Only half of investment by firms is in physical capital, such as buildings and machinery. The other half is in intangible assets, such as branding, software and training. This has been true for the past two decades or more in the UK, but only if you step beyond the measures in the National Accounts, which include only some of the recognised intangible assets. This paper surveys ongoing work at the Office for National Statistics to develop measures of investment in intangible assets, using new insights and innovative approaches. In particular, this paper reviews developments in three areas: in-house branding investments, employer-funded training investments, and in-house investments in organisational capital. We reconsider some of the key assumptions made in the literature and propose alternative approaches to measurement. The paper concludes by considering implications of this work, and identifies some of the remaining gaps in the evidence base for measuring intangible assets.

The Irish economy has recovered at an impressive pace from the economic and financial crisis that lasted from 2008–12. Nonetheless, as a small open economy with some lingering vulnerabilities from the recent crisis, the economy remains heavily exposed to potential adverse shocks. In this paper, we explore the possible impact of external shocks on the Irish economy. We model the shocks in a two-stage process: first using NiGEM to estimate the impact on Ireland's key trading partners and the broader international environment and then examining the effect of these changes in the COSMO model of the Irish economy. The paper focusses on three relevant risks facing the economy: the potential for a hard Brexit, an increase in interest rates and a depreciation of the sterling euro exchange rate. Using this two-step approach allows us to demonstrate the transmission of external shocks to the Irish economy. The results help to quantify the potential impact on future growth, the labour market, public finances and the financial system of some key risks materialising.

This note examines the impact of rising bond yields in certain Euro Area countries on debt sustainability. It concludes that without the financial assistance of the bailout packages, government debt in Greece would clearly have been unsustainable, while Ireland and Portugal would have been extremely vulnerable. We also examine the case of vulnerable countries which have not received bailouts — Italy, Spain and Belgium. We conclude that while they can absorb some temporary rise, as has been seen in recent weeks, a significant further sustained rise — more than 100–200 basis points — would call their solvency into question in the absence of financial assistance.

This paper describes how the large budget deficits of 2020 in the United States and the United Kingdom were financed, how central banks are in practice managed not just short-term interest rates but also yields on government bonds, and how their ability to resist a post-coronavirus surge in inflation has been compromised.

Global trade in the 21st century is characterised by complex value chains. Successful exporters usually rely on quality imports, and exported goods cross borders many times before reaching their final consumer. This poses challenges to economic measurement as well as policymaking because it becomes difficult to characterise the true interdependencies between countries. Currently, estimates of the share of imports from a trade partner destined for re-exports, and the share used in the domestic economy, are crude at best. We develop a novel approach to estimate these shares. Instead of assigning imports for re-exports proportionally across all source countries, we consider the origin of imports for each trader who re-exports goods. The method is illustrated for the Netherlands, a major re-exporter. We find that non-European member states export 10 billion euros of commodities to the Netherlands that are destined for re-export to the United Kingdom. We also find that the goods trade deficit between the Netherlands and the United States is drastically reduced when taking re-export flows into account.

In the 15 years to 2000 UK business investment rose quite substantially in real terms. Having shown little deviation from an average of 7¼ per cent over the period 1965–85, the real share of business investment in GDP measured 10¾ per cent in 2000 (see figure 1). One of the factors contributing to this increase was the sharp fall in the relative price of investment goods, the scale of which is illustrated by the altogether different trends in real and nominal shares of business investment in GDP.

Labour market reform has become a central policy issue for many European countries, and there are lessons to learn for the further development of the New Deal in the UK. We discuss reforms in Denmark and the Netherlands, and look at their implication for employment and earnings. The Dutch started a sequence of reforms in the early 1980s based around wage moderation. Real wages per person hour rose less rapidly than elsewhere in Europe, and employment rose more strongly. Other reforms made the labour market more flexible, and many part-time jobs were created. The Dutch can claim to have succeeded in improving their labour market preformance. The Danes started serious reforms in the 1990s, and individuals on social benefits have a right and a duty to be activated. Registered unemployment has fallen sharply as a result of these New Deal style policies, but only some of these individuals have moved into employment. Increased flexibility, moderate real wage growth and active support for job-seekers all seem to help reduce unemployment and raise employment. Evidence from Denmark and the Netherlands suggests that making work relatively more rewarding helps to reduce inactivity and unemployment.

This paper explains how the collapse of growth after 2008, in combination with soaring public and external deficits, led to the escalation of Greek debt, while the government's delay in responding to the crisis increased the cost of borrowing and necessitated the bail-out agreement with the IMF and the European Union. One year later, Greece is struggling to harness fiscal deficits amidst a deep recession and rising social tension. Debt sustainability has not yet been ensured and another tranche of loans has been negotiated under new terms and conditions, including higher taxes and extensive privatisations of public companies and property. The paper discusses the main failures of the bail-out agreement and why the lack of growth so far has undermined efforts at stabilisation. As an alternative, the paper suggests that with a modest return to growth, combined with fast-track privatisations, the prospects of debt sustainability improve substantially. In light of the recent debate on the European Stability Mechanism, the paper suggests that the bail-out facility should avoid the debt seniority condition, so that Greece could return to normal market borrowing after 2013 without raising new fears of ‘haircuts’ on private sector obligations.

The current financial crisis has evolved slowly over the past eighteen months, and policy reactions have responded to events. In August 2007 it became clear that a number of banks had lost some of their capital base as a result of defaults on home loans in the US. The impacts of these defaults had been spread across the Atlantic as they were contained within bundles of assets that had been constructed into securities and sold to European banks. By the autumn of 2007 it was clear that there was a strong risk of a banking crisis, as discussed by Barrell and Holland (2007) in the October 2007 Review. We considered that this was a risk, but that the costs were so obviously large that policymakers would strive to avoid it, and hence it was not our main scenario. We were wrong on both counts, and a crisis at least as large as that we discussed emerged after the US authorities let Lehman Brothers fail in September 2008. We argued that a crisis would lead to a reduction in growth of a cumulated 3 per cent in the US and a cumulated loss of about 2 ½ per cent in the UK and the Euro Area. If a crisis burst, we expected US interest rates to reach zero in 2009 with deflation toward the end of the year.

The incoming Labour Government of 1997 promised a new approach to the conduct of fiscal policy. Two lessons to be learnt from previous experience were: (1) adjust for the cycle and build in a margin for uncertainty; (2) set stable fiscal rules and explain clearly fiscal policy. Although the claims for novelty were exaggerated there was a serious attempt to expand the supporting explanatory material at the time of the Budget and the Pre-Budget Report (which was itself an innovation). It started well, with the most significant tightening of fiscal policy occurring in 1997–8; but it ended with a record postwar deficit, a debt/GDP ratio heading for more than 75 per cent of GDP and the suspension of the fiscal rules. While the Treasury was not alone in failing to forecast the financial crisis and its consequences, doubts about the policy were being raised before 2007. Although the fiscal rules were met over the preceding period and projected to be met in future, a succession of current budget deficits and a tendency, from 2001 onwards, for over-optimism in fiscal projections left the UK less well equipped than it might have been to meet the challenges of the crisis.

On 7 February 1992, European Community Foreign and Finance Ministers signed the Treaty on European Union which contains only the second set of constitutional amendments to the EEC Treaty since 1957. This new Treaty merged into one text the Treaty on Economic and Monetary Union and the Treaty on Political Union which had been agreed at the European Council in Maastricht two months previously.

The Canadian system of housing finance proved to be resilient and efficient during the global financial crisis and its aftermath. The system's effectiveness is the result of a rigorous prudential regulatory and supervisory regime coupled with targeted government guarantees of mortgage insurance and securitisation products. In the post-crisis period, household debt levels and house prices have risen, owing, in part, to accommodative monetary conditions necessary to support the economic recovery. These vulnerabilities were mitigated by tightening macroprudential policy, specifically mortgage insurance rules, and strengthening mortgage-underwriting standards. Looking ahead, the housing finance framework needs to be adjusted and strengthened by rebalancing the risk exposures away from the government towards the private sector participants in the housing finance market. Although some measures have already been taken for this purpose, more adjustments may be needed to create the right incentives and achieve a sustainable rebalancing in risk exposures. Measures should also be considered to promote a liquid private-label mortgage securitisation market in Canada.

Trust allows financial transactions to take place when contracts are incomplete and the cost of negotiating too great for the parties involved. Banking covers many different types of transactions in assets with different levels of incomplete contracts. Investment banks have traditionally dealt with assets with incomplete contracts and often traded on informal and opaque markets. The creation of new global banks combined know-how, capital and collateral to generate enormous growth in these markets. While global banks developed trust with counterparties in specific markets, the opacity combined with limited liability structures also created principal-agent problems. The scandals which emerged are a reflection of these agency problems and have left trust in the banks greatly diminished. If levels of trust remain so low, this will be consistent with ongoing bank vulnerability, less lending to finance risky but profitable investment projects, and consequently lower economic activity. Regulation can support private incentives to accept codes of conduct which enhance trust.

Five years after the financial crisis, the global economy remains unbalanced and many of the advanced countries are still struggling to return to robust, sustainable growth. Taking a historical perspective, I argue that this predicament reflects a failure to adjust to profound changes in the economic landscape, which have given rise to the (re-)emergence of major financial booms and busts. The economic developments that really matter now take much longer to unfold – economic time has slowed down relative to calendar time – and yet the planning horizons of economic agents have shortened. The key problems arise from the cumulative effects of past decisions on stocks, and yet these effects are treated as short-term flow issues. The risk is that instability will become entrenched in the system. Policy needs to adjust.

Low levels of bank capital and liquidity in combination with ongoing crises in other countries are shown to increase the probability of banking crises in OECD countries. Hence global coordination of regulatory reform is vital for reducing crisis risks.

The Fundamental Equilibrium Exchange Rate (FEER) is that value of the real exchange rate that is consistent with macroeconomic equilibriumo This article uses the long-run trade equation elasticities from the models of Her Majesty's Treasury, the National Institute of Economic and Social Research and the Bank of England to examine the FEER calculation. The sensitivity of the results to changes in the key elasticities and to the possibility of a recent improvement in UK trading performance is considered. Historical comparisons are made between the FEER and the actual real exchange rate. All the results suggest that the real exchange rate was above the FEER at the time of ERM entry. The fixing of the nominal exchange rate removes a possible mechanism by which the economy might reach equilibrium and therefore convergence requires a period where UK inflation is lower than that of its trading partners.

Traditional macroeconomic models are based on the concept of a single representative consumer. A great deal can be gained by constructing a dynamic general equilibrium economic model which represents the behaviour of a panel of consumers spread out along the income distribution. Such a framework allows us to assess the distributional impact of policy changes. We present here such a model, showing the behaviour of consumers facing uncertain incomes and we use it to assess the distributional impact of changes to pension provision. We find that means testing of old age pensions increases inequality among the retired because of the effect it has on incentives to save.

There is a perception among some commentators and policy analysts that leadership and managerial practices in private schools are superior to those in state schools. Analysing a survey of workplaces in Britain, we find little evidence to support this contention when examining the prevalence of modern human resource management (HRM) practices in schools. Rather, the evidence points to greater use of such practices in state schools. Those practices are correlated with improved school performance in the state sector, but not in the private sector. We discuss the implications of these findings for the policy of encouraging managers of private schools to sponsor state schools.

We estimate the changing value of workplace pensions in the UK and incorporate their value into an estimate of the public sector pay differential. Falling pension membership in the private sector and growing value of public service pensions led to a significant increase in the estimated public sector pay differential from 1997 to 2009, even though headline pay grew faster in the private sector. From 2009 to 2012, although pay grew faster in the public sector, reforms to public service defined benefit pensions, particularly indexation to the CPI rather than RPI, significantly reduced the public pay differential.