax and national insurance; 15 percent of onshore corporation tax. - Revenues: about a quarter of GB£200 billion revenue from activities related to the EU. - Passporting vs equivalence: no third-country regime replicates passporting fully; many third-country equivalence provisions are narrower and potentially unstable. - Box 2 — The Automobile Sector (key facts and vulnerabilities): - GB£14.5 bn in gross value added in 2016 (about "0.8 percent" of total GVA). - Direct employment: "159,000" people in 2016 with a further "238,000" in the wider supply chain. - Exports: GB£40.1 bn in 2016 (GB£18.3 bn to the EU). - About "85 percent" of automotive industry imports from EU; six out of ten industry imports from Germany, Belgium, and Spain. - "Just in time" production model and EU whole vehicle type approval underpins regulatory access to the single market; trading under WTO terms would require meeting EU vehicle standards and paying MFN tariffs on goods imported into the EU from non-EU countries. ### Health, pensions, and fiscal sustainability implications - Fiscal challenge summary: - Population aging, rising healthcare, long-term care and pension spending projected to increase annual public spending by "more than four percentage points of GDP between 2023 and 2043" (OBR 2018). - Output losses associated with Brexit would shrink the revenue base available to meet these demands; movement of parts of the financial sector outside the UK could accelerate revenue declines. - Health spending: - Public health spending around "eight percent of GDP". - Public health expenditure real growth averages: - "3.58" percent per year (1985–2015 average). - "4.70" percent per year (1995–2009 average). - "3.51" percent per year (1995–2015 average). - OBR projections: - Demographics only: "0.8 percent of national income" (FY2023–FY2041); "1.2 percent of national income" (FY2023–FY2067). - With cost pressures: "2.7 percent of national income" (FY2023–FY2041); "6.1 percent of national income" (FY2023–FY2067). - Pensions and long-term care: - Pensioner-specific benefits projected to remain around "five percent of GDP" until the late 2020s. - Pension benefit spending projected to increase by about "1.7 percent of GDP by FY2067". - Gross public service pension expenditure projected to fall from "2 percent of GDP in FY2017" to "1.3 per cent of GDP in FY2067". - Long-term care projected increases: "0.5 percent of national income" between 2017–18 and 2041–42; "0.8 percent of national income" between 2017–18 and 2067–68. - Triple lock: annual increase equal to the highest of "2½ percent, CPI inflation, or the rise in average earnings." OBR-assumed triple lock effect over the projection period: "0.35 percent a year." - If pensions grew with average earnings instead, expenditure increase would be about "0.8 percent of GDP" (versus the larger triple lock effect). - Fiscal policy options: - Reining in pressures in health and pensions (efficiency gains, cost-sharing, indexation reform, SPA increases). - Cutting spending elsewhere (limited scope after many years of consolidation). - Raising additional revenue (general government revenues could be increased by "5 percent of GDP" and remain in line with advanced-economy average). - Tax policy considerations: VAT, PIT, and NICs account for about two thirds of government revenues; VAT tax relief costs around "2.5 percent of GDP" with the zero percent VAT rate on most foods contributing "0.9 percent of GDP". - Efficiency of health expenditure (Annex I): - DEA and SFA analyses suggest potential gains: the UK could increase life expectancy and HALE by two to three years without increasing public sector health expenditure. - SFA selected coefficients (examples, significance preserved): logHE_pub 0.085*** (HALE), logEducSec 0.163*** (HALE), logWater 0.208*** (HALE), logObesity -0.018*** (HAQ), logAlcohol -0.007** (HAQ). - Observations in regressions commonly reported as 168, 172, etc., with significance levels noted (*** p<0.01, ** p<0.05, * p<0.1). ### Uncertainties, limits, and final conclusions - Major uncertainties: - Range of possible UK–EU relationships; empirical inputs like trade elasticities and NTB estimates; absence of perfect historical analogues. - Final conclusions: - WTO scenario: output loss of between about 5 and 8 percent compared with a no-Brexit scenario. - FTA scenario: output falls by between about 2½ and 4 percent relative to continued EU membership in the long run. - Significant cross-sector heterogeneity in effects. - Policy actions—active labor market programs, retraining, education quality improvements, housing supply reforms, and measures to support entrepreneurship and credit access—can facilitate labor reallocation and mitigate welfare costs from structural adjustment. *Source: cr18317 (International Monetary Fund staff analysis).* ### References _______________________________________________________________________________ 30 ### BREXIT: SECTORAL IMPACT AND POLICIES ### Executive summary and main findings - The paper estimates the long-run economic impact of Brexit under two illustrative post-Brexit relationship scenarios between the United Kingdom and the European Union: a typical Free Trade Agreement (FTA) scenario and a World Trade Organization (WTO) scenario. - Under the FTA scenario, the level of output is likely to fall by between about 2½ and 4 percent relative to a no-Brexit scenario, with an average of about 3 percent. - Under the WTO scenario, the level of output is likely to fall by between about 5 and 8 percent relative to a no-Brexit scenario, with an average of about 6 percent. - The estimated ranges reflect substantial uncertainty driven by difficulty quantifying non-tariff trade costs and choosing model specifications; these uncertainties are only partially captured by the reported ranges (see ¶35). ### Scenarios, methods, and channels analyzed - Scenarios analyzed: - Free-trade agreement (FTA) scenario: illustrative, not a prediction. - WTO scenario: illustrative, not a prediction. - Channels quantified: - Higher trade barriers: quantified using a standard multi-country and multi-sector computable general equilibrium (CGE) model and different versions following Costinot and Rodriguez-Clare (2014). - Restricted EU migration and reduced foreign direct investment (FDI): impacts based on previous studies and literature relationships between migration, inward FDI, and output. - Comparative approach: - The analysis complements studies such as Dhingra and others (2017a), Vandenbussche and others (2017), Felbermayr and others (2018), and Latorre and others (2018), and incorporates an additional migration/FDI channel relative to many studies. ### Quantitative headline results (exact figures preserved) - FTA scenario: output reduction between about 2½ and 4 percent (average about 3 percent) relative to no-Brexit. - WTO scenario: output reduction between about 5 and 8 percent (average about 6 percent) relative to no-Brexit. - Additional explicit estimates: - UK’s real output would be between 2.6 and 3.9 percent lower under the FTA scenario than under a scenario of continued EU membership. - UK’s real output would be between 5.2 and 7.8 percent lower under the WTO scenario than under a no-Brexit scenario. ### Sectoral heterogeneity and regional implications - Sectoral impacts vary significantly: - Considering only the trade channel under the FTA scenario: - Average output loss in manufacturing: about 1 percent. - Much larger losses in chemicals, electrical, optical and transport equipment manufacturing. - Service sectors face an average loss of about 4 percent, with a range from relatively unaffected hotel and restaurants to a 15 percent loss in financial intermediation. - Migration-sensitive sectors: - Sectors employing a significant share of EEA workers—food, warehousing, hospitality, agriculture—could be more vulnerable to a fall in EEA migrants. - Regional composition matters: - Financial services account for over 15 percent of London’s GVA compared with the national average of about 7 percent. - Manufacturing of coke and chemicals account for greater share of GVA in North East, North West and Yorkshire. - Transport equipment manufacturing concentrated in West Midlands. - Services industries account for 80 percent of output in South East. - Supply-chain integration: - UK intermediates’ value added in gross exports (forward linkages) increased by 31 percent; foreign value added in UK exports (backward linkages) increased by 37 percent. - Nearly half of the UK’s intermediate goods imports and exports are with other EU countries. - The EU supply chain sources about 10 percent of EU intermediate goods exports and imports from the UK. - Participation in international production chains is dominated by manufacturing sectors (around 60 percent). - Transport equipment sector has the most significant reliance on intermediate inputs from the EU, followed by chemicals and pharmaceuticals. ### Labor reallocation and adjustment dynamics - Empirical evidence indicates: - The UK labor market is highly flexible at the macro level (can maintain low unemployment through shocks). - The speed of sectoral labor relocation from shrinking to expanding sectors is faster than most European countries in the sample, but slower than the US and fast-growing Asian economies. - Slow sectoral labor reallocation can contribute materially to productivity slowdowns (example: Barnett and others (2014) suggest about one third of the productivity slowdown between 2007 and 2011 can be attributed to slower reallocation of resources). ### Policy recommendations to facilitate structural transformation - Policies should be coordinated to speed adjustment and limit welfare costs to displaced workers: - Product market policies: remove barriers to entry to promote competition. - Financial support for entrepreneurship: help workers upgrade skills and promote new entry, supporting competition. - Labor market policies: protect workers not jobs; active labor market policies such as support for retraining are critical for both low-skilled and highly-specialized workers. - Housing supply reforms: help workers relocate to regions with available jobs. - Rationale: Rising trade barriers will cause resource reallocation across sectors; slow worker relocation can produce prolonged structural unemployment and/or weak productivity growth. ### Uncertainties and limits of inference - Major sources of uncertainty: - Wide range of potential post-Brexit UK–EU relationships. - Empirical estimates of trade elasticity and non-tariff trade costs used as model inputs. - Lack of historical analogues that precisely match the UK’s situation; example: Rodrik (1992) on Eastern European disintegration suggests very large output losses in those transitions, but structural differences limit direct inference. - The reported numeric ranges capture only part of the true uncertainty. ### How EU membership has affected the UK economy (background findings) - Trade and integration facts: - EU27 trade amounts to about 30 percent of UK GDP. - Exports to the EU account for about 45 percent of UK gross exports in 2017. - The UK runs a goods trade deficit with the EU: exports about 9 percent of GDP; imports about 12 percent of GDP. - Deficits in machinery and transport equipment account for over half of the goods trade deficit. - Financial services exports have risen much faster than the OECD average since the inception of the single market; UK-located banks underwrite around half of debt and equity issued by EU businesses and are counterparties to over half of the over-the-counter interest rate derivatives trade by EU companies and banks; about GBP£1.4 trillion of assets are managed in the UK on behalf of European clients (Box 1). - Trade-creation effects of integration (literature highlights): - Head and Mayer (2014): regional trade agreements increase trade on average by about 60 percent; for the EU median effect is 26 percent. - Baier and others (2008): EU membership increases trade by 92 percent; other regional agreements increase trade by 58 percent. - Mayer and others (2018): single market increased trade between EU members by 109 percent for goods and 58 percent for tradable services (median). - Felbermayr and others (2018): UK’s EU membership increased goods and services trade by 48 and 84 percent, respectively. - Integration depth and supply-chain facts: - Nearly half of the UK’s intermediate goods imports and exports are with other EU countries. - UK value chain integration improvements: forward linkages up 31 percent; backward linkages up 37 percent. - Challenges in quantifying gains: - Estimating the exact effects of trade on output and employment requires counterfactuals (what would have happened without EU membership) and faces methodological challenges; nevertheless, existing empirical evidence generally finds substantial UK income increases from reduced trade barriers due to EU membership. *Prepared by Jiaqian Chen. Content based on the supplied IMF material.* ### 16. In addition to the trade advantages, the UK economy has benefited from EU ### cr18317 - 16. In addition to the trade advantages, the UK economy has benefited from EU ### Benefits of EU membership: inward FDI and migration - Inward FDI - The annual value of inward FDI has been between 0.4 to 11 percent of GDP over the past ten years. - A significant share of inward FDI comes from the EU. - A significant share of non-EU investors uses the UK as a base to access the broader EU single market; this investment may decline if access is reduced significantly. - Dhingra and others (2017c) estimated that being a member of the EU has increased FDI inflows in the UK by about 28 percent. - Haskel and others (2007) find a 10 percentage point increase in foreign presence raises productivity by about 0.5 percent. - Foreign investment is unevenly distributed across sectors, with food, mining and manufacturing sectors having large shares of foreign investment. - Migration - By 2016 EU migrants accounted for about 5 percent of the working age population. - EU migrants have higher employment rates, at about 80 percent in 2017, than the UK-born population. - EU migrants are, on average, more skilled than UK natives, and the educational attainment gap between migrants and natives has been rising over time. - Empirical analysis suggests migrants have a positive impact on productivity (Boubtane and others 2015). - Portes (2015) finds that a 50 percent decrease in net migration rate would be associated with a 0.3 percentage point decrease in productivity. - Distribution of EU migration across sectors is uneven, with about 25 percent of workers in the food industry coming from the EU, followed by warehousing. ### Summary of empirical literature on Brexit's long-run economic impact - Most studies conclude the UK would face a permanent net loss in the level of output in the range of 2.2 to 9.5 percent depending on scenarios considered. - Studies typically assume more restricted trading arrangements post-exit; estimates are more negative in WTO scenarios where barriers are largest. - Several studies assume substantial reductions in labor productivity in addition to reduced trade, generating larger aggregate losses (Dhingra and others, 2017a; HM Treasury, 2016). - Sectoral studies - Felbermayr and others (2018): manufacturing impacts vary, with GVA mostly unaffected in food, beverages and tobacco, and GVA falling by more than 15 percent in chemical and electronics and optical products sectors. - Services (Felbermayr and others, 2018) in a WTO scenario: effects range from -3.7 percent (sewerage and waste) to 2 percent (water transport services). - HM Government (2018) provisional analysis: manufacturing sector losses range from 6 percent (machinery equipment and energy) to 16 percent (chemical, rubber and plastic products). - HM Government (2018) services sector estimates: retail and wholesale trade about -11 percent; defense, education and health -8 percent; financial and other services about -7 percent; business services about -6 percent. - Vandenbussche and others (2017): administrative and support activities identified as the most affected services sector. ### Channels and theoretical considerations - Leaving the EU affects the economy through higher trade barriers, reduced immigration and reduced inward investment. - Neoclassical growth models predict level effects from integration; endogenous growth models allow integration to affect growth by changing incentives for R&D and investment. - Empirical evidence: EU membership has been associated with permanent increases in the level of output but not clear permanent changes in potential growth rates from membership itself (Craft, 2016). ### Brexit scenarios considered (trade-off between access and independence) - EEA membership excluded because it would require retention of free movement of labor and single market membership. - WTO Scenario - UK would revert to WTO rules in absence of agreement. - UK would impose MFN tariffs on imported goods and face higher export (tariffs and non-tariff) costs on goods and services due to lack of single market and customs union access. - Inward investment and inward migration are likely to fall. - FTA Scenario - UK leaves the single market and customs union but faces a lower increase in trade barriers compared with WTO scenario. - Assumptions common to both scenarios - Trading arrangements with other non-EU countries remain unchanged (except for Iceland, Liechtenstein, Norway and Switzerland as they participate in the EU single market). - UK authorities continue to uphold high regulatory standards. - Latorre and others (2018) suggest a comprehensive TTIP-type agreement with the US would improve UK GDP by around ½ percent. ### Modeling approach and data inputs - Use of computable general equilibrium (CGE) models to estimate long-term effects of higher trade barriers on real income. - Three CGE model variants: - Perfect competition (Armington-type, multiple countries/sectors, tradable intermediate inputs). - Monopolistic competition without firm-level heterogeneity (Krugman-style, fixed exporting costs). - Monopolistic competition with firm-level heterogeneity (Melitz-style) capturing selection effects on aggregate productivity. - Data and parameter sources - Trade linkages: World Input-Output Database (WIOD) for 2011, aggregated to 34 countries plus rest of world, and 31 sectors. - Trade elasticities: goods elasticities from Felbermayr and others (2018); services elasticity set at 5 (Costinot and Rodriguez-Clare, 2013). - Bilateral preferential and MFN tariffs: World Integrated Trade Solutions and WTO Integrated Database. - Non-tariff barriers (NTBs): estimates from Felbermayr and others (2018), interpreted as tariff-equivalent trade cost increases. ### Scenario parameterization for trade costs - FTA Scenario - Tariffs on goods remain at zero. - Non-tariff costs rise to half of the estimated non-tariff trade costs eliminated due to UK’s EU membership (Felbermayr and others, 2018). - Numerically equivalent to about 10 percent, on average, increase in tariff-equivalent non-tariff trade costs for all sectors. - WTO Scenario - UK and EU apply MFN tariffs on goods trade with each other. - Non-tariff trade costs rise by the full amount of the estimated non-tariff trade costs reduced due to UK’s EU membership. - Numerically equivalent to an average of 20 percent increase in tariff-equivalent non-tariff trade costs for goods and services sectors. ### Quantitative results: GDP and sectoral impacts from higher trade barriers - Aggregate output changes (average across three models) - FTA scenario: UK output falls by 2.5 percent, on average. - Model-specific FTA impacts: 3.3 percent loss (Melitz), about 2 percent loss (Krugman or perfect competition). - WTO scenario: UK output falls by 4.8 percent, on average. - Model-specific WTO impacts: 6.4 percent loss (Melitz), 4.2 percent loss (Krugman), 3.8 percent loss (perfect competition). - Sectoral heterogeneity - Some sectors expected to improve: agriculture, natural resource and food manufacturing (domestic substitution from imports). - Manufacturing sectors: chemicals sector expected to see the largest fall; transport equipment and textiles could see significant losses in the WTO scenario. - Services sector: average effects more negative than some goods sectors; financial intermediation could see about a 25 percent reduction in output in the WTO scenario; hotel and restaurants largely unaffected in the analysis. - Overall, FTA scenario yields smaller average sectoral losses than WTO scenario due to lower increase in trade barriers. ### Additional modeling insights - Melitz-model results are most negative because higher trade barriers reduce selection pressure, allowing lower-productive firms to survive and lowering aggregate productivity. - Results are presented as ranges across the three CGE model specifications, with the average taken as the baseline estimate. *International Monetary Fund* ### 29. Financial intermediation is among the most affected sectors. This in part reflects the ### cr18317 - 29. Financial intermediation is among the most affected sectors. This in part reflects the ### Financial intermediation — scope and channels of impact - Direct exposure: - "about 25 percent of annual financial services revenues in the UK is related to business with the EU" (Oliver Wyman (2016)). - "about 35 percent of London wholesale banking is related to EU27 clients (equivalent to about 17 percent of all UK banking assets)" (Bruegel (2017)). - Knock-on and general equilibrium effects: - Estimates incorporate "knock-on" impacts from loss of adjacent activities, shifting of entire business units, or closure of lines of business due to increased costs. - Oliver Wyman (2016) "estimated this broader impact on the financial system is just as large as the direct impact." - Model estimates also "incorporate the general equilibrium effects from lower aggregate demand." - Uncertainty and heterogeneity: - "the impact of non-tariff barriers is also more uncertain in financial services." - Firms "will have to set up new entities and relocate staff ... which will have a heterogenous cost impact across different firms, due to different client bases and business models." - "In the medium term, future harmonization across the EU could alter the national licensing regimes making potential NTBs uncertain." ### Migration — assumptions, elasticities, and projected impacts - Policy assumptions (FTA vs WTO scenarios): - FTA scenario: government adopts a preferential lower minimum income requirement equivalent to "GB£20,500 salary threshold" for EU migrants relative to non-EU migrants; phased in gradually reaching a "difference in annual net migration inflows of 40,000 people per year in 2030." - WTO scenario: "net migration falling to 100,000 in 2030, i.e. about 40 percent below the ONS baseline projection." - Migration and productivity elasticities: - Boubtane and others (2015): "for the UK, a 1 percentage point increase in the migrant share of working age population leads to a 0.4–0.5 percent increase in productivity." - Jaumotte and others (2016): "a 1 percent increase in the migrant share in the adult population results in an increase in GDP per capita and productivity of about 2 percent." - Projected quantitative effects by 2030: - UK adult population projected "to be about 55 million in 2030 under the ONS baseline population projection." - FTA scenario: cumulative reduction in migration of "220,000 by 2030" reduces adult population share and migrant share in labor force by "0.3 percent and 0.3 percentage points, respectively"; using average elasticities this "would reduce GDP per capita by about 0.4 percent and GDP by 0.6 percent." - WTO scenario: "GDP per capita falls by about 0.7 percent and GDP by 1 percent." ### Inward investment — assumptions and effects - Literature background: - UK’s inward FDI "increased by about 28 percent owing to its membership to the EU" (Bruno and others, 2016; Campos and Coricelli, 2015; Straathof and others, 2008). - Scenario assumptions: - "We do not assume any reductions in FDI in the FTA scenario." - WTO scenario: "we assume inward FDI falls by about 5 percent compared to the pre-Brexit WEO projection and the decline lasts for a period of 5 years (equivalent to a reversal of about 20 percent of the increase in FDI inflows attributable to EU membership)." - Estimated output impact: - "the fall in FDI reduces output (real income) by about 0.4 percent under the WTO scenario." - Calibration note: "we assume FDI inflow as share of GDP of 2.4 percent" and financial market development proxy "takes a value of 46 percent of GDP in the UK" in referenced data. ### Aggregate results across channels (trade, migration, FDI) - WTO scenario: - "output falls by between 5.2 and 7.8 percent in the WTO scenario, with an average of 6.2 percent." - FTA scenario: - "output falls by between 2.6 and 3.9 percent, with an average of 3.1 percent." - Comparison with other studies: - Studies focusing only on direct trade impacts tend to show smaller effects; IMF staff estimates from the trade channel alone are "slightly larger than Dhingra and others (2017a) and Felbermayr and others (2018)" and greater than Vandenbussche and others (2017) due to model structure and assumed NTBs. - Example referenced elasticity approach: Ebell and Warren (2016) "assumed an elasticity of 0.25, suggesting the 20 percent decline in trade as in their WTO scenario reduces GDP by 5.1 percent through lower productivity." ### Sectoral labor reallocation — concepts and empirical approach - Concepts: - Micro flexibility: "ability to allow for the reallocation of worker into jobs needed to sustain growth." - Macro flexibility: "ability of the economy to adjust to macroeconomic shocks." - Barriers to rapid reallocation include "excessive product market regulations," "limited access to credit," and "highly specialized sector-specific human capital." - Empirical evidence: historically "about 6 to 11 percent of individuals change firms each year, only 2–3 percent switch from the declining to expanding sector" (Greenaway and others, 2000). - Empirical strategy: - Model: dynamic panel error correction model (ECM) of sectoral labor allocation for a panel of 14 high-income economies and 10 sectors, drawing on Ngai and Pissarides (2007), Pagan (1985), and others. - Long-run relationship: sector employment driven by relative sectoral consumption expenditure (or gross output) and sectoral prices. - Short-run dynamics: ∆log(N) equation includes short-term elasticities, ECM error term with speed of adjustment parameter 휆, controls for global business cycle and trends. - Two-stage estimation: - Stage 1: pooled OLS to estimate long-run elasticities and stationary error term. - Stage 2: construct error term and estimate short-term elasticities and 휆 using fixed effect panel regression (sector and time) on a country-by-country basis. - Data: Groningen Growth and Development Center 10 sectors (GGDC) database (Timmer and others, 2015); coverage 1960–2012 for 14 high-income countries and 10 sectors. ### Sectoral labor reallocation — empirical findings - Estimated speed of adjustment: - "The estimated average adjustment speed is -0.17 across the 14 high-income economies in our full sample." - Interpretation: "the average economy in our sample reallocates about 17 percent of the distance between its current and desired long run allocation within one year." - UK-specific result: - UK estimated 휆 = "-0.09***" (Table 1), positioned in the middle of the 14-country distribution. - Comparative context: - Singapore: fastest rate (27 percent a year). - Italy and Spain: estimated coefficients not statistically significant, speed drops to "just 1 percent." - Stability: "the estimated speed of adjustment appears to be relatively stable in the UK until the late-1980s." - Additional regression outputs (from Text Table 1): - Sample: 14 high-inc. economies and UK sub-sample. - ecm term (speed of adj.): -0.17*** (full sample), -0.09*** (UK). - Relative GVA growth: 0.07*** (full sample), 0.04 (UK). - Relative sectoral price growth: 0.05** (full sample), 0.12*** (UK). - Observations: 5,306 (full sample), 441 (UK). - R-squared: 0.08 (full sample), 0.14 (UK). - Interpretation and implications: - Despite a perception of high labor market flexibility, "low rate of sectoral labor reallocation in the UK seems to be counter-intuitive" — possibly driven by high sector-specific skills and incentives to remain within industries (example: "50 percent of the people worked in the financial sector found their next job in financial services related sectors"). *Source: IMF staff calculations and analysis as presented in the provided content.* ### 44. These empirical estimates should be interpreated with caution, given the important ### 44. These empirical estimates should be interpreated with caution, given the important ### Empirical uncertainty and limitations - Econometric estimations remain subject to statistical uncertainty. - Two important limitations to the exercise: - The sample of high-income economies has been constrained by the availability of long time series critical to identify impact of structural changes. - The UK labor market has gone through important reforms in recent years; empirical results may not fully reflect the effectiveness of these reforms. ### Policy discussion — general - Policies are key to facilitating faster adjustment and minimizing associated costs to individuals and in aggregate. - For product markets: - Competition is the key force behind reallocation. - UK already has one of the least restricted product markets (Koske and others, 2013). - Making finance available to support entrepreneurship can help workers upgrade skills and promote new entrants, thus competition. - For labor markets: - The key is to protect workers not jobs. - Reforms to promote housing supply would help workers move to regions where jobs are. ### Labor market policies — findings and recommendations - Unemployment benefits and active labor market policies: - In the UK, unemployment benefit (measured by net income replacement rate) is below the OECD average; however, long-term unemployment benefit is above. - Provision of insurance may come at the cost of efficiency; high quality active labor market policies can mitigate efficiency losses from high unemployment benefit. - The Nordic model: generous benefits coupled with effective labor market policies. - Training and expenditure: - Expenditure on labor market training in the UK is among the lowest in the OECD. - Well-targeted spending on training for unemployed workers could address skill deficiencies and facilitate transitions into more productive industries, potentially improving wages and job stability. - Lack of training could explain why the UK ranks lower than other high-income economies in relocating workers from shrinking to growing sectors. - Recent policy: Chancellor announced a package including, as part of the National Retraining scheme, a new career guidance service offering expert advice to help people identify work opportunities and get the skills to secure the job. - Program design and guidance: - Evaluations of active labor market programs show mixed track records; programs that develop specific skills tend to produce positive employment effects over the medium term. - Efficient allocation of funds could be achieved by allowing public employment providers to choose which training program unemployed workers participate in. - Government should provide clear guidance on future job opportunities based on observed effects from Brexit. ### Other policies — entrepreneurship and funding - Policies supporting entrepreneurship would help workers upgrade skills and promote competition. - Access to credit for further education, self-employment, or entrepreneurship is essential for workers willing to change careers significantly. - Evidence and programs cited: - New Entrepreneur Scholarships program has helped potential entrepreneurs with financial resources to set up new businesses (Slack, 2005). - Re-training programs such as U.S. Trade Adjustment Assistance (D’Amico and Schochet, 2012) and the European Globalization Adjustment Fund (EGF) have been found to improve re-employment probabilities and earnings, though deployment effectiveness depends on visibility and worker awareness. - As the UK exits from the EGF and from the European Social Fund and progresses with the Shared Prosperity Fund as replacement, developing trade adjustment programs that are visible and fairly applied could be considered (Claeys and Sapir 2018). ### Housing supply — findings and recommendations - Consensus: UK housing supply is lagging demand. - In 2016/17, total housing stock increased by around 217,000 residential dwelling, 15 percent higher than the previous year’s increase but short of the estimated 240–250,000 new homes needed to keep pace with household formation. - Accounting for backlog, House of Lords Select Committee on Economic Affairs (Building more homes, 2016) recommended development of at least 300,000 new homes annually for the foreseeable future. - Empirical evidence: House prices (and regulations) have a significant impact on regional migration in the UK. - Government pledges: - Pledged to deliver 1 million homes by the end of 2020 and to deliver half a million more by the end of 2022. - Housing White Paper identified three problems: not enough local authorities planning for homes they need; housebuilding too slow; construction industry too reliant on a small number of big players. - Recommended measures to boost supply: - Ease planning restrictions. - Mobilize unused publicly-owned lands for construction. - Provide incentives for local authorities to facilitate residential development (Wilson and Barton, 2018 and Andrews and others, 2011). ### Conclusions — Brexit scenarios and policy role - Long-run economic consequences of Brexit estimated under various post-Brexit scenarios: - WTO scenario: output loss of between about 5 and 8 percent compared with a no-Brexit scenario. - FTA scenario (more benign): output falls by between about 2½ and 4 percent relative to continued EU membership in the long run. - There is significant cross-sector heterogeneity in the effects. - Policy role: - Greater emphasis on active labor market programs, such as retraining, and improving the quality of education will help facilitate labor reallocation and support productivity. - Making credit available to encourage entrepreneurship would help workers upgrade skills and mobility, allowing workers to move to where jobs are. ### Box 1 — The Financial Sector (key facts and implications) - Size and employment: - The financial services industry constitutes around 7 percent of UK GDP, around half of that comes from outside London. - Direct employment: 1.1 million people in 2013 with around two-thirds outside London. - When related professional services are considered, UK workforce in financial services numbers nearly 2.2 million. - Fiscal contributions (2011–12): - The sector contributed 12 percent of PAYE income tax and national insurance, and 15 percent of onshore corporation tax received by Exchequer. - Revenues and trade: - About a quarter of the GB£200 billion revenue comes from activities related to the EU and another quarter with the rest of the world. - The UK has a large trade surplus in financial services with the EU. - Market access regimes: - No existing FTAs provide greater access to the EU market than EU single market membership. - EEA membership grants financial services passport like EU-authorized firms. - Customs union membership prevents charges equivalent to customs duties on goods but does not provide access to EU market for financial services (example: Turkey). - CETA contains a financial services chapter and in principle provides for trade in financial services under GATS modes, but in practice firms may have no greater access than under third country equivalence. - Switzerland secured some market access via EFTA and bilateral agreements, but access to the market for financial services is limited; reliant largely on WTO GATS terms; equivalence determinations under some regimes are in train. - Third-country and equivalence issues: - In absence of a deal, UK and EU would fall back on WTO terms, in particular GATS. - GATS: members must ensure “treatment of services and suppliers from other member no less favorable than that accorded to like services and suppliers of any other country.” GATS commitments on financial services are typically limited. - GATS includes a “prudential carve-out.” - Third-country equivalence regimes cover a narrower set of activities than passporting and can exclude activities such as deposit-taking and lending, retail asset management and payment services. - Specifics: - No third country regime under CRD IV for banking services including deposit taking, lending, payment services, some corporate finance advisory services and some trading services. - Third country insurers can provide services by establishing a branch within the EEA; Solvency II contains a third-country equivalence regime for reinsurance but not for direct insurance. - MiFIR (in force January 2018) introduced a third-country regime allowing third-country banks and investment firms to provide services related to securities, funds, and derivatives. - UCITS: no third-country regime; UK-based asset managers wishing to continue marketing UCITS products would have to re-domicile or market as AIFs. - AIFMD: contains third-country equivalence provisions; an NPPR exists but AIFMD envisages NPPR will be phased out. - Equivalence is potentially vulnerable to regulatory changes, can be revoked at short notice, the decision process is lengthy with no time limit, and could be politicized. - Other considerations: - It is difficult to determine firms’ reliance on passporting due to volume and multiplicity of passports issued by the FCA and PRA. - Equivalence does not replicate passporting but may provide equal treatment and reduce some frictional costs. - Legislation underpinning access is activity-based and may not map easily onto firms’ business structures. - The UK financial “ecosystem” creates network effects from co-location and interconnection of financial and professional services; changes in conditions for one service could have spillovers to others. ### Box 2 — The Automobile Sector (key facts and vulnerabilities) - Economic size and employment: - The sector created GB£14.5 bn in gross value added in 2016 (about 0.8 percent of total GVA). - Direct employment: 159,000 people in 2016 with a further 238,000 in the wider supply chain. - Regional concentrations: West Midlands, North West and North East. - Nearly 7 percent of the total workforce in automotive manufacturing comprises EFTA nationals, higher than the economy average of 5 percent. - In 2016, it accounted 1.1 percent (GB£3.6bn) of the UK total business investment, and carried out GB£3.4bn of research and development. - Trade and supply chain: - Exports: GB£40.1 bn in 2016 (GB£18.3 bn to the EU). - Just over half of total value added embodied in gross exports of UK automotive industry reflects value added generated in the UK (TiVA: origin of value added in gross exports, Dec 2016); the other half reflects value generated abroad, of which 24 percent is from within the EU. - About 10 percent of total UK imports was linked to the automotive industry with 85 percent imported from EU. - Around six out of ten industry imports are from three EU countries: Germany, Belgium, and Spain. - Industry structure: - Nearly 3,000 businesses operate in UK automotive manufacturing sector; about 90 percent are small and medium sized enterprises at the Tier 2 level. - UK vehicle makers sourced 44 percent of the value of their parts from domestic suppliers, rising from 36 percent in 2011, but below the 50 percent reported in France and Germany. - Production model and regulatory underpinnings: - “Just in time” production model is underpinned by the EU regulatory regime. - To sell a vehicle in the EU, the vehicle must be checked by an EU type approval authority; the authority checks that the “whole vehicle” complies with up to 60 separate technical requirements, via individual approvals for each system on the vehicle. - EU customs union prevents member states from imposing customs duties or formalities on goods imported from other member states and prevents restrictions on quantity (quotas or import/export bans); single market prevents non-tariff barriers that may restrict imports and exports. *Source: cr18317 - 44. These empirical estimates should be interpreated with caution, given the important* ### Box 2. The Automobile Sector (concluded) ### Box 2. The Automobile Sector (concluded) ### EU legal framework and UK implementation - The EU legal framework has been achieved by establishing a common set of product rules. - The UK government implements EU legislation on harmonized vehicle standards relating to all road vehicle manufacturing. - Regulatory barriers are a significant industry concern for international trade with non-EU markets, including: - differences in local testing and certification requirements; and - application of technical regulations different to those agreed globally. ### Whole vehicle type approval requirements - All new vehicles sold in the UK must be type approved (whole vehicle approval) by an EU type approval authority prior to registration. - Whole vehicle approval: - ensures vehicles irrespective of where they are produced comply with relevant environmental, safety and security standards; - accounts for both the United Nations Economic Commission for Europe (UN-ECE) and EU led regulations; - brings together all the individual system and component approvals for a vehicle into a single legal document enabling a manufacturer to demonstrate compliance with all relevant technical requirements; - allows the manufacturer to produce subsequent vehicles in conformity with the original approval and issue a certificate of conformity for each vehicle. ### Implications of trading under WTO terms - If UK and EU were to trade under WTO terms, UK car manufacturers need to meet the requirements set out by the EU, in particular vehicle standards legislation. - Importers and distributors of automotive products from manufacturers based in third countries must satisfy themselves that the products comply with EU legislation, including type approvals from a type approval authority. - These manufacturers would also need to comply with legislative requirements in their home country. - Goods imported into the EU from non-EU countries must pay a tariff under the WTO MFN tariff schedule. ### Examples of mutual recognition and deeper integration arrangements - Many countries negotiate bilateral agreements to reduce regulatory barriers: - EU-South Korea FTA: includes a provision on the mutual recognition of vehicle type approvals. A type approval issued by one party’s “competent authority,” confirming conformity with the relevant UN-ECE regulations, must be accepted by the other party as providing proof of conformity. - EU-Swiss agreements and the EEA: go one step further on mutual recognition. The EU-Swiss mutual recognition agreements include a chapter on motor vehicles, which allows for mutual recognition of vehicle type approvals, and is linked to an agreement that recognizes Swiss legislation as equivalent. Where legislation is deemed equivalent, EU type approvals will be recognized as proving conformity with Swiss legislation, and vice versa. - EEA agreement: EEA countries adopt EU product legislation into their domestic legislation, and goods that originate from these countries are treated as products from Member States. ### UN-ECE context and scope - The globally harmonized regulations of the UN-ECE, accepted in more than 50 markets, help to minimize the costs arising from different regulatory standards. - The UN-ECE standards relate predominantly to safety; the EU adopts the safety regulations developed in the UN-ECE, but the EU develops its own environmental regulations. - Example: EU Regulation deliver reductions in CO2 emissions from new cars and vans sold in the single market and the EU emission standards define the limits for exhaust emissions of new vehicles sold in the EU. - The UK will be a member of the UN-ECE 1958 Agreement after existing the EU. *Source: Box 2. The Automobile Sector (concluded), cr18317* ### 4. Over the medium to long term, population aging will put significant pressure on the ### cr18317 - 4. Over the medium to long term, population aging will put significant pressure on the ### Summary of the fiscal challenge - Population aging, rising healthcare, long-term care and pension spending are projected to increase annual public spending by more than four percentage points of GDP between 2023 and 2043 (OBR 2018). - Output losses associated with Brexit, or weaker productivity growth, would shrink the revenue base available to meet these spending demands. Movement of a meaningful share of the relatively tax revenue-rich financial sector outside the UK could cause revenues to fall faster. - The UK may face difficult decisions about the desired size of its public sector and the mode of delivery and financing of public services. ### Health spending: current status and drivers - Public health spending is around eight percent of GDP; this is above the mean for OECD countries but broadly in line with a benchmark based on income per capita, old-age-dependency ratio, and income inequality. - Public health expenditure has doubled in real terms from the late 90s until the global crisis and continued to increase at a slower pace during austerity; it currently accounts for nearly one fifth of the UK government’s total managed expenditure (PESA 2017). - Drivers of past and future health spending increases: - Demographic trends: - Between 1976 and 2016 there was a four-percentage point increase in the share of population aged 65 and over. - The proportion of people aged 65 and older is projected to grow to about a quarter of total population by 2050 from 16 percent today (ONS 2017). - Demographic pressures have explained little of past increases but are expected to become a growing driver going forward. - Income effect: - Health care is a ‘normal good’; estimated income elasticity typically close to one. - Non-demographic cost-pressures: - Increasing relative health care costs, technological advances, prevalence of chronic conditions, and lifestyle changes have largely explained past rises in health spending as a share of GDP. - Decomposition of average yearly real growth in UK public health spending (from cited sources and IMF staff calculations): - From 1985 to 2015: Average = 3.58; Demographics = 0.41; Income (0.8) = 1.49; Income (1) = 1.87; Residual (0.8) = 1.67; Residual (1) = 1.30. - From 1995 to 2009: Average = 4.70; Demographics = 0.18; Income (0.8) = 1.36; Income (1) = 1.70; Residual (0.8) = 3.15; Residual (1) = 2.81. - From 1995 to 2015: Average = 3.51; Demographics = 0.25; Income (0.8) = 1.26; Income (1) = 1.58; Residual (0.8) = 1.99; Residual (1) = 1.68. - Since 2010, spending growth has often been below the level expected based on demographics and income (i.e., negative residual), while quality-adjusted public healthcare output growth has been supported by productivity gains, though diminishing. ### Health spending projections and fiscal impact - OBR projections (assuming health spending per person of a given age and sex grows in line with average earnings): - Demographic pressures alone could increase health spending by 0.8 percent of national income between FY2023 and FY2041, and by 1.2 percent of national income between FY2023 and FY2067. - Incorporating other cost pressures, OBR projects health spending increasing by 2.7 percent of national income between FY2023 and FY2041, and by 6.1 percent of national income between FY2023 and FY2067. - International institution estimates of additional non-demographic cost pressures: - OECD (2013) ‘cost-pressure scenario’: other cost pressures increase spending by 1.7 percent a year beyond demographics and income effects. - IMF estimates: additional cost pressure for the UK of about 1.5 percent a year between 1980 and 2008 and 2.2 percent a year between 1995 and 2008 (IMF 2010, 2012). ### Pensions and long-term care pressures - Pensions: - Pension payments account for a significant share of public expenditures and liabilities. - Public spending on the elderly is relatively low compared to other countries, reflecting a smaller elderly population and a higher prevalence of private voluntary pensions incentivized with tax exemptions. - The generosity of the state pension eroded over nearly three decades but has partly recovered over the last decade. - Public spending on pensioner benefits is projected to increase significantly over the medium to long term, with a notable contribution from the indexation policy (i.e., triple-lock indexation). - Switching from the triple lock (highest of 2½ percent, CPI inflation, or rise in average earnings) to a more sustainable indexation method will be required; moving to a double-lock (highest of average earnings growth or inflation) is likely to make only a small difference in long-term fiscal sustainability. - Further increases in the state pension age (beyond those already legislated) may be needed as life expectancy continues to increase, but should not be the sole means of adjustment as they may disproportionately affect groups with lower-than-average life expectancy. - Means testing for access to social benefits in old age could improve sustainability while safeguarding the most vulnerable; alternatively, redistribution objectives could be pursued via the tax system while preserving a simple state pension structure. - Long-term care (public adult social care): - Long-term care spending is projected to increase by 0.5 percent of national income between 2017–18 and 2041–42, and by 0.8 percent of national income between 2017–18 and 2067–68 (OBR 2018). - The 2014 Care Act aimed to cap individuals’ out-of-pocket long-term care costs, but implementation was postponed and then not pursued as planned; this cap could pose additional spending pressures if implemented. ### Policy alternatives and recommendations - Three broad policy alternatives are discussed: 1. Reining in pressures in health and pensions, or being less ambitious on benefit expectations. - Health: - Cross-country analysis suggests room for further efficiency gains; potential gains in public health expenditure efficiency are above the median for advanced economies. - Consider higher cost-sharing through user fees: the share of out-of-pocket payments in the UK is lower than the mean for other advanced countries. - Pensions: - Consider increases in state pension age (with attention to distributional effects). - Move away from the triple lock indexation to a more sustainable method (double-lock likely yields only a small fiscal improvement). - Consider means testing for social benefits in old age or using the tax system to target redistribution while keeping a simple state pension. 2. Cutting spending in other areas. - Deficit reduction since the financial crisis has relied mostly on spending measures. - Spending restraint accounts for the bulk of planned consolidation over the next three years. - By 2020, most categories of public spending as a ratio to GDP will be at or below pre-crisis levels. - Scope for further reductions may be limited after several years of consolidation and given the need to invest in human and physical capital to boost productivity. 3. Raising additional revenue. - Identifying further efficiency gains without reducing quality may become difficult, highlighting the need for additional revenue measures. - The tax burden is at the highest level in three decades, but the UK still has a lower tax environment compared to the mean for advanced economies. - Given the scale of long-term revenue needs, increases in broad-based taxes would likely be required. - “Hard” earmarking of tax increases is not advisable as it may introduce volatility in health revenues and increase budget rigidities. ### Key statistics and projections (selected) - "More than four percentage points of GDP" — projected increase in annual spending on healthcare, long-term care and pensions between 2023 and 2043 (OBR 2018). - Public health spending: around "eight percent of GDP". - Public health expenditure real growth averages: - "3.58" percent per year (1985–2015 average). - "4.70" percent per year (1995–2009 average). - "3.51" percent per year (1995–2015 average). - Demographic contribution to public health spending growth: - "0.41" (1985–2015), "0.18" (1995–2009), "0.25" (1995–2015). - OBR long-term health spending projections: - Demographics only: "0.8 percent of national income" (FY2023–FY2041); "1.2 percent of national income" (FY2023–FY2067). - With cost pressures: "2.7 percent of national income" (FY2023–FY2041); "6.1 percent of national income" (FY2023–FY2067). - Long-term care projections (OBR 2018): - Increase of "0.5 percent of national income" between 2017–18 and 2041–42. - Increase of "0.8 percent of national income" between 2017–18 and 2067–68. - Triple-lock indexation guarantee: annual increase equal to the highest of "2½ percent, CPI inflation, or the rise in average earnings." *UNITED KINGDOM — INTERNATIONAL MONETARY FUND (excerpt).* ### 12. A variety of macro and micro level cost-containment controls are already in place. ### 12. A variety of macro and micro level cost-containment controls are already in place. ### Existing macro and micro cost‑containment controls - Following the IMF (2010) taxonomy, controls include: - Budget caps: Costs in NHS are constrained by a global budget set at the national level on a multi-year cycle. - Supply constraints: Output controls on treatment coverage are informed by the National Institute of Clinical and Healthcare Excellence, which provides guidance on treatments for the NHS to fund based on evidence and cost-effectiveness analysis. - Price controls: - Wage controls for healthcare professionals have been in place as a result of a broader public sector wage increase cap, at 1 percent since 2013–14. - National tariffs or prices are set for each “type of care” reflecting its average cost. - Public management and coordination: - Primary care is delivered mainly through general practitioners, who are normally patients’ first point of contact and act as gate-keepers for secondary care. - Services are allocated by need and waiting lists. - Market mechanisms: - In England and Northern Ireland there is an internal market within the NHS, in which buyers (commissioners) are separated from suppliers (hospitals). - Commissioning groups manage regional budgets and fund care for resident population. - Patients are free to choose the GP of their choice, as well as any NHS hospital (provided their GP is willing to refer them). - Patient information is readily accessible online through NHS Choices (England), SHOW Scotland, NHS Direct Wales, and NI Direct. - Addressing behavioral risk factors: - Decreasing smoking levels and reductions in alcohol use have been observed, but binge drinking remains elevated and obesity reduction efforts have had less impact. - Starting in 2018, a tax on sugary soft drinks is introduced. - Chocolate and sweets are included in Public Health England’s program aiming for a 20 per cent reduction in sugar by 2020. ### NHS financial pressures and recent fiscal responses - Fiscal and service pressures: - Although some savings targets have been met in the past five years, financial pressures on the NHS have been mounting. - A&E waiting times targets have been increasingly missed; NHS providers have been in deficit on average since FY2013, requiring offsetting savings to keep overall spending within the limit set by the government. - Funds from the capital budget have also been reallocated to fund day-to-day spending. - The 1 percent pay cap for NHS staff was lifted earlier this year, potentially increasing cost pressures but facilitating recruitment and retention. - Recent government funding announcements: - In June 2018, the government pledged an increase in the funding for the National Health Service over five years, with an average real increase of 3.4 percent per year starting in FY2019. - The announced expansion would amount to additional £20 billion (in today’s prices) or 1 percent of GDP by fiscal year 2023. - The announcement provided no details on how the extra spending will be financed, with details to be provided at a future fiscal event. ### Pension expenditure, schemes, and fiscal impact - Government roles and schemes: - The state pension is a benefit received by all pensioners reaching state pension age who have paid sufficient National Insurance contributions (NICs) into the National Insurance Fund. - Since April 2011, the government has committed to a ‘triple lock’ on the level of state pension received so that it increases in line with growth in the consumer prices index (CPI), average earnings or 2.5 percent, whichever is higher. - Public sector occupational pension schemes cover staff working in central government, local authorities and arm’s-length bodies; most of the schemes in central government are unfunded pension schemes. - The Treasury covers any shortfall between the pensions paid and the contributions received and would also retain any surplus for unfunded schemes. - The government supports private sector pensions through regulation (Pensions Regulator and Financial Conduct Authority), the Pension Protection Fund, auto-enrollment, and pensions tax relief. - Nearly 10 million eligible jobholders auto enrolled into an AE pension scheme. - Fiscal size and liabilities: - Public sector pension schemes constitute the largest liability on the public sector balance sheet, amounting to around 40 percent of total liabilities and 75 percent of GDP. - In FY2016, the government’s pension payments accounted for nearly 20 percent of total expenditures on public services (£40 billion to former public sector employees and £100 billion in state pension benefits). - In FY2016, gross pension tax relief amounted to £38.6bn and the NICs relief on employer contributions was £16.2bn. - There is no contractual government guarantee to cover pension schemes if the assets in the Pension Protection Fund (PPF) are insufficient to cover the claims. ### Public spending on the elderly and pensioner vulnerability - Spending and coverage: - Public expenditures on the elderly are below the OECD average and significantly below the average for European countries. - The replacement rate for state pensions is one of the lowest in the OECD, though net replacement rates are close to the OECD median once private voluntary schemes are taken into account. - Many pensioners have significant assets in occupational pensions and/or in housing. - Distributional issues: - Controlling for housing costs, the median income for pensioners is in line and poverty rates are lower compared to non-pensioners. - Certain pensioner segments remain relatively more vulnerable: reliance on state support is more significant at the bottom of the distribution. - Relative poverty rates (50 percent of the median income) increase faster with age compared to OECD average. ### State pension indexation (Box 2) - Historical changes and effects: - A statutory link between the state pension and earnings was removed in 1980, linking benefit increases to (retail) prices instead of earnings; the value of the state pension declined from 26 per cent of mean full-time earnings in 1979 to 16 per cent in the period 2000–2008. - The ‘triple lock’ was announced in the June 2010 Budget and implemented in 2012. - In 2010, the Government applied a discretionary increase of 2.5 per cent. - With the triple lock in place, the state pension increased by more than average earnings in each year from 2012 to 2018 except for 2016, and the state pension increased to around 18.5 per cent of average full-time earnings in FY17. - A new state pension (NSP) was introduced for people reaching state pension age from April 2016, at about 25 percent of average earnings (but requiring 35 years of national insurance contributions to qualify for the full rate). - The Government confirmed its commitment to retaining the triple lock until 2020 and more recently until the end of this Parliament. - Cross-country context: - Indexation policies differ across countries; the UK minimum 2.5 percent lock is an outlier compared to other countries’ indexation policies. - Indexation has a greater impact on basic flat‑rate schemes like the UK state pension than on earnings‑related schemes. *Source: cr18317 - 12. A variety of macro and micro level cost-containment controls are already in place. (https://www.imf.org/-/media/files/publications/cr/2018/cr18317.pdf)* ### 17. Public spending on pensioner benefits is projected to increase significantly over the ### 17. Public spending on pensioner benefits is projected to increase significantly over the ### Key projections and drivers - Spending on pensioner specific benefits are projected to remain broadly stable around five percent of GDP until the late 2020s. - Pension benefit spending is projected to increase by about 1.7 percent of GDP by FY2067 due to increases in population above pensionable age and the impact of the triple lock indexation. - Gross public service pension expenditure (i.e. before offsetting member contributions) is projected to fall from 2 percent of GDP in FY2017 to 1.3 per cent of GDP in FY2067. - Demographic projections: - The proportion of the population that is of pensionable age is projected to fall to 18 percent between 2016 and 2020 as the SPA for men and women rises to age 66 by October 2020. - The proportion of the population of pensionable age is forecast to reach 19 percent in 2026 and climb further thereafter. - Public sector workforce changes: - The number of public sector employees has fallen by around 15 percent from 6.3 million to 5.4 million between 2009–10 and 2014–15. - Short-term effect: increases pension costs as member contributions as a proportion of public sector pensions paid will fall. - Long-term effect: fewer people claiming a public sector pension in the future, reducing public sector pension costs overall. ### Triple lock and indexation effects - The triple lock indexation contribution: - If pensions were to grow in line with average earnings instead, the expenditure pressure would reduce in half (raising by about 0.8 percent of GDP instead). - In the OBR projection, the effect of the triple lock over the projection period is assumed to be equivalent to earnings growth plus about 0.35 percent a year. - The “triple lock premium” is estimated as the average additional uprating each year if the triple lock had been applied rather than earnings from 1991 to the end of the medium-term forecast in early 2020s. - International comparison note: applying the same calculation for other advanced economies suggests the estimated triple lock premium is rarely much lower than that estimated for the UK, and potentially significantly larger. ### Policy discussion: fiscal options and trade-offs - The UK has three broad options to address long-run increases in health and pension spending: - Rein in spending on these areas or be less ambitious in terms of expected service levels. - Cut spending elsewhere. - Increase revenues to finance the larger size of the state. - The OBR projections indicate that funding the projected increases simply through higher government borrowing would push debt onto an unsustainable trajectory. ### Health: reform options to rein in pressures - Efficiency gains: - Continuously seeking best value for money could ease fiscal pressures without reducing quality. - The multi-year NHS funding plan (announced in June) is subject to a NHS 10-year plan and government-set NHS 5 financial tests, including improving productivity and efficiency. - High-level cross-country analysis suggests room for improvement: potential gains in public health expenditure efficiency are below the median for the overall sample, but above the median for advanced economies. - Cost sharing and out-of-pocket payments: - The UK has limited cost-sharing for publicly covered services; outpatient prescription drugs (England), optical, and dental services are subject to co-payments. - Out-of-pocket payments and total private health spending as a share of GDP are lower in the UK compared to the mean for OECD countries, suggesting higher cost-sharing could be considered. - Risks: user charges can deter appropriate use and may have negative public-health consequences; in most European and OECD countries user charges make up only a small portion of expenditure. ### Pensions: reform options to rein in pressures - Increasing pensionable age: - The OBR central projection goes beyond legislated SPA increases, reducing state pension expenditures by 25 percent (i.e. 2.3 versus 1.8 percentage points from FY17 to FY67). - Further increases in SPA will likely be required as life expectancy rises, but raising SPA may disproportionately affect groups with lower life expectancy; relying solely on SPA increases is not appropriate for fiscal sustainability. - Reforming indexation (triple lock is unsustainable in long run): - Moving to a double-lock (highest of average earnings growth or inflation) does little to improve long-run affordability: spending on the state pension would still increase by 1.6 percent of national income by FY2066 (as opposed to 1.8 percent with the triple-lock), with over 40 percent of this increase explained by the double-lock relative to earnings indexation. - Alternatives include: - Average earnings indexation. - Inflation indexation. - Smoothed earnings link (uprate with earnings, use temporary price-indexation when inflation exceeds wage growth, revert to earnings once pension value remains above a fixed minimum proportion of average earnings). - Simple discretionary increases in generosity could also be used if the government chooses the target level rather than following the arbitrary triple lock. - Means testing for access to social benefits in old age or targeting redistribution through the tax system could improve sustainability while preserving a simple state pension structure. ### Cutting spending elsewhere - Historical context: - Over the last 35 years, spending in health and pensions increased by 5 percent of GDP but was largely offset by reductions in other areas (e.g., defense, interest payments). - Future constraints: - Scope for further reductions in other areas may be limited after several years of consolidation and the need to invest in human and physical capital to boost productivity. - The forthcoming Spending Review is an opportunity to reassess efficiency gains and reprioritize spending. ### Raising additional revenues - Potential: - General government revenues could be increased by 5 percent of GDP and still remain in line with the average for advanced economies. - Tax policy options and considerations: - Scaling back distortionary tax expenditures (e.g., preferential VAT rates) could improve efficiency and increase revenues; tax relief on VAT represents the largest category by tax expenditures cost (2.5 percent of GDP), with the zero percent VAT rate on most foods contributing 0.9 percent of GDP. - Moving toward more equal tax treatment of employees, the self-employed, and corporations would improve fairness and reduce legal-form switching for tax reasons. - Given the scale needed, raising one of the three main taxes (VAT, PIT, NIC) would likely be required: - VAT, PIT, and NIC together account for about two thirds of government revenues. - The Conservative manifesto pledged not to increase VAT; VAT is the least progressive of the three main taxes. - NICs and PIT are progressive but differ: increasing PIT rather than NICs would tax pensioners and those with unearned income more. - Corporation tax: - Corporation taxes are the fourth largest revenue source. - The corporation tax rate has been cut repeatedly since 2010, with an additional cut from 19 to 17 percent planned for April 2020. - At 19 percent, the UK already has one of the lowest headline corporate tax rates in the G20; despite a relatively broader base, it remains one of the most generous corporate tax systems among advanced economies on comprehensive measures. ### Selected key statistics (preserved exactly as in source) - five percent of GDP (state of pensioner specific benefits until late 2020s) - 1.7 percent of GDP (increase in pension benefit spending by FY2067) - 2 percent of GDP (gross public service pension expenditure in FY2017) - 1.3 per cent of GDP (gross public service pension expenditure projected in FY2067) - 18 percent (proportion of population of pensionable age projected between 2016 and 2020) - 19 percent (proportion of population of pensionable age forecast in 2026) - around 15 percent (fall in number of public sector employees between 2009–10 and 2014–15) - 6.3 million (public sector employees in 2009–10) - 5.4 million (public sector employees in 2014–15) - 0.35 percent a year (OBR-assumed triple lock effect over projection period) - 0.8 percent of GDP (expenditure increase if pensions grew with average earnings instead of triple lock; described as “about 0.8 percent of GDP”) - 25 percent (OBR central projection reduction in state pension expenditure increase due to SPA changes; i.e. 2.3 versus 1.8 percentage points from FY17 to FY67) - 1.6 percent of national income (state pension spending increase by FY2066 under double-lock) - 1.8 percent (state pension spending increase by FY2066 under triple-lock) - 5 percent of GDP (increase in health and pensions over last 35 years) - 5 percent of GDP (additional general government revenues that could be raised and still be in line with the average for advanced economies) - 2.5 percent of GDP (cost of tax relief on VAT as largest category by tax expenditures cost) - 0.9 percent of GDP (contribution of zero percent VAT rate on most foods to tax relief on VAT) - 19 percent (current corporation tax rate noted prior to the planned cut to 17 percent in April 2020) *Source: cr18317 - 17. Public spending on pensioner benefits is projected to increase significantly over the* ### 24. An explicit earmarking of tax increases for health spending has been raised as an ### 24. An explicit earmarking of tax increases for health spending has been raised as an option in the domestic policy debate. ### Earmarking debate - around 60 percent of respondents supported tax rises to increase funding for the NHS (up 20 percentage points from 2014). - Hard-earmarking is not advisable: - From a public financial management perspective, hard earmarking makes the budget more rigid, limiting reallocations or fiscal adjustment. - Such an arrangement could result in health expenditures with excessive volatility and procyclicality. - A revenue head created by earmarking may struggle to grow in line with spending pressures. - Note: Revenues from NICs are not earmarked and contribute to general government revenues in the same way as income tax. ### Conclusion — fiscal implications of population aging - Spending pressures related to population aging will pose a significant challenge to the public finances in a context of already relatively high public indebtedness. - If these pressures are left unaddressed, additional borrowing would put debt in an unsustainable path (OBR FSR 2018). - Preserving fiscal sustainability will require difficult social choices going forward. - Policy options noted: - Explore opportunities for further efficiency gains in the NHS. - The elimination of the triple-lock could lead to important savings over time on state pensions. - More broadly, absent a fundamental rethinking of the size and role of the public sector, revenue measures will need to play a more prominent role. - Observation: A higher reliance on taxes would be a natural consequence of population aging under the current model that funds health and pension spending mostly via general taxation. *Sources: Haver Analytics; IMF Fiscal Monitor 2018; ONS; and IMF staff calculations.* ### Annex I — Assessing the Efficiency of Health Expenditure #### Methodology and data - Two methodologies used to analyze the relationship between spending inputs and health outcomes for 178 advanced, emerging, and low-income economies, for the period 2010–2015: - Non-parametric model: Data Envelope Analysis (DEA) identifies a production frontier from best performers by level of spending. Inefficiency measured as distance to frontier. - Parametric model: Stochastic Frontier Analysis (SFA) estimates a production frontier by regression; efficiency measured using the residuals and requires specifying a distribution for the efficiency term (휇 ௜). The analysis considers both half normal and exponential distributions. - Baseline specification (parametric): log(LE ௜) = 훼 + Σ훽 ௝ log(X ௝௜) + 휀 ௜ − 휇 ௜ - Key input variable: public health expenditure per capita (PPP-adjusted). - Health outcomes: life expectancy at birth; robustness checks use health adjusted life expectancy at birth (HALE) and amenable mortality (Healthcare Access and Quality Index). - Data sources: World Development Indicators Database, WHO Database, Eurostat, GBD 2015 Healthcare Access and Quality Collaborators (2017). - Data issues: - Health expenditure series for the UK have a break in 2013; variables are averaged over the period 2013–2015 for the UK. - Secondary completion rate missing for several countries; predicted values assigned based on simple regressions when needed. #### Findings — overall - Results suggest there is room for improvement in the UK: - Potential gains in public health expenditure efficiency are below the median for the overall sample, but above the median for advanced economies. - Non-parametric (DEA) results: - The UK could increase life expectancy and health-adjusted life expectancy by two to three years without increasing public sector health expenditure. - Results are robust to inclusion of other inputs as additional controls (controls include secondary completion rates, and either alcohol consumption or obesity rates). - Using amenable mortality (HAQ index) delivers a similar message: potential gains in the HAQ index without increasing public sector health expenditure (and other inputs) are higher for the UK than the median for Advanced Economies. Three DEA versions considered: 1 input (public health expenditure), 2 inputs (adds secondary completion rates), and 3 inputs (adds prevalence of tuberculosis). - Parametric (SFA) results: - Baseline SFA controls: secondary completion rate, access to clean water, alcohol consumption, obesity rates, incidence of tuberculosis, and population density. - Estimated signs are intuitive: life expectancy increases with public health expenditures, educational attainment, access to clean water, and population density; life expectancy decreases with alcohol consumption, obesity rates, and incidence of tuberculosis. - In line with DEA, SFA suggests the UK lies below the efficiency frontier; life expectancy and HALE could be increased by two to three years without increasing public sector health expenditure. - Results robust to additional controls: smoking rates, share of population aged 65 plus, private health expenditures per capita (PPP-adjusted), access to sanitation facilities, annual temperatures, precipitation, and universal health coverage index. - For amenable mortality (HAQ index), alcohol consumption and obesity rates are excluded as controls because the index is risk-standardized. #### Selected quantitative results (SFA and HAQ regressions) - HAQ table (dependent variable: HAQ) — selected reported coefficients and significance: - logHE_pub 0.028*** 0.029*** - logEducSec 0.066*** 0.066*** - logWater 0.051*** 0.049*** - logObesity -0.018*** -0.018*** - logAlcohol -0.007** -0.005 - logTuberculosis -0.021*** -0.018*** - logPopDens 0.005* 0.005* - Observations 168 168 (pval in parentheses; *** p<0.01, ** p<0.05, * p<0.1) - HALE table (dependent variable: HALE at Birth) — selected reported coefficients and significance (half normal / exponential specifications): - logHE_pub 0.085*** 0.090*** - logEducSec 0.163*** 0.154*** - logWater 0.208*** 0.215*** - logTuberculosis -0.038*** -0.031*** - (Observations 172 172) - Life Expectancy (dependent variable: Life Expectancy at Birth) — selected coefficients across many specifications (half normal and exponential): - logHE_pub ranges reported (examples): 0.029***, 0.035***, 0.025***, 0.029***, 0.028***, 0.029***, 0.029***, 0.032***, 0.029***, 0.027***, 0.030***, 0.025***, 0.026***, 0.028***, 0.029***, 0.029***, 0.027***, 0.030***, 0.027***, 0.017*** - logEducSec ranges reported (examples): 0.063***, 0.031***, 0.063***, 0.062***, 0.060***, 0.063***, 0.062***, 0.073***, 0.062***, 0.038***, 0.061***, 0.033**, 0.058***, 0.061***, 0.057***, 0.062***, 0.066***, 0.070***, 0.066***, 0.032** - logWater examples: 0.034***, 0.044***, 0.027*, 0.034**, 0.018, 0.034**, 0.031**, 0.012, 0.032**, 0.012***, 0.037**, 0.105***, 0.029*, 0.033**, 0.014, 0.035**, 0.033**, 0.019, 0.034**, 0.051** - logObesity examples: -0.015**, -0.020***, -0.016**, -0.015**, -0.018**, -0.016**, -0.012**, -0.013**, -0.013**, -0.012***, -0.016***, -0.019***, -0.015**, -0.015**, -0.018***, -0.017***, -0.013**, -0.012*, -0.014**, -0.016*** - logAlcohol examples: -0.009**, -0.020***, -0.014***, -0.010**, -0.009**, -0.009**, -0.010**, -0.015***, -0.010**, -0.014***, -0.005, -0.001, -0.011***, -0.006, -0.005, -0.005, -0.006, -0.011***, -0.006, -0.007** - logTuberculosis examples: -0.023*** repeated across specifications - logPopDens examples: 0.007**, 0.009***, 0.005*, 0.007**, 0.007**, 0.007**, 0.010***, 0.008***, 0.010***, 0.010***, 0.006**, 0.008***, 0.005**, 0.006**, 0.006**, 0.006**, 0.008***, 0.007***, 0.008***, 0.007** - Observations reported across specifications include: 168, 119, 168, 168, 168, 168, 156, 156, 156, 127, 168, 119, 168, 168, 168, 168, 156, 156, 156, 127 - pval in parentheses; significance levels: *** p<0.01, ** p<0.05, * p<0.1 #### Robustness and interpretation - DEA and SFA results are consistent: both indicate potential gains equivalent to increasing life expectancy and HALE by two to three years without additional public health spending for the UK. - Using the amenable mortality index (HAQ) that is risk-standardized brings UK potential gains closer to the median for the full sample and above the median for advanced economies. - Correlation note: DEA and SFA results for the amenable mortality index correlate positively (0.68 and 0.7 respectively) with the distance to the efficiency frontier estimated by GBD 2015 Healthcare Access and Quality Collaborators (2017). *Sources: Eurostat; GBD 2015 Healthcare Access and Quality Collaborators (2017); WDI database; WHO database; and IMF staff calculations.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2018/cr18317.pdf_