UK pestel

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Country Profile Series

United KingdomIn-depth PESTLE insights

REFERENCE CODE: ML00002-031

PUBLICATION DATE: May 2012

WWW.MARKETLINE.COM

MARKETLINE. THIS PROFILE IS A LICENSED PRODUCT AND IS NOT TO BE PHOTOCOPIED

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OVERVIEW

Catalyst

This profile analyzes the political, economic, social, technological, legal, and environmental (PESTLE) structure in the

UK. Each of the PESTLE factors is explored on four parameters: current strengths, current challenges, future prospects,

and future risks.

Summary

Key findings

The UK has a strong democratic system, but differences between the coalition partners in the incumbent

government pose a challenge

The UK adheres to a democratic, parliamentary system of governance known as the Westminster system. The structure

of the administration ensures that there is an adequate separation of powers between the executive branch, led by the

prime minister, the bicameral legislature, and the judiciary, as well as ensuring that there is a system of checks and

balances in place. As the World Bank's governance indicators illustrate, the UK is one of the most successful nations in

terms of the application of the rule of law, control of corruption, government effectiveness, and regulatory quality.

Furthermore, according to the governance indicators for 2010, the country had a high percentile rank of 92.3 for

government effectiveness.

The tensions between the ruling coalition of the Conservatives and the Liberal Democrats are bound to rise after the

Liberal Democrats took a drubbing in local elections in the first half of 2011. Although the leaders of both parties have

signed a five-year program to reduce the budget deficit, the Liberal Democrats are expected to push to protect their own

interests. Tensions between pro Europe Liberal Democrats and Conservatives who have a skeptical outlook on

integration are expected to continue to plague British politics. The government has a strong majority in parliament;

however, the diverse opinion of the coalition parties regarding strong government austerity measures, the slashing of the

top income tax rate, a pensions cap, and the worsening eurozone crisis have put a strain on relations. As per opinion

polls conducted in April 2012, the popularity of the Conservatives has fallen while support for the opposition Labour Party

has inched up. With the country in recession, the chance of a fallout between the coalition partners has increased.

The UK economy is developed, but rising government debt remains a concern

The UK is the second largest economy in the European Union (EU) and is one of the strongest in terms of social welfare,

standards of living, unemployment, interest rates, inflation, and inward and outward foreign investment. The UK has the

seventh highest level of GDP per capita in the EU in terms of purchasing power parity, after Luxembourg, Ireland, the

Netherlands, Denmark, Austria, and Finland, and it has the third highest level in the G8, after the US and Canada.

UK government debt has constantly been on the rise since 2001, and has reached an alarming figure of around 86.5% of

GDP in 2011 as per MarketLine estimates. For the first time the UK government debt reached £1.26tn ($1.97tn). It would

be difficult for the government to service a ballooning debt against the backdrop of a contracting economy. The fiscal

situation is set to worsen as it would be difficult for the government to go ahead with the deficit reduction plans as the

economy is passing through a recessionary phase. Rising government debt will be a challenge to the UK economy in the

medium term.

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The country has high standards of living, but income inequality is still apparent

A report released by the United Nations (UN) declared that for the first time in more than 100 years the standard of living

in the UK has outstripped that of the US. While this point remains debatable, there is no doubt that the standard of living

experienced by residents of the UK is comparable even with that enjoyed by people living in Scandinavian countries.

According to the Human Development Index 2011 report published by the UN Development Programme, the UK ranked

28th in terms of human development. However, the government is faced with the challenge of income disparity. As per a

2008 Organisation of Economic Co-operation and Development report, the annual average income in the UK of the top

10% was £55,000, about 12 times higher than that of the bottom 10%, who had an average income of £4,700. Relative

inequality has increased and the government has fallen short of its targets in reducing poverty, especially child poverty.

The UK has strong scientific and research and development capabilities, but regulatory controls hamper

earnings potential

The UK is renowned for its capabilities across the full range of scientific disciplines, along with the arts and humanities.

According to the World Bank, in 2010 the UK’s gross domestic expenditure on research and development (R&D) was

1.82% on GDP. The UK is renowned for the quality of its R&D, and persistently builds on its strengths in science and

innovation. The country has traditionally been keen to encourage R&D in both the public and private sectors.

However, the authorities face the unenviable challenge of striking a balance between keeping the distribution of

indigenous technology profitable and maintaining a competitive advantage. For example, the UK is a key player in the

defense industry. However, even if companies within this field are able to consistently produce new and innovative

products, they might not be allowed to profit as much as they could out of doing so, as the dispersion of this technology

is sensitive. Therefore, the government must closely monitor the developments of such industries and decide on its

export policy with regards to technology.

Business legislation encourages commercial activity; however, traditional liberties are coming under threat

The legislation that affects the business environment in the UK has been created and amended in such a way that the

interests of investors are generally given priority. This is evident from the fact that domestic and foreign players have

shown a continuous commitment to investing in the country. The majority of multinational corporations that are based

outside of Europe but have a presence on the continent establish their European operations in the UK.

However, the government faces the challenge of maintaining the traditional liberal values of the country's society while at

the same time changing legislation to help it to deal with the threat of terrorism. There is yet to be a balance struck

between these two priorities. Legislation such as the Terrorism Act 2006 and the Prevention of Terrorism Act 2005 has

garnered its fair share of controversy, not only in political circles but also among the general public.

The UK has a strong global influence over environmental issues, but high air pollution is a cause forconcern

With its position as an industrialized global power and a member of the G8, the UK has a leadership role to play in the

global efforts toward sustainable development and the protection of the environment. The UK, with its close ties to a

number of countries and its influence in the Commonwealth, has the ability to gain commitments from a number of

countries that are currently in the developing phase and therefore unwilling to sacrifice economic advancement for

environmental gain. The European Commission issued a second and final warning to the UK in June 2010 to clean up its

air quality. Air pollution in London is the highest in the UK and the country as a whole is among the worst. Exhaust fumes

and emissions from factories and power stations around London are the main causes of pollution, and the UK faces a

fine of £300m if it fails to improve its air quality.

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PESTLE highlights

Political landscape

•

The UK is one of the most prosperous and influential nations in the world and has a large role to play onthe international stage. It is one of the five permanent members of the UN Security Council, one of the

founding members of the North Atlantic Treaty Organization, a member of the G8, and a member of the

EU, although it has followed a conservative approach to the issue of European integration.

• David Cameron has taken a host of measures to reduce the fiscal deficit, including a 26% decrease in

the central government's contribution to local councils by 2015, a 24% cut to the foreign and

commonwealth office, and another 24% cut to the Department for Culture, Media, and Sport.

Economic landscape

• The country attained a poor growth rate of 0.8% in 2011, and the economy was in recession by the end

of Q1 2012, when GDP contracted by 0.2%.

• The economic slowdown has adversely affected the creation of jobs in the country. The unemployment

rate was 8.1% in 2011, and is expected to reach 8.3% by the end of 2012. Nearly 2.5 million people

were unemployed in 2011, which was the highest number in 16 years.

Social landscape

• The government faces a number of challenges when it comes to maintaining the level of public services

on offer. Given the fact that the budget deficit is a clear point of concern for the authorities, maintaining

expenditure levels on social welfare projects will prove a challenge.

• The government’s policy of "managed migration" could prove crucial in helping to offset the effects of the

aging population on the economy. The speed at which the ratio of children and those aged above 65 is

rising relative to the working age population is of concern to policymakers.

Technological landscape

• The UK has the world's largest aerospace industry outside the US. It is one of the country's few globally

competitive manufacturing sectors, supporting more than 276,000 jobs.

• According to the Science and Innovation Investment Framework for 2004–14, the government stated its

objective of raising the level of knowledge intensity, which stood at 1.9% in 2004, to the 2.5% mark by

2014.

Legal landscape

• The UK was named the 14th freest economy worldwide by the Heritage Foundation's and the Wall Street

Journal’s Index of Economic Freedom 2012, and was ranked seventh in the World Bank's Doing

Business indicators for 2012.

• The UK has comprehensive labor laws, but has compromised on many issues relating to labor since

joining the EU. However, the government opted out of proposed EU laws that would strengthen criminal

penalties for employing anyone who is not eligible to work in the UK.

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Environmental landscape

• To help stem the rapid pace of global warming, the EU and its individual members have committed to

meet the targets set by the Kyoto Protocol. These include reducing greenhouse gas emissions by 8%

from 1990 levels during 2008–12.

• Under the Kyoto Protocol, the UK has to cut its emissions by 12.5% compared with 1990 levels by 2012.

On a Kyoto basis, UK emissions were 19.4% below 1990 levels in 2009 without emissions trading or

22.0% lower including emissions trading, indicating that to date the UK has made good progress.

Key fundamentals

Table 1: The UK – key fundamentals

2009 2010 2011 2012f 2013f 2014f 2015f

GDP, constant prices ($bn) 1,668.2 1,703.2 1,716.8 1,727.3 1,750.0 1,791.2 1,834.7GDP growth rate (%) -4.6 2.1 0.8 0.6 1.3 2.4 2.4

GDP, constant 2000 prices, per capita ($) 26,996.3 27,355.1 27,420.0 27,434.3 27,642.4 28,139.6 28,667.0

Inflation (%) 2.18 3.31 4.5 2.432 1.9 1.95 2.05

Exports, total as a percentage of GDP 28.4 29.6 27.5 27.3 27.2 26.8 26.2

Imports, total as a percentage of GDP 31.2 33.4 30.6 30.2 29.9 29.3 28.5

Mid-year population (millions) 61.8 62.3 62.6 63.0 63.3 63.7 64.0

Unemployment rate (%) 7.6 7.9 8.1 8.3 8.4 8.0 7.7

Mobile penetration per 100 people 130.6 130.6 132.9 134.6 136.0 137.1 137.9

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TABLE OF CONTENTS

Overview 2

Catalyst 2

Summary 2

Key Facts and Geographic Location 11

Key facts 11

Geographical location 12

PESTLE Analysis 13

Summary 13

Political analysis 14

Economic analysis 17

Social analysis 20

Technology analysis 23

Legal analysis 26

Environmental analysis 29

Political Landscape 32

Summary 32

Evolution 32

Structure and policies 35

Outlook 40

Economic Landscape 41

Summary 41

Evolution 41

Structure and policies 42

Performance 44

Monetary situation 51

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Ask the analyst 77

Disclaimer 77

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TABLE OF FIGURES

Figure 1: Map of the UK 12

Figure 2: The UK – political events timeline 34

Figure 3: Key political figures 35

Figure 4: Composition of legislature 37

Figure 5: Historical GDP growth, 1991–2011 42

Figure 6: GDP and GDP growth rate, 2005–15 45

Figure 7: Sector-specific contribution to GDP, 2011 46

Figure 8: Agricultural output (£bn), 2006–11 47

Figure 9: Industrial output (£bn), 2006–11 48

Figure 10: Services sector output (£bn), 2006–11 49

Figure 11: The UK's external trade position, 2007–11 50

Figure 12: Consumer price index and consumer price index-based inflation, 2005–15 52

Figure 13: Unemployment in the UK, 2005–15 53

Figure 14: Major religions in the UK, 2001 56

Figure 15: Carbon dioxide emissions (million metric tonnes) and growth (%), 2005–10 74

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TABLE OF TABLES

Table 1: The UK – key fundamentals 5

Table 2: The UK – key facts 11

Table 3: Analysis of the UK’s political landscape 14

Table 4: Analysis of the UK’s economy 17

Table 5: Analysis of the UK’s social system 20

Table 6: Analysis of the UK’s technology landscape 23

Table 7: Analysis of the UK’s legal landscape 26

Table 8: Analysis of the UK’s environmental landscape 29

Table 9: Comparative performance on receipt of patents, 2003–11 62

Table 10: Year of ratification of fundamental labor rights conventions 68

Table 11: Year of ratification of major international environmental treaties 72

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Key Facts and Geographic Location

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KEY FACTS AND GEOGRAPHIC LOCATION

Key facts

Table 2: The UK – key facts

Country and capital

Full name The United Kingdom of Great Britain and Northern Ireland

Capital city London

Government

Government type Constitutional monarchy

Head of state Queen Elizabeth II

Head of government Prime Minister David Cameron

Population 63.0 million

Currency British pound (GBP)

GDP per capita, adjusted by purchasing power parity $35,900

Internet domain .uk

Demographic details

Life expectancy Total population: 80.17 years

Men: 78.05 years

Women: 82.4 years

Ethnic composition (2001 census) White (92.1%), black (2.0%), Indian (1.8%), Pakistani (1.3%), mixed(1.2%), and others (1.5%)

Major religions (2001 census) Christian (71.6%), Muslim (2.7%), Hindu (1.0%), , other (1.6%), andunspecified (23.1%)

Country area 243,6100 sq km

Language English

Exports Manufactured goods, machinery, fuels, chemicals, food, beverages,tobacco

Imports Manufactured goods, machinery, fuels, foodstuffs

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Key Facts and Geographic Location

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Geographical location

The country is located in Western Europe, between the North Atlantic Ocean and the North Sea, northwest of France.

Figure 1: Map of the UK

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PESTLE Analysis

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PESTLE ANALYSIS

Summary

The UK, being an influential member of the European Union (EU) and one of the largest economies in the world, remains

a significant economic and political force. The relative economic decline experienced by the country throughout most of

the 20th century has been reversed in recent years, with the UK riding out the global downturn relatively well. Its

membership of the United Nations (UN) Security Council, the EU, the North Atlantic Treaty Organization (NATO), and the

G8, along with its continued strong links with its former colonies through the Commonwealth and robust cultural and

security ties with the US, place it in a unique position within the global community.

However, with unprecedented strain on the Euro-American alliance in response to the Iraq war, the UK’s efforts to keep a

foot in both the European and American camps are proving increasingly challenging. In May 2010, David Cameron took

over the role of prime minister from Gordon Brown. Economic conditions worsened in 2011, with GDP contracting in two

consecutive quarters ending March 2012, resulting in recession. The problems were compounded by a mounting fiscal

deficit and increasing unemployment rate, which posed challenges to the present Conservative government. Although

the previous Labour administration introduced new welfare measures to tide over the economic crisis, their long-term

implications are expected to be serious, with increased government borrowing likely. The present government headed

has introduced measures to restructure the National Health Service (NHS) to reduce cost and offer more options to

patients.

The government’s policies in the technology sectors are proving to be obstacles in two ways, with strict regulatory

policies on indigenous innovations and liberal policies in niche sectors giving up competitive advantage. However,

legislation affecting businesses is on the whole welcoming and will help in attracting foreign direct investment (FDI) into

the country. In terms of environmental impact, the UK still needs to improve on its emission levels, with CO2 emissions ofaround 538 million metric tonnes in 2010.

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PESTLE Analysis

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Political analysis

Overview

The UK’s political landscape is deeply entrenched in the ethos of democracy and the stable system of governance

ensures that there is a level of consistency in its policies. Following the world wars, the UK developed into a major global

force, largely on the back of its rapid economic development. The US remains a close ally of the UK, with the two

supporting deeper engagement with emerging economies such as China and India. However, it continues to face terror

threats from groups such as al-Qaeda. Finally, the Scottish National Party's (SNP’s) victory in local elections in Scotland

is likely to result in a referendum on Scottish independence in 2014.

Table 3: Analysis of the UK’s political landscape

Current strengths Current challenges

Strong democratic setup and effective governance

Strong position in global politics

Tensions in the ruling coalition and falling popularity of thegovernment

Future prospects Future risks

NHS reforms

Stronger ties with emerging economies

Terrorism

The SNP may push for independence

Current strengths

Strong democratic setup and effective governance

The UK adheres to a democratic, parliamentary system of governance known as the Westminster system. The structure

of the administration ensures that there is an adequate separation of powers between the executive branch, led by the

prime minister, the bicameral legislature, and the judiciary, as well as ensuring that there is a system of checks and

balances in place. As the World Bank's governance indicators illustrate, the UK is one of the most successful nations in

terms of the application of the rule of law, control of corruption, government effectiveness, and regulatory quality.

Furthermore, according to the governance indicators for 2010, the country had a high percentile rank of 92.3 for

government effectiveness.

Strong position in global politics

After the two world wars, the UK rebuilt itself into a prosperous and modern nation. As a permanent member of the UN

Security Council, the G8, and NATO, and as a result of the legacy of the British Empire, the UK is a major player in

global politics. The UK also has a large influence in multinational organizations such as the International Monetary Fund

(IMF) and the World Bank. Successive decades of solid economic growth, initially built on the foundations of the

industrial sector and now largely driven by the services industry, have ensured that the country’s political might is backed

by its firm establishment as a global business hub and economic power.

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PESTLE Analysis

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Current challenges

Tensions in the ruling coalition and falling popularity of the government

The tensions between the ruling coalition of the Conservatives and the Liberal Democrats are bound to rise after the

Liberal Democrats took a drubbing in local elections in the first half of 2011. Although the leaders of both parties have

signed a five-year program to reduce the budget deficit, the Liberal Democrats are expected to push to protect their own

interests. Tensions between pro Europe Liberal Democrats and Conservatives who have a skeptical outlook on

integration are expected to continue to plague British politics. The government has a strong majority in parliament;

however, the diverse opinion of the coalition parties regarding strong government austerity measures, the slashing of the

top income tax rate, a pensions cap, and the worsening eurozone crisis have put a strain on relations. As per opinion

polls conducted in April 2012, the popularity of the Conservatives has fallen while support for the opposition Labour Party

has inched up. With the country in recession, the chance of a fallout between the coalition partners has increased.

Future prospects

NHS reforms

Looking at the country's burgeoning healthcare costs, the government has been trying to bring in reforms to the NHS. In

April 2012, the reforms bill on health and social care was finally passed. The main focus of the bill is to curtail burgeoning

costs against the backdrop of increasing expenditure due to an aging population. The government argues that the

reforms will reduce costs by 45% while giving more choices to the patient. The bill has been passed; however, it is not

clear if it can bring any significant changes to the strained NHS.

Stronger ties with emerging economies

The rapid economic development of certain developing countries has made it imperative for the UK to cooperate with

them for mutual benefit or risk its economy suffering heavy losses at the hands of new, low cost centers of production.

The UK extended its support to India in its campaign to become a permanent member of the UN Security Council in

November 2010. The support came at a meeting between Prime Minister Manmohan Singh and his UK counterpart

David Cameron on the margins of the G20 summit.

The UK and India had shared a strategic partnership since 2004, which was converted into an enhanced partnership

during Cameron's visit in July 2010. Such changes in relationships between countries are representative of the changing

global political and economic landscape. Furthermore, the UK filed a request with the EU in March 2010 to set up bigger

and stronger political embassies in New Delhi, Beijing, and Islamabad to strengthen its relations with Asia. The country

has also placed emphasis on developing stronger relations with Russia and South Africa.

Future risks

Terrorism

The heavy involvement of the UK in the war on terror in Afghanistan and Iraq seems to have had some negative

consequences, with the threat of terrorism being taken more seriously than ever before. The July 7, 2005 bombings in

London brought the capital to a standstill, and the public threats issued by various Islamic fundamentalist groups such as

al-Qaeda are a clear indication of the constant dangers that they pose. Foiled terrorist attacks have also served to put

the government and the public on edge.

In March 2010, the UK's intelligence and security service said that terror threats linked to Pakistan remained the primary

area of concern. Additionally, according to a security committee headed by Labour MP Kim Howells, about 15% of the

security services' work is now focused on East Africa and Somalia in particular, as there are an increasing number of

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PESTLE Analysis

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extremists visiting the area for terrorist training purposes. The committee said the UK faced a range of covert threats to

its security, and identified al-Qaeda as presenting the most significant threat. The US renewed its terrorism alert for the

UK in January 2011 due to the continuing high threat level. The US state department placed England, Scotland, Wales,and Northern Ireland in its terrorism alert due to the potential threat from terrorists to public transportation systems,

aviation, and other travel infrastructure. This expired in April 2011, but the UK remains under threat from terrorism.

Moreover, with the city of London hosting the Olympics in 2012, safety and security will be a major issue.

The SNP may push for independence

The SNP won a majority in the Scottish parliament in elections held in May 2011. As a result of this, it is thought that the

party may go in for a referendum on independence in 2014, and there is a high possibility of devolution. Such a

referendum would not be legally binding, but the government would equally be unable to overlook it. Nevertheless, there

are major impediments to Scotland breaking away from the UK, including the division of debt and oil reserves. In the

near term, the SNP is already pushing for greater financial independence; however, its push for full independence from

the UK is likely to be opposed by all other political parties including Labor, the Liberal Democrats, and the Conservatives.

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PESTLE Analysis

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Economic analysis

Overview

Real GDP in the UK grew by 0.8% in 2011.The UK economy slipped into recession after two consecutive quarters of

contraction. The economy contracted by 0.3% in the fourth quarter of 2011 and 0.2% in the first quarter of 2012 due to a

reduction in construction, mining, and manufacturing output. The revival of the UK economy slowed down significantly in

the face of austerity measures imposed by the government and due to the turmoil in sovereign debt markets. Fears

about whether some members of the eurozone will be able to pay their debts and weak growth have negatively

reinforced each other in a crisis of confidence. The negative development of the euro crisis is holding back investment

and consumption and leading to low growth in the UK. Monetary strain on households due to negative prospects for

earnings and house price growth, combined with high household debt levels and uncertain employment forecast, mean

consumer spending will be constrained. However, the low inflation of around 2.4% in 2012 forecast by MarketLine will

ease pressure on household incomes that constrained growth in late 2011 and early 2012. The risks to UK economic

growth remain significant and biased to the downside in the short term. As per MarketLine forecasts, the economy will

grow at a weak rate of 0.6% in 2012. At the same time, there is also some upside potential, particularly if the crisis in the

eurozone reaches an appropriate and satisfactory conclusion.

Table 4: Analysis of the UK’s economy


Highly developed economy and favorable investment climate

Excellent infrastructure for conducting business

Highly competitive economy

Rising government debt

Budget deficit


Corporate tax reduction

Eased inflationary pressure

Recessionary phase may continue

General anti-avoidance rule implementation

High unemployment rate

Current strengths

Highly developed economy and favorable investment climate

The UK is the second largest economy in the EU and is one of the strongest in terms of social welfare, standards of

living, unemployment, interest rates, inflation, and inward and outward foreign investment. The UK has the seventh

highest level of GDP per capita in the EU in terms of purchasing power parity, after Luxembourg, Ireland, the

Netherlands, Denmark, Austria, and Finland, and it has the third highest level in the G8, after the US and Canada.

According to the World Bank's Doing Business indicators for 2012, the UK is the seventh best country in the world in

which to do business. A number of changes have been made to the UK's controlled foreign company (CFC) rules, while

favorable changes to Treasury consent rules have also been made. These changes, which are in line with EU

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PESTLE Analysis

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requirements, are expected to enhance the competitiveness of the UK economy.

Excellent infrastructure for conducting business

The importance of transportation infrastructure in the UK’s economic performance is an accepted fact. The available data

on transportation infrastructure illustrate that the country is very well-developed in this regard. The UK has nine ports and

terminals, 11 heliports, and 471 airports, of which 334 have paved runways. The UK is also well-connected through its

network of roads, which cover over 388,000km; railways, which reach across more than 16,500km; and waterways,

which total around 3,200km. Moreover the UK has a favorable business environment in terms of a deep pool of

expertise, a central time zone perfectly positioned between the east and the west, a robust flexible regulatory

environment to start business, a doorway to the rest of the EU, and in London one of the leading world financial markets.

Highly competitive economy

The UK is an open and competitive economy, is still relatively free of regulation, and boasts political and economic

institutions that are viewed favorably by international businesspeople. The country’s science base is strong and is being

strengthened further, and is receptive to new ideas and knowledge from abroad through inward investment and

international collaboration in research and development (R&D). The UK’s strength lies in knowledge economy sectors

such as software and pharmaceuticals. According to the World Economic Forum’s Global Competitiveness Report 2011–

12, the UK moved up one place and ranked 12th with a score of 5.39 out of 7.00, up from 5.25 in 2010.

Current challenges

Rising government debt

UK government debt has constantly been on the rise since 2001, and has reached an alarming figure of around 86.5% of

GDP in 2011 as per MarketLine estimates. For the first time the UK government debt reached £1.26tn ($1.97tn). It would

be difficult for the government to service a ballooning debt against the backdrop of a contracting economy. The fiscal

situation is set to worsen as it would be difficult for the government to go ahead with the deficit reduction plans as the

economy is passing through a recessionary phase. Rising government debt will be a challenge to the UK economy in the

medium term.

Budget deficit

The financial crisis of 2007–08 pushed the overall fiscal deficit to 11.74% of GDP in 2009–10, a post-war record and one

of the highest deficits in the world. With public finances on a clearly unsustainable path, the June 2010 budget laid out a

five-year adjustment plan that would cut the deficit to 1.5% of GDP by 2015–16. Progress was made in 2010–11, with the

deficit dipping to 10.65% of GDP, and further deficit reduction to 8% of GDP in the medium term. The coalition

government led by David Cameron has a fiscal mandate that sets a primary target of eliminating the structural budget

deficit during 2016–17 and a supplementary target that requires public sector net debt as a percentage of GDP to fall by

2015–16. The fiscal mandate is expected to put government debt on a sustainable path and avoid the kind of sovereign

debt crises seen in several eurozone economies; however, the future of public finances will strongly depend on the

performance of the economy.

Future prospects

Corporate tax reduction

The main tax change was the reduction of corporate tax to 24% from April 1, 2012, which is to gradually be brought down

to 22% from April 1, 2014. The 24% rate means the UK sits 15th in the EU league table of corporation tax. This relatively

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PESTLE Analysis

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low rate of corporate tax compared with other industrial economies is coupled with a lower effective tax rate of 10% to be

applied to patented technology. The purpose is to encourage the development of innovation in the UK. This rate

reduction is a welcome change for businesses, as a greater share of their profits would be reinvested to enable theircompanies to expand. The policy announced at the budget would give confidence to large businesses to invest in the

UK.

Eased inflationary pressure

The UK registered high inflation 4.5% in 2011. However, inflation fell steadily through the final quarter of 2011 and into

2012. The consumer price index (CPI) declined from a high of 5.2% in September 2011 to 3.4% in February 2012, driven

primarily by downward pressures on the prices of petrol and gas, but it increased slightly to 3.5% in March 2012 on

account of the increased cost of food, clothing, and recreation and culture. MarketLine forecasts suggest that inflation will

fall back toward the 2% CPI target in 2012 as energy and food prices subside somewhat from earlier very high levels.

Weakening demand due to economic uncertainty and continuing surplus capacity in the economy will keep a check on

inflationary pressures throughout the year.

Future risks

Recessionary phase may continue

The government maintained that it will continue with austerity measures to bring down the fiscal deficit in spite of the

economy being in its first double dip-recession since 1972. The huge cut in public spending led to a sharp contraction in

the construction sector, which had contributed majorly to the economic revival experienced since 2009. Against this

backdrop, the path to recovery looks sl im, as there is no possibility of any sort of fiscal stimulus from the government side

to boost the economy. With the majority of the austerity measures yet to be implemented, recovery from the recession

looks unlikely in the short term.

General anti-avoidance rule implementation

The proposed introduction of a general anti-avoidance rule, which will apply from April 2013, is primarily aimed at

preventing tax avoidance. However, many grey areas remain in the rule regarding the extent of the power of the tax

authorities, the type of transactions that would lead to the trigger of the rule, the evidence needed for a claim to be

subject of tax relief, and whether businesses can appeal against it. These uncertainties may deter investments and

capital inflows into the UK.

High unemployment rate

The unemployment figure for 2011 was around 8.1%, up from 7.9% in 2010. Unemployment has been rising since June

2010 as public sector job cuts have outpaced private sector gains, reversing the fairly optimistic labor market trends up to

spring 2011. Unemployment continued to go up in the last quarter of 2011, but fell 0.1% between December 2011 and

February 2012, reaching 8.3% of the labor force according to the International Labour Organization measure, with a total

of 2.67 million people being unemployed between November 2011 and January 2012 . The claimant count measure of

unemployment, which is timelier but based on a narrower set of people, stood at 1.61 million in March 2012, up from 1.45

million in 2011. As per MarketLine forecasts, unemployment figures for 2012 will increase to around 8.3% with an upward

bias through 2013.

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Social analysis

Overview

Residents of the UK enjoy a standard of living comparable with those in other developed countries. This is primarily due

to decades of solid economic growth, the benefits of which have been funneled into the development of solid social

infrastructure. The systems of education and healthcare delivery rank among those offered by the most developed

countries. Income inequality and child poverty are pressing social issues that the government has recognized and

attempted to tackle. The government has stated its objective of eradicating child poverty by 2020 and has tried to even

out the benefits of economic development through redistributive measures that are aimed particularly at pensioners and

single parents supporting children. Within the vast social welfare system, a number of organizations exist to ensure that

none of the disadvantaged are left out of the social security net.

The government is addressing the challenges posed by an aging population through innovative measures such as

"managed migration" and reforms to the system of social welfare, particularly healthcare and pensions. The

establishment of the single European market could be a boon that brings in a number of younger working age people

who will help to offset the issues posed by an aging population.

Table 5: Analysis of the UK’s social system


High standard of living

Education system

Healthcare services

Income inequality and child poverty

Relatively high dependency ratio


System of "managed migration"

Measures to increase simplicity and transparency

Challenges of an aging population

Rising healthcare costs

Current strengths

High standard of living

A report released by the UN declared that for the first time in more than 100 years the standard of living in the UK has

outstripped that of the US. Furthermore, there is no doubt that the standard of living experienced by residents of the UK

is comparable even with that enjoyed by people living in Scandinavian countries. According to the Human Development

Index 2011 report published by the UN Development Programme, the UK ranked 28th in terms of human development.

Strong education system

The educational infrastructure in the UK is considered to be of very high quality and it has historically attracted students

from all parts of the globe. The nation’s tradition of education dates back hundreds of years and is constantly evolving.

The UK’s qualifications are both recognized and respected throughout the world. The UK has around 170 universities

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and higher education institutes, including three universities in the world's top 10 and one of the top five according to a

study by the Times Higher Education magazine in 2011. The ranking was based on indicators such as research quality,

graduate employability, teaching, and how international the faculties and student bodies are. Although the UK has notbeen doing that well in terms of the number of graduate students it produces, it is still the case that it has some of the top

universities in the world.

Healthcare services

The UK healthcare system is one of the most successful social ventures in the world. This success can be attributed to

the presence of an advanced healthcare infrastructure and the involvement of the private sector. Public expenditure on

health in the UK has traditionally been very high in order to be able to maintain the quality of the service provided. All

residents of the UK, residents of countries that belong to the European Economic Area, and residents of countries that

have bilateral healthcare agreements with the UK are eligible for NHS care. The system has established itself as one of

the best in the world.

Current challenges

Income inequality and child poverty

The government has publicly declared its goal of eliminating child poverty by 2020. Despite some progress, it still has

much to do if it is to meet its target. According to Oxfam estimates, in 2010 nearly 13 million people l ived in poverty in the

UK, which equates to one out of every five Britons. Furthermore, it has been seen that over 3.8 million children live in

poverty in the UK, mainly because of factors such as family breakdown and poor education. The government has to do a

lot more to tackle poverty, especially poverty among children, to achieve its goal by 2020.

Relatively high dependency ratio

In the UK, people of working age (between the ages of 15 and 64) accounted for 66.2% of the total population in 2011,

while 17.3% of the population were 0–14 years old and 16.5% were 65 and over. However, the proportion falling into this

latter age group is set to increase. As the dependency ratio rises, it becomes more difficult to maintain the standard of

living of the dependent population, because the shrinking workforce is put under increasing strain. The government faces

the challenge of balancing the social welfare system to account for these future developments. Reforms need to take

place soon (especially in the pension and healthcare systems) to deal with the excessive burden that is bound to be

placed on them in the near future.

Future prospects

System of "managed migration"

The government’s policy of "managed migration" could prove crucial in helping to offset the effects of the aging

population on the economy. The speed at which the ratio of children and those aged over 65 to the working age

population is rising is of concern to policymakers. However, to counter the increase in this ratio, the prudent management

of immigration levels could be used as a tool to ensure that the UK’s dependent population will have an adequate base of

workers to support it. In addition, the free movement of people and labor in the single European market should be used

to help offset the issues that are being caused by the rapidly aging population.

Measures to increase simplicity and transparency

The coalition government headed by David Cameron has announced a host of measures to simplify benefits, impose

time limits on those who are able to work, and to encourage people on unemployment benefits to find work. People who

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need support for a short time have a wide choice in terms of housing subsidies, tax credits, and direct welfare payments.

Furthermore, those who do move from welfare to gainful employment face tax rates that go up to 95%. A wide array of

programs such as these increases the chances of fraud or that the multiple programs will be taken advantage of.The work and pensions secretary Iain Duncan Smith has come out with a single "universal credit" payment that would be

capped at the prevailing median income of those who do work, which is currently around £25,000 ($39,500) a year. As

earnings increase with each passing year, the credit would fall at a uniform rate. The government hopes that these

measures will bring more simplicity and transparency into the system and provide incentives for people on welfare to look

for work.

Future risks

Challenges of an aging population

One of the biggest challenges that an aging population brings is finding a way to modify pension schemes so that they

remain stable despite the heavy burden that is going to be placed on them. Due to an aging population, pension fund

deficits accumulated to £54bn ($84.6bn) in 2010–11 across the 101 councils of the UK. The UK Treasury estimated the

extra cost from state and public sector pension stands at £1.13tn ($1.77tn). These funds have total liabilities of £186.6bn

($292.6bn) against assets valued at £132.4bn ($207.6bn). As per an IMF report in April 2012, the UK could face an

additional pension cost of £800bn ($1.2tn) by 2050 due to higher life expectancy and an ever-increasing aging

population. The previous Labour government made a concerted effort to bring about fundamental changes in the UK’s

pension system to make it more adaptable to future challenges while ensuring that there is as little disruption to the

current system as possible. By and large, the government has had the support of opposition parties in this regard.

One fundamental change to the system is the raising of the minimum age at which Britons can claim pensions from 65 to

68 years over the next three decades. The number of years in which women will have to make pension contributions to

the state pension fund in order to be able to claim a full state pension will be reduced massively, from 44 years to 30.

Another positive to come out of the changes is that pension payments will be increased in line with average earnings

rather than inflation, which means that they are likely to be higher.

Rising healthcare costs

Healthcare costs are rising at an alarming rate in the UK and could become unsustainable in the coming 10 years as per

a Standard & Poor's report in January 2012. According to MarketLine in 2010, total healthcare expenditure stands at

10.81% of GDP. Healthcare costs will be one of the biggest expenditures for the UK government in the coming decades

and could become unsustainable if the government does not take immediate action.

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Technology analysis

Overview

The government has been successful in steering the progress of R&D in the right direction. Serious efforts have been

taken to boost competitiveness, as technological developments will help the UK to stand out in the face of increasing

competition from emerging economies. According to the World Bank, in 2010 the UK’s gross domestic expenditure on

R&D was 1.82% of GDP, up from 1.87% in 2009. R&D and IT are vital to a growing economy, and the dearth of

personnel could pose a serious challenge to the country's attempts to maintain its competitiveness in these areas. As the

UK becomes increasingly open to the movement of goods, services, capital, and people, however, it may lose its

competitive advantage as technology in which it specializes begins to be disseminated.

Table 6: Analysis of the UK’s technology landscape


Renowned scientific expertise

Effective intellectual property rights

Lack of skilled personnel

Regulatory control over indigenous innovations


Scope for new industries

Outsourced R&D can improve focus on core areas

Declining patent applications by residents

Current strengths

Renowned scientific expertise

The UK is renowned for the quality of its R&D and is consistently building on its strengths in science and innovation. The

country has also traditionally been keen to encourage R&D both in the public and private sectors. The government has

stated its objective of raising the ratio between R&D across the economy and GDP (known as the level of knowledge

intensity) to about 2.5% by 2014 from its previous level of 1.85% in 2004. According to the World Bank, in 2010 the UK’s

gross domestic expenditure on R&D was 1.82% of GDP. In 2009, expenditure on R&D was 1.87% of GDP, up from

1.77% in 2008.

There are various R&D initiatives underway in the UK, including the Research Councils UK Energy Programme, several

Department of Trade and Industry capital grant demonstration programs, and the Carbon Trust, which supports

technology development across a wide range of technologies. The UK government is also matching up to £500m from

the private sector to create an Energy Technologies Institute to carry out R&D to identify secure, reliable, and affordable

long-term low carbon energy technologies. According to the European Innovation Scoreboard 2011, the UK ranked sixth

in innovation performance.

Effective intellectual property rights

As the UK is at the forefront of innovation and R&D globally, it has concurrently developed its legislation with regards to

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the protection of intellectual property rights (IPR). The UK Intellectual Property Office (UK-IPO) is responsible for granting

IPR in the country, including trademarks, designs, patents, and copyrights. Although the UK does not have a general

statutory register of copyright, the UK-IPO is responsible for maintaining registers of trademarks, designs, and patents.Legislation pertaining to IPR protection is frequently passed and amended in accordance with developments in the

industry.

Current challenges

Lack of skilled personnel

At the moment, despite the quality of educational and research institutions within the UK, there is a shortage of

manpower in the R&D field. Another factor behind this is the attractive opportunities available outside of research within

the UK. Moreover, technicians in R&D (per million people) have constantly been on a declining trend, dropping from

907.6 in 2008 to 837.0 in 2010. Technicians in R&D and equivalent staff are people whose main tasks require technical

knowledge and experience in engineering, physical and life sciences (technicians), or social sciences and humanities(equivalent staff). They participate in R&D by performing scientific and technical tasks involving the application of

concepts and operational methods, normally under the supervision of researchers. The decline in the working age

population has had an impact on the progress of R&D within the country.

The UK has also witnessed a serious shortfall in IT and telecoms talent, as the number of graduates with IT-related

degrees has declined substantially in recent years. Both R&D and IT are vital to a growing economy, and the dearth of

personnel could pose a serious challenge to the country's attempts to maintain its competitiveness in these areas.

Regulatory control over indigenous innovations

The authorities face the unenviable challenge of striking a balance between keeping the distribution of indigenous

technology profitable and maintaining a competitive advantage. For example, the UK is a key player in the defenseindustry. However, even if companies within this field are able to consistently produce new and innovative products, they

might not be allowed to profit as much as they could out of doing so, as the dispersion of this technology is sensitive.

Therefore, the government must closely monitor the developments of such industries and decide on its export policy with

regards to technology.

Future prospects

Scope for new industries

As the UK is at the forefront of new technologies, there are good opportunities for the development of relatively nascent

fields such as nanotechnology, space research and space tourism, and alternative energies. The government has put in

place a number of incentives to make investment in such industries an attractive proposition. There is also scope forpublic-private partnerships, and tax concessions are available. While such ventures are generally capital-intensive and

returns are not always assured, the prospects are extremely bright for companies that do manage to make a

breakthrough, as is the case with the more traditional technology-intensive industries such as pharmaceuticals and

telecommunications.

Outsourced R&D can improve focus on core areas

The trend of outsourcing some R&D activities to the low cost emerging markets has been quite common for some time.

This is of particular importance in the pharmaceuticals industry, where most of the major companies have established

R&D centers in foreign countries, particularly in Eastern Europe and Asian territories such as India, China, Malaysia, and

Indonesia. The main advantage that these countries have is that they can provide labor at a cheaper rate, while the

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quality of output is more or less the same. Although it might appear to be a problem in the short term, this may be a boon

in the long run considering the fact that it might allow companies to focus on core areas and provide greater scope for

new innovative ventures.

Future risks

Declining patent applications by residents

As per World Bank data, the number of patent filings by UK residents fell from 17,883 in 2005 to 15,490 in 2010. Patent

applications are worldwide patent applications filed through the Patent Cooperation Treaty procedure or with a national

patent office for exclusive rights for an invention (a product or process that provides a new way of doing something or

offers a new technical solution to a problem). A patent provides protection for the invention to the owner of the patent for

a limited period, generally 20 years. This declining trend may hamper the UK's future technological competitiveness in

the international market. According to the Innovation Union Scoreboard for 2011, the UK is categorized as an innovation

follower and slow grower, while Germany is an innovation leader and moderate grower.

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Legal analysis

Overview

The legal system in the UK is organized, transparent, and efficient. This makes for an environment that is conducive to

business, as legislation is passed in a practical manner, keeping all stakeholders in mind. At the same time, this

legislation is enforced in a fair manner by a number of agencies set up for monitoring specific areas. The judicial system

has a good reputation globally, although public perception is not as favorable within the UK. In addition, the judicial

system has been criticized for its archaic structure.

Changes are being implemented in order to make the judiciary more efficient. Constitutional reforms have been put in

place to establish a Supreme Court, which started functioning in 2009.

The tax system in the UK is competitive globally, although in the face of increasing competition from emerging

economies the country will struggle to maintain this edge.

Table 7: Analysis of the UK’s legal landscape


Legislation conducive to business

Effective enforcement of legislation

Increase in VAT

Tax evasion

Finding balance between traditional liberties and increased terrorthreat

Future prospects Future risks Tax reforms

Other reforms on CFCs and enterprise management incentiveschemes

Judicial reforms

Lack of incentives to attract FDI

UK regulation not in sync with EU

Current strengths

Legislation conducive to business

Legislation that affects the business environment of the UK has been created and amended in such a way that the

interests of investors are always given priority. This is evident from the fact that domestic and foreign players have

shown a continuous commitment toward investing in the country. The majority of multinational corporations based

outside Europe usually prefer to control their European operations from the UK. According to the World Bank Doing

business indicators for 2012, the UK ranked seventh out of 183 countries for ease of doing business. In ease of getting

credit, it placed first; this indicates that any company wishing to enter the UK has fewer hurdles to face when procuring

the required capital, both in the form of working capital and long-term capital requirements. For starting a business it

placed 19th, in resolving insolvency it placed sixth, protecting investors 10th, and trading across borders 13th. The

government has made continuous efforts to ensure that the overall environment is conducive to business.

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Effective enforcement of legislation

It is important for companies to produce effective legislation, but it is also equally important for them to successfully

enforce it. According to the World Bank's Doing Business indicators for 2012, the UK ranked 21st out of 183 countries in

terms of enforcement of contracts. The number of days in the enforcement of contracts is 399, compared to the

Organisation of Economic Co-operation and Development (OECD) average of 518 days. Moreover, the number of

procedures in forcing a contract is 28 days, which is lower than the OECD average of 31 days. As per world governance

indicators for 2011 the UK received a percentile rank of 94.8 and an impressive score of +1.77 out of +2.50, up from

+1.55 in 2005, which reflects an improvement in terms of the enforcement of law.

Current challenges

Increase in VAT

In January 2011, the British government implemented a rise in VAT of 2.5 percentage points to 20%. Furthermore,

capital gains tax was increased to 28% from 18%, and the top marginal income tax rate remains at 50%. The British

Retail Consortium, a trade body that represents around 80–90% of stores, had predicted that a VAT rise from 17.5% to

20% would cut consumer spending by £3.6bn during 2011–14. This move is also expected to increase prices, cut

demand for goods and services, and bring down companies' profits. The additional taxes along with high marginal tax

rates are expected to increase the burden on both individuals and businesses in the country.

Tax evasion

It has been estimated that tax evasion and avoidance costs the UK at least £35bn annually. This is nearly 9% of tax

revenue. Others estimate the number to be substantially higher. The efficient collection of this revenue would reduce the

demand to slash social and welfare expenditure, which hurts the poorest in communities. Treasury figures also advocate

that those who are avoiding paying are primarily wealthy individuals and corporations, so recouping this money would notharm the most vulnerable. Against this backdrop the government has brought in general anti-avoidance rules to make tax

evasion more difficult in the country.

Finding balance between traditional liberties and increased terror threat

The government faces the challenge of maintaining a traditionally liberal society while at the same time adding to and

amending legislation that will help it deal with terrorism. For example, the House of Commons has passed a law that

bans the "glorification" of terrorism and gives law enforcement agencies special powers to act against websites deemed

inflammatory. While the House of Commons approved the law by a comfortable margin, it was criticized by members of

the House of Lords for restricting freedom of speech. In much the same way, legislation such as the Terrorism Act 2006

and the Prevention of Terrorism Act 2005 garnered its fair share of controversy, not only in political circles but among thegeneral public as well.

Future prospects

Tax reforms

The main tax change for large businesses announced at the budget was the reduction of the corporation tax to 24% with

effect from April 1, 2012, with further reductions planned to bring the rate down to 22% from April 1, 2014. The 24% rate

will make the UK 15th in the EU league table of corporation tax. Smaller businesses with revenues of less than £77,000

will gain from computing tax on profits based on a cash basis (a major accounting method that recognizes revenues and

expenses at the time physical cash is actually received or paid out) with effect from April 1, 2013.

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Other reforms on CFCs and enterprise management incentive schemes

In the recent budget the Chancellor unveiled the particulars of the modernized CFC regime with a goal to simplify the

way multinational corporations do business in the UK and to increase the nation's competitiveness as a global

investment destination. Reforms to the CFC would simplify the way British companies invest overseas, while HM

Revenue & Customs will scrutinize multinational companies to prevent them from diverting profits away from the UK to

low tax jurisdiction regions. The government has also announced reforms to enterprise management incentive schemes

to double an individual’s maximum limit to £250,000. Such schemes are tax advantaged share options intended to assist

small companies that are subject to risk to recruit and retain employees. Moreover, it is a way of compensating

employees for undertaking higher risk by investing their time and skills to help small businesses succeed. Besides this,

further plans are on the cards to perk up the position of capital gains entrepreneurs’ relief (10% tax rate) for individuals

with enterprise management incentive scheme options.

Judicial reforms

In the past, the structure of the judicial system has been criticized by many as being archaic and non-transparent. In

response to this criticism, the Constitutional Reform Act 2005 was passed, laying the foundation for the establishment of

a Supreme Court, which started functioning in October 2009 and took over the responsibility of being the highest court in

the land.

The Supreme Court functions completely autonomously and hears all appeals from England, Northern Ireland, and

Wales, and civil appeals from Scotland. The Supreme Court is the highest court of appeal in the UK. However, the court

will also give effect to directly applicable EU law, and it will interpret domestic law consistently with EU law. The impact of

Supreme Court decisions will extend far beyond the parties involved in any given case, shaping the UK’s society.

Future risks

Lack of incentives to attract FDI

A number of emerging economies have introduced various pioneering schemes in an attempt to attract foreign

investment and provide global investors with an option that is more competitive and innovative than any other. For

example, India, Russia, and China have all introduced various versions of special economic zones, which attract

marquee global investors looking for tax exemptions or tax concessions. Moreover, one trend that may define this

decade is the increasing attractiveness of Germany in the attraction of international investment. Its strong emergence

from recession and European economic leadership is likely to result in Germany emerging as the location most likely to

challenge the UK’s leadership in FDI in the medium term. The UK government will have to bring about changes in its

policies to attract FDI and to compete with BRIC and other emerging economies.

UK regulation not in sync with EU

The UK’s regulatory authorities must consider international reforms in law and must incorporate those changes within the

UK regulatory framework. Being a member of the European community, the UK has not reformed many laws pertaining

to financial services and agriculture insurance as per the directives of the EU. Hence as a result, in spite of being a part

of a single market, the UK’s businesses suffer from high regulatory compliance costs. The government has to take

measures to bring the country’s laws in sync with EU regulations.

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Environmental analysis

Overview

The UK, considered to be one of the strongest players in global politics, has a large role to play in determining future

global policies. Increasingly, world leaders are viewing climate change and sustainable development as global issues

that require efforts to be made internationally, not just by individual countries, and the UK has a major role to play in

convincing other countries to commit to this cause. The government must also ensure that it meets all of the

commitments that it has made in order to send positive signals to other countries.

The UK must effect a greater reduction in emissions of pollutants if long-term environmental protection is its aim.

Although targets have been set through a number of international and internal agreements, the process should be

carried forward. The great challenge lies in balancing economic development with positive progress in the environmental

situation. This will be especially tough in the face of increasing competition from emerging markets.

Table 8: Analysis of the UK’s environmental landscape


Strong global influence

Good track record in implementing policies

High air pollution


Proactive policy toward Kyoto Protocol successor

Carbon budget

Collaboration with US and other countries on clean technology

Balancing environmental protection with economic development

Current strengths

Strong global influence

With its position as an industrialized global power and as a member of the G8, the UK has a leadership role to play in the

global efforts being made toward sustainable development and environmental protection. The UK played a central role in

the recent UN Framework Convention on Climate Change conference in Durban to extend the Kyoto Protocol beyond

2012 while at the same time ensuring that all international parties remain committed to it. The UK, with its close ties to a

number of countries and its influence throughout the Commonwealth, has the ability to help extract commitments from

nations that are currently in the developing phase and therefore are not willing to sacrifice economic development for

environmental gain.

Good track record in implementing policies

The UK has a good track record in achieving a number of its environmental objectives and in expanding its

environmental infrastructure. Multiple targets related to emissions of conventional air pollutants, organic pollutants, and

heavy metals to the quality of drinking and surface water were achieved. The UK has broadened its environmental

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objectives on account of various international commitments, and partly as a response to its goal of sustainable

development. The step by the UK toward integrated pollution control is a major component of environmental

management, although it is only half completed and its scope is sti ll limited to large point sources of pollution. InDecember 2010, the directive on industrial emissions was published in the official journal and will be enforceable into the

country’s law before January 6, 2013. In October 2011, the Energy Act 2011 was passed. The act brings a significant

change in the provision of energy efficiency measures for both homes and businesses to enable and secure low carbon

energy supplies and ensure fair competition in the energy markets. Seven environment-related directives have been

combined into one piece of legislation to improve the framework of the act. The government has stated that it is

committed to the use of market forces, although it is yet to make extensive use of economic instruments as part of its

environmental policy.

Current challenges

High air pollution

The European Commission issued a second and final warning to the UK in June 2010 to clean up its air quality. Air

pollution in London is the highest in the UK and the country as a whole is among the worst. Exhaust fumes and

emissions from factories and power stations around London are the main causes of pollution, and the UK faces a fine of

£300m if it fails to improve its air quality.

In addition to the final warning, the European Commission also asked the UK government to come up with a pragmatic

solution to clean up the air pollution. If the government is unable to come up with any viable solution, it will be referred to

the European Court of Justice. According to the House of Commons environmental audit committee in 2010, particle

pollution is responsible for more than 4,300 premature deaths a year in London at an annual cost of up to £2bn. The

government has to take immediate and decisive steps to control air pollution in the country.

Future prospects

Proactive policy toward Kyoto Protocol successor

The UK played a central role in galvanizing support for extending the Kyoto Protocol beyond 2012. The UK supported

ratification of the Kyoto Protocol second commitment period, and worked to secure a mandate for a comprehensive

legally binding instrument in protocol form by 2015. Indeed, by committing to a second commitment period, the UK

through the EU has championed the next round of negotiations, helping to maintain essential elements that include its

potential long-term viability as a framework. This is a significant step forward in curbing emissions to tackle global climate

change.

Carbon budget

Under the Climate Change Act, the UK government has to report annually to lawmakers on its progress in meeting its

carbon budgets. According to Chris Huhne, the secretary of state for energy and climate change, the UK will endeavor to

reduce its emissions of greenhouse gases by 50% compared with 1990 levels by 2025. The government has set an

overall target of an 80% reduction in emissions of the pollutants compared with 1990 levels by 2050. The goal of a 50%

reduction in greenhouse gases from 1990 levels by 2025 is part of the fourth carbon budget under the Climate Change

Act, which was approved by the former Labour government in 2008.

Under the Kyoto Protocol, the UK has to cut its emissions by 12.5% compared with 1990 levels by 2012. On a Kyoto

basis, the country’s emissions were 19.4% below 1990 levels in 2009 without emissions trading or 22.0% lower including

emissions trading. So far, the UK has made good progress. Counting all the greenhouse gases covered by the Kyoto

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Protocol, the country's emissions fell by 25.2% between 1990 and 2010, which is substantially more than the 12.5%

reduction required under Kyoto by 2012. The UK's reduction also compares well to cuts achieved in other countries.

Furthermore, the government has started a new mandatory scheme for large public and private sector organizations toboost energy efficiency and reduce carbon emissions. The Carbon Reduction Commitment scheme requires

organizations such as supermarkets, hotels, hospitals, local authorities, and central government departments to take

part, and it is expected to save around £1bn a year by 2020 through cost-effective energy efficiency measures.

Collaboration with US and other countries on clean technology

In May 2012, the UK made a pact with the US to develop floating wind turbines. This would help the UK to exploit high

speed wind power over the deep sea. The UK has one third of the European continent’s wind potential, and collaboration

with the US would help in developing the technology needed to harness such vast wind power. The countries also signed

a memorandum of understanding to work together on other new technologies for power generation, energy efficiency,

and transmission. Moreover, in April 2012 the UK hosted the third “clean energy ministerial,” where 23 countriesparticipated to discuss development and measure progress on clean technologies. All of these measures will help the UK

develop clean technologies for the future.

Future risks

Balancing environmental protection with economic development

The dilemma of striking a balance between economic development and protecting the environment is one that will remain

an issue for the foreseeable future. While economic development and concurrent technological development have some

positive influences on the environment, they also have overwhelming detrimental effects. In the UK, the relative decline

of the industrial sector has meant that there is less pressure on the environment, although even the transition to a

services-driven economy has not erased the harmful impact that overall economic development is having on the planet.However, in May 2012, former cabinet minister Chris Huhne warned that the UK’s economic growth will not be

sustainable unless the government focuses on “green growth.” Huhne added that the continuing debate to choose

between environmental protection and economic development is not necessary, and that the government has to take into

account environmental issues in growth strategies.

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Political Landscape

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POLITICAL LANDSCAPE

Summary

The UK has strong democratic traditions. There is great respect for human rights and civil liberties and, by and large,

public sector-related activities are carried out in a transparent and accountable manner. The system of governance in the

UK has developed from a monarchy into a democratic parliamentary system of governance known as the Westminster

system. The legislative, executive, and judicial functions are entrusted to separate bodies. Executive authority is vested

in the cabinet, led by the prime minister, while legislative authority is vested in a bicameral parliament and judicial

authority is vested in a system of courts. Neither of these institutions has absolute authority over the other, and there is

an adequate system of checks and balances in place. The monarch, Queen Elizabeth II, is the head of state, but this

position is largely ceremonial.

The UK emerged from the world wars as a dominant, industrialized nation, largely on the back of continuous economicdevelopment. As a result, the UK became a major force in global politics as a permanent member of the United Nations

(UN) Security Council and the North Atlantic Treaty Organization (NATO) and an important member of the European

Union (EU). The UK has distanced itself from complete European integration, but at the same time the government has

tried to keep itself involved in the EU's international commitments. The country was criticized for its support of the US-led

war on terror in Afghanistan and Iraq.

In May 2010, elections to the House of Commons brought about an historic change in the political composition of the UK.

The Conservative Party headed by David Cameron won the election with 36.1% of the vote, claiming 305 seats out of the

650 available, and went on to form the UK's first coalition government since World War II.

Evolution

Pre-1950s

Early medieval Britain consisted of a number of small kingdoms, which by 1000 had formed into the kingdoms of England

and Scotland. The King of Scotland inherited the English throne in 1603 and acted as sole ruler over the two territories.

These kingdoms were combined to form the Kingdom of Great Britain in 1707. In 1801, the Kingdom of Great Britain

merged with the Kingdom of Ireland to form the United Kingdom of Great Britain and Ireland, which became a dominant

power in the 19th century (it would later become the United Kingdom of Great Britain and Northern Ireland after most of

the latter country seceded in 1927).

At the height of its powers, the UK's empire covered around a quarter of the earth’s surface. However, the nation

suffered great losses during the two world wars in the first half of the 20th century. After World War II ended, the Labour

Party came into power and established a welfare system. The UK became a permanent member of the UN Security

Council and a founder member of NATO. The end of World War II also heralded the start of decolonization, whereby a

number of the UK’s colonies gained independence.

1950–90

In 1961, the UK’s application to join the European Economic Community (EEC) was opposed by French president

Charles de Gaulle, although the country eventually joined in 1973 despite strikes across the country. The late 1960s saw

the start of intense violent conflicts in Northern Ireland between elements of the unionist community and the nationalist

community. Apart from the dispute between the two parties over the status of Northern Ireland within the UK, the minority

nationalist community (primarily Roman Catholic) resented the treatment they received from the majority unionist

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community (primarily Protestant), while the unionists opposed the dominance of the nationalists.

The Conservatives came to power in 1979, led by Prime Minister Margaret Thatcher. In 1982, the UK sent special forces

teams to the Falkland Islands (an archipelago located off the coast of South America) after they were invaded byArgentina, successfully regaining control over the territory. Under Thatcher, economic reforms took place with the

introduction of free market policies and the privatization of various state enterprises. Thatcher was re-elected twice, in

1983 and in 1987, but resigned in 1990 after facing a challenge for the leadership of the Conservative Party. John Major

was then named prime minister.

1991–2011

In 1991, the UK, as one of the US’s allies, helped liberate Kuwait from Iraqi occupation. The Northern Ireland peace

process received a boost in 1993 when the UK government issued a joint peace proposal with the Irish government.

Eventually, the Belfast Agreement in 1998 brought an end to the conflict in Northern Ireland. In recent times, there has

been a significant devolution of powers from the central government to various sub-national entities. The devolvedsystem of government is different from a federal system of government in that, under the doctrine of parliamentary

sovereignty, devolution is in theory reversible and sub-national entities are subordinate to the UK parliament.

In 1997, the Labour Party, led by Tony Blair, emerged with a landslide victory over the Conservatives. Blair’s party was

subsequently re-elected twice, in 2001 and again in 2005, despite the party’s policy of staunch support for the war on

terror in Iraq and Afghanistan. In 2007, Gordon Brown succeeded Tony Blair as both the head of the Labour Party and

the prime minister.

In June 2009, the governing Labour Party lost the European elections, ending in third position with only 15.7% of the

vote, while the Conservative Party received 27.7%. In the May 2010 elections to the House of Commons, the

Conservative Party won with a 36.1% share of the vote, winning 305 seats. The Conservative leader David Cameron

subsequently went on to form the UK’s first coalition government since World War II in partnership with the Liberal

Democrats. In October 2010, the coalition government announced large-scale public spending cuts to reduce the

burgeoning budget deficit. The spending cuts included an average 19% four-year cut in the budgets of government

departments.

In August 2011, the killing of a man by police resulted in looting and riots in London and other cities. The damage was

estimated by the insurers to come to around £200m. In December 2011, Prime Minister Cameron disagreed with

proposals to make changes in the EU’s Lisbon treaty. He said that these proposals would jeopardize the status of

London as a financial center.

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Figure 2: The UK – political events timeline

• World War I began in1914.

• War ended in 1918with several hundred

thousand UK soldiersdead.

• First Labourgovernment waselected in 1924.

• Major worldwide

economic crisis was

witnessed in 1931.

• World War II started

in 1939.

• War ended in 1945

and a welfare statewas introduced by thenewly elected Labour

government.

• The UK became a

permanent member of

the UN SecurityCouncil in 1945.

• The UK became afounder member of

NATO in 1949.

• Queen Elizabeth II wascrowned as queen in

1953.

• The UK intervened inSuez Canal crisis, but

withdrew due to US

pressure in 1956.

• The UK’s bid to join the

EEC was vetoed byFrench President

Charles de Gaulle in

1961.

• The UK joined the EECin 1973.

• EEC membership wasendorsed in a

referendum in 1975.

• In 1981, the Thatchergovernment began the

process of privatizationof state-run industries.

• In 1982, Argentina

invaded the Falkland

Islands in the SouthAtlantic, which wasrecaptured by the UK.

• Thatcher was re-elected

in 1983 in the midst of

high unemployment andunrest in the inner c ities.

• Thatcher resigned after

she lost the leadership

of her party and she wassucceeded b y John

Major in 1990.

• In 1991, the UK tookpart in US-led mil itary

campaign to liberateKuwait from Iraqi

occupation.• Major was re-elected

as prime minister in

1992.• The UK’s government

along with the Irish

government issued theDowning Street

declaration on Northern

Ireland in 1993.• The Labour Party led

by Tony Blair won alandslide victory in

1997.

• The voters of theRepublic of Ireland and

Northern Irelandapproved the GoodFriday Agreement fo r a

political settlement in

1998.• In 1999, the Scottish

parliament and Welshassembly were

inaugurated.

•The Labour Party led byTony Blair won its second

successive election in2001.

•The UK joined US-ledmilitary campaign against

Iraq in 2003.

• The Labour Party won athird successive term in

office in 2005.

•Gordon Brown succeeded

Tony Blair as the prime

minister in 2007.

•In May 2010, theConservative Party won

the House of Commons

elections with 36.1% ofthe vote and formed a

coalition governmentalong with the LiberalDemocrats. David

Cameron b ecame the

prime minister.

1914−50 1951 − 80 1981−90 1991−2000 2001 Onwards

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Structure and policies

Key political figures

Key political figures in the UK are:

• Prime minister David Cameron

• Head of state Queen Elizabeth II.

Figure 3: Key political figures

Queen Elizabeth II is the monarch of the UK and she is the only monarch of more than one

state in the world. Queen Elizabeth II is a constitutional monarch of the country and she takes on

certain representational duties, which are ceremonial in nature. The monarch of the UK has theright to dissolve the parliament and appoint a prime minister. Moreover, the monarch is the head

of the commonwealth and so the official head of state for fifteen countries, which is largely a

ceremonial position.

David Cameron became the prime minister and took office on May 14, 2010. He was elected as

the leader of the Conservative Party in December 2005. Cameron believes that some of the

issues that his party focus on include promoting social justice and increasing the access to good

schools, good healthcare and good housing. Cameron has been serving as the MP of Witney

since2001.

Structure of government

The UK subscribes to a democratic, parliamentary system of governance known as the Westminster system. This

system, which was developed in the country over several centuries, is named after the location of the parliament of the

UK. The Westminster system is characterized by the presence of a titular head of state, who in practice serves as more

of a ceremonial figurehead; a bicameral legislature in which at least one of the houses is elected; a de facto executive

branch led by the head of the executive, who is usually the head of the party with the largest representation in

parliament; and a judicial branch that is independent of the legislature and the executive.

Center/federal

Legislative power is vested in both the government and the two chambers of parliament: the House of Commons and the

House of Lords.

On a broad level, the duties of the houses are similar and involve monitoring the work of the government, passing

legislation, and discussing issues of significance. There is a system of checks and balances, as the decisions made by

one house usually have to be cleared by the other.

State/provincial

In the late 1990s a significant devolution of authority was carried out in the UK through the transfer of powers from the

central government to various sub-national bodies. Despite the creation of a national parliament in Scotland and a

national assembly in both Wales and Northern Ireland, the UK parliament had retained overall authority over these

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devolved institutions. Referendums held in Scotland, Wales, and Northern Ireland in 1997 and 1998 confirmed that the

public was in favor of devolution, and by 1999 the devolved powers were formally transferred to the administrations in

these countries.Following the passage of the Scotland Act 1998, the Scottish parliament and executive formally came into existence, with

the parliament having been given executive powers. The parliament and the executive have an annual budget of £30bn

and have powers in specific areas such as economic development, education, health, law and home affairs, local

government, transport, social services, housing, and the environment.

Key political parties

Labour Party

The Labour Party initially came into existence in 1900 as a political pressure group that formed out of the trade union

movement, and was greatly influenced by the socialist political parties of the time. A leading left party in England,

Scotland, and Wales since the 1920s, it has been a party of self-proclaimed democratic socialism. In more recent times,

the party has adopted more of a "third way" approach to policymaking, which combines both socialism and laissez-faire

approaches.

In terms of public membership, the party is estimated to be the UK’s second largest with around 200,000 members.

Under the leadership of Tony Blair and Gordon Brown, it was at the helm of affairs in the UK from 1997 until 2010,

although its majority in the House of Commons fell rapidly during this time. Brown took over from Blair as head of the

party and prime minister in June 2007. However, in the May 2010 elections for the House of Commons, the party only

received 29% of the vote (258 seats out of 650) and lost overall power.

Conservative Party

The Conservative Party is arguably the oldest polit ical party in the world, as its roots can be traced back to the second

half of the 18th century. The Tory party of the 18th and 19th centuries can be considered the parent of the Conservative

Party; indeed, the Conservatives are even now often referred to as the Tories. The party is the largest in the UK in terms

of public membership, with around 290,000 members, and is the most successful party in the UK in terms of number of

election victories.

The Conservative Party won the May 2010 House of Commons elections with 36.1% of the votes (305 seats out of 650).

The party, along with the Liberal Democrats, then formed a coalition government in the UK.

In its policy document, the party has stressed the need for a “responsibility revolution,” in which large-scale changes are

to be brought about in the current system in order to create “an opportunity society, a society in which everybody is a

somebody, a doer not a done-for.”

Liberal Democrats

The Liberal Democrats trace their roots back to the formation of the Liberal Party in 1859. In terms of public membership,

the Liberal Democrats are the UK’s third largest party, with an estimated 70,000 members. In general, the party

promotes social liberalism, which focuses on individual liberty, minimal state intervention in an individual’s personal

affairs, and the decentralization of power away from "unaccountable" public bodies. Nick Clegg was elected as the

official leader of the Liberal Democrats in December 2007 after the resignation of his predecessor, Sir Menzies

Campbell.

The Liberal Democrats' policy initiatives are based upon the overall objective of maintaining “a fair, free, and open

society." For example, the party supports the decentralization of power away from national government and free

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education for all citizens including university students, whereas it opposes the authoritarian anti-terror laws that were

brought in by the previous Labour government.

In the general elections of May 2010, the Liberal Democrats gained 23% of the total vote, winning 57 seats in parliament.The party is part of the coalition government led by the Conservatives.

Composition of legislature

In the last parliamentary elections held in May 2010, the Conservative Party won 36.1% of the total vote, gaining 305

seats in parliament. Apart from Prime Minister David Cameron, the party has other important members of the cabinet

such as the ministers responsible for finance, foreign affairs, home affairs, defense, health, justice, and the environment.

The Labour Party managed to secure 29% of the total vote and 258 seats in parliament. The Liberal Democrats secured

23% of the total vote and 57 seats in parliament.

Figure 4: Composition of legislature

Conservatives47%

Labour40%

Liberal Democrats9%

Others4%

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Key policies

Economic

The government’s primary policy is to boost economic growth while trying to bring down the rising budget deficit by 2016.

Other policy measures are to bring inflation down to the government target rate of 2% . Inflation stands at 2.4% by the

end of first half of 2012. The government will continue its support for further trade liberalization. It announced in the 2012

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budget a reduction in corporate tax to 22% by 2014 and raising the initial income tax threshold from £8,100 to £9,205.

The government introduced laws to close down tax loopholes and crack down on tax avoidance. Other areas would be

moderate disinvestment of the public sector, which includes returning parts of the banking sector to private ownership.Moreover, the regulations regarding takeover of UK companies may become more stringent. With regards to labor

policies, the government is contemplating putting a ceiling on non-EU skilled workers to reduce immigration and thus

prevent local unemployment.

Social

The Conservative-led administration has announced its intention to reduce the intake of foreign labor and boost

employment opportunities for the domestic population. The coalition government headed by David Cameron has

announced a host of measures to simplify benefits, impose time limits on those who are able to work, and to encourage

people on unemployment benefits to find work. People who need support for a short time have a wide choice in terms of

housing subsidies, tax credits, or direct welfare payments. Furthermore, those who do move from welfare to gainful

employment face tax rates that go up to 95%. A wide array of programs such as these increases the chances of fraud or

that the multiple programs will be taken advantage of.

The work and pensions secretary Iain Duncan Smith has come out with a single "universal credit" payment that would be

capped at the prevailing median income of those who do work, which is currently around £25,000 ($39,500) a year. As

earnings increase with each passing year, the credit would fall at a uniform rate. The government hopes that these

measures will bring more simplicity and transparency into the system and provide incentives for people on welfare to look

for work. It is estimated that health and social care needs alone account for most of the £70bn spent each year on

patients with long-term conditions. With the number of people aged over 85 expected to double in the next 25 years, it is

crucial that the NHS of the future has the capacity to cope with the increased demands that this group of patients will

bring and also provide better service. Looking at the burgeoning healthcare costs, the government has been trying tobring in reforms to the NHS. In March 2012, the reforms bill on health and social care was finally passed. The main focus

of the bill is to curtail increasing costs against the backdrop of the UK’s aging population. The government argues that

the reforms will reduce costs by 45% while giving more choices to the patient. The bill has been passed but it has yet to

be seen if it can bring any significant changes to the strained NHS.

Foreign

The UK is one of the most prosperous and influential nations in the world and has a large role to play on the international

stage. The country is one of the five permanent members of the UN Security Council, is one of the founding members of

NATO, a member of the G8, and a member of the EU, although it has followed a conservative approach to European

integration. In late 2011, the UK government vetoed a proposed new EU treaty on economic and monetary union, thus

undermining UK-EU relations, which may lead to a diminishing role for the UK as far as future EU policy matters are

concerned. Further to the issue of Scottish independence, a referendum is planned in 2014. With the Scottish National

Party pressing for independence, the future of the union remains undecided. Although full independence is unlikely, there

may be more devolution. The UK will continue to remain a close ally of the US.

Defense

As a permanent member of the UN Security Council, the UK has a responsibility to contribute toward global

peacekeeping and crisis management efforts. The UK has committed troops to a number of peacekeeping missions in

countries around the world such as Sudan, Liberia, Sierra Leone, the Democratic Republic of Congo, Cyprus, Kosovo,

Bosnia, Georgia, Iraq, and Afghanistan. As one of its main defense policy objectives, the UK aims to combat terrorism

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and the proliferation of weapons of mass destruction. The UK has established an especially close relationship with the

US, and has been its closest ally in regard to the war on terror and military involvement in Afghanistan and Iraq. As part

of its defense policy relating to the war on terror and tyranny, the UK committed its forces against the Gaddafi regime inLibya and successfully contributed to overthrowing his dictatorship; however, with regards to the unstable political

situation in Syria, Britain still has not committed to any specific course of action.

Performance

Governance indicators

The World Bank report on governance uses voice and accountability, political stability and absence of violence,

government effectiveness, regulatory quality, rule of law, and control of corruption as indicators for 212 countries and

territories over 1996–2010. The study was carried out by Daniel Kaufmann and Massimo Mastruzzi of the World Bank

Institute and Aart Kraay of the World Bank Development Economics Research Group. For any country, a percentile

score of zero corresponds to the lowest possible rank and a percentile score of 100 corresponds to the highest possiblerank.

The UK was ranked in the 91.9 percentile for voice and accountability in 2010. This parameter measures the extent to

which a country's citizens are able to participate in selecting their government, along with freedom of expression,

freedom of association, and the availability of free media. The UK ranks highly due to its openness and liberal attitude

toward the press. The UK is ahead of its neighbor France, which was ranked in the 89.1 percentile. However, the country

was slightly behind Germany, which was ranked in the 92.9 percentile.

The UK was ranked in the 58.0 percentile for political stability and absence of violence in 2010. This parameter

measures perceptions of the likelihood that the government will be destabilized or overthrown by unconstitutional or

violent means, including domestic violence and terrorism. France and Germany were both well ahead, ranking in the

70.8 and 74.1 percentiles respectively.

The UK was ranked in the 92.3 percentile for government effectiveness in 2010. This parameter measures the quality of

public services, the quality of civil services and the degree of their independence from political pressures, the quality of

policy formulation and implementation, and the credibili ty of the government's commitment to such policies. The UK’s

rank on this indicator has been impressive throughout recent times, as successive governments have broadly pursued

similar economic policies, leading to stability in policy formulation and implementation. Germany was slightly behind the

UK with a percentile rank of 91.9, while France was ranked in the 89.5 percentile.

The UK was ranked in the 97.1 percentile for regulatory quality in 2010. This parameter measures the ability of the

government to formulate and implement sound policies and regulations that permit and promote private sector

development. A high ranking indicates fair implementation of policies and regulations in the private sector. Under thiscategory, both Germany and France trailed the UK, ranking in the 93.8 and 87.1 percentiles respectively.

The UK was ranked in the 94.8 percentile for rule of law in 2010. This parameter measures the extent to which agents

have confidence in and abide by the rules of society, and in particular the quality of contract enforcement, the police, and

the courts, as well as the l ikelihood of crime and violence. In this category, Germany and France placed lower than the

UK, ranking in the 92.4 and 90.5 percentiles respectively.

The UK was ranked in the 90.0 percentile for control of corruption in 2010. This parameter measures the extent to which

public power is exercised for private gain, including both petty and grand forms of corruption, as well as the appropriation

of the state by elites and private interests. Germany was ranked slightly higher than the UK at 93.3, while France was

lower at 89.0.

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Outlook

Prime Minister David Cameron indicated that there would be a "seismic shift" in how the country was governed after

unveiling a historic coalition with the Liberal Democrats in mid-May 2010. After taking office in Britain's first coalition

government since World War II, the prime minister announced that the Conservative Party and its Liberal Democrat

partner considered a record fiscal deficit to be the most important issue requiring immediate attention. The detailed joint

policy program published by Cameron included a pledge not to join the euro, and confirmed plans for a fixed five-year

term for the British parliament. Furthermore, the government announced that i t would limit the immigration of non-EU

economic migrants and provide more funding for poor children beyond the schools budget. The government has a strong

majority in parliament; however, the diverse opinions of the coalition parties regarding strong government austerity

measures and the worsening eurozone crisis can put a strain on relations. There is a very low possibility of an early

election, but it cannot be ruled out if relations between coalition partners become further strained on account of

deteriorating economic conditions.

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ECONOMIC LANDSCAPE

Summary

The UK’s economic development has historically been based on its strong industrial centers. However, in more recent

times the services sector has overshadowed the industrial sector to become the key driver of economic growth. This shift

has led to unbalanced economic growth, as London and the South East have consistently grown, while in the North cities

such as Manchester, Liverpool, Newcastle, Sheffield, Leeds, and Birmingham, which have traditionally been dependent

on industrial activity, have not been benefiting from this growth.

The economy slipped into recession in April 2012 after two consecutive quarters of negative economic growth. The

economy contracted by 0.2% in the first quarter of 2012. Mining, manufacturing, construction, and financial services

contributed to the negative growth in GDP. Meanwhile the public debt rose to £1.2tn, which is around 86.5% of the

country’s GDP and thus significant cause for concern. The government maintained that it will go ahead with austeritymeasures to reduce the fiscal deficit . Easing the inflation rate may reduce the household burden that was a major drag

on growth in late 2011 and early 2012; however, inflation is expected to stay above the target rate of 2% until the end of

2012. The interest rate will remain at a low of 0.5% and is not expected to change. Strong fiscal consolidation is in

progress, and remains vital to achieve a more sustainable budgetary position, thus reducing fiscal risks.

Evolution

The UK has traditionally been at the forefront of economic progress. After the two world wars, a government led by

Clement Attlee, the then leader of the Labour Party, was established. This government went about the nationalization of

various industries and institutions such as the inland transport system, electricity, gas, telephones, coal mining, and even

the Bank of England (BoE). The Labour Party still considers the establishment of the National Health Service in 1948 to

be one of its most important achievements.

Led by Harold Wilson, the Labour government of the 1960s had a different focus than the government of the 1940s,

choosing to concentrate on economic planning and the modernization of British industry. The government created large

public sector companies that were technology-intensive, funded the creation of infrastructure to support industry, and

encouraged innovation and the adoption of new technologies.

The victory of Margaret Thatcher and the Conservative Party in the 1979 elections brought about a change in direction

for the UK economy. Under Thatcher, economic reforms took place with the introduction of free market policies and the

privatization of various state enterprises, and the government sold a number of large public sector enterprises created by

previous governments. Thatcher was re-elected twice, in 1983 and in 1987, but resigned in 1990 after being challengedfor the leadership of the Conservative Party. John Major succeeded her as prime minister.

Since the 1990s, the economy of the UK has made a pronounced shift from its traditional dependence on its industrial

sector. The services sphere has come to the forefront, and successive governments have promoted this trend. The

2000s saw an annual average growth rate of around 1.6%. However, due to the global financial crisis, the country’s GDP

contracted by 1.1% and 4.5% in 2008 and 2009 respectively. The country’s economy recovered in 2010 to register

growth of 2.1%, but slipped into recession in April 2012 on account of uncertainty in the eurozone and fiscal austerity

measures.

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Figure 5: Historical GDP growth, 1991–2011

-5

-4

-3

-2

-1

0

1

2

3

4

1991 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

G

r o w t h r a t e ( % )

Year


Financial authorities and regulators

The Financial Services Authority (FSA) is the regulatory body for most financial services markets, exchanges, and firms

in the UK. It aims to ensure that financial markets are run in a fair and efficient manner, and that retail financial services

consumers are dealt with fairly. The FSA is an independent non-governmental body that was entrusted with statutory

powers by the Financial Services and Markets Act 2000. The UK Treasury appoints the FSA board, which sets the

overall policy, while the executive is responsible for day-to-day decisions and the management of staff. The FSA’s board

comprises a chairman, a chief executive officer, three managing directors, and nine non-executive directors.

In May 1997, the government gave the BoE complete autonomy to control monetary policy and to decide on strategies to

meet the government’s targets for inflation. The responsibility of determining the interest rate level lies with the Monetary

Policy Committee (MPC), which sets interest rates that enable inflation to remain within target levels. The MPC consists

of nine members: the governor, two deputy governors, the bank's chief economist, the executive director for markets,

and four external members.

A representative from the Treasury, who keeps the MPC informed of the government’s economic aims and objectives,

also sits in on the meetings of the MPC, and is allowed to discuss issues but is not entitled to vote. The external

members, who are directly appointed by the Chancellor of the Exchequer, help the MPC benefit from expertise from

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outside the BoE. The members of the MPC vote to set interest rates at the level they believe is consistent with meeting

inflation targets.

Banking sector

The UK has one of the most competitive, efficient, and secure banking systems in the world. It has attained global

leadership in cross-border bank lending, foreign exchange turnover, over-the-counter derivatives turnover, and marine

insurance net premiums. The sector’s deposits are the third largest in the world. As of March 2010 foreign banks in

London had 241 branches and subsidiaries. A third of these were from the eurozone area. Foreign banks in the UK

handled assets worth £7.6tn ($11.9tn) in 2009. The UK’s banks managed 150 million current and savings accounts.

Close to 10,500 bank branches and around 64,000 ATM cash machines were in the UK as of 2010, which is more per

million people than in France, Germany, and Italy. As of June 2010, the UK banking sector commanded a whopping 18%

of the world market in international lending. Around half of European investment banking activity is conducted in London.

In excess of 400,000 people are engaged in the banking sector.

Stock markets and derivatives

The London Stock Exchange (LSE) is responsible for providing a platform to trade in a wide array of securities, including

domestic and international equities, covered warrants, exchange-traded funds, depositary receipts, debts, and fixed

interest products. The LSE allows companies of every size to raise capital through four primary markets. The exchange’s

market capitalization as of December 2011 stood at a staggering $3.2tn. It comprises the following components:

• The Main Market – Arguably the most prestigious listing and trading environment globally.

• The Alternative Investment Market (AIM) – The equities market for smaller companies.

• The Professional Securities Market – For depository receipt securities and listed debt.

• The Specialist Fund Market – Dedicated to specialized investment entities.

Insurance

The UK insurance market had total gross written premiums (GWP) of $309.7bn in 2010, representing a compound

annual growth rate (CAGR) of -3.1% between 2006 and 2010. In comparison, the French and German markets recorded

CAGRs of 1.4% and 2.7% respectively over the same period, reaching values of $279.8bn and $239.6bn in 2010. The

life insurance segment was the market's most lucrative in 2010, with total GWP of $213.6bn, equivalent to 69% of the

market's overall value. The non-life insurance segment contributed GWP of $96.1bn in 2010, equating to the remaining

31% of the market's aggregate value. The performance of the market is forecast to accelerate, with an anticipated CAGR

of 4.4% for 2010–15, which will drive the market to a value of $383.5bn by the end of 2015. Comparatively, the French

and German markets will record CAGRs of 1.4% and 0.7% respectively over the same period, reaching values of$299.4bn and $248bn in 2015.

Asset management

As of December 2010, fund managers in the UK managed assets adding up to £3.9tn ($6.1tn), an increase of 20% over

the 2009 figure of £2.7tn ($4.23tn). The fund management industry looks after over half of all UK household investments

and pensions. The UK asset management industry is the second largest in the world, behind only the US.

Key policies

The key macroeconomic policies of the government are focused on maintaining fiscal discipline, restoring full

employment, returning inflation to target, and stimulating growth, investment, and demand. The BoE has kept its official

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base rate on hold at a historic low of 0.5% since March 2009, and is not expected to alter interest rate policy in the near

term. The quantitative easing program stands at a cumulative £325bn ($509.6bn), signifying a major expansion of money

supply in the economy to boost the contracting economy. Overall economic impact is likely to be modest unless financialinstitutions transmit this to the wider economy through lending and spending. Additionally, fiscal credibility was enhanced

by the introduction of two rules for the setting of fiscal policy, which were a debt ceiling of 40% of GDP and the

requirement that the government borrow only to fund capital projects, adjusting for cyclical factors and the so-called

"golden rule" (that the government should not borrow money to fund current public expenditure).

The rising fiscal deficit along with increasing debt levels forced the Cameron government to initiate a program with some

tough austerity measures. These included a 26% decrease in the central government's contribution to local councils by

2015, a 24% cut to the foreign and commonwealth office, and another 24% cut to the Department for Culture, Media, and

Sport. In addition, the mandatory annual television l icense fee of £145.50 ($229) was frozen until April 2017.

Performance

GDP and growth rate

Overview

Real GDP grew by 0.8% in 2011, but due to negative growth in two consecutive quarters ending March 2012 the

economy was officially in recession by April 2012. The poor performance of the economy – mainly due to the dip in

construction, mining, manufacturing, and service output – is exaggerated by the present uncertainty surrounding the

eurozone. According to MarketLine, real GDP growth is expected to hover around 0.6% in 2012, but stronger growth is

expected in the second half of the year, reaching around 1.3% in 2013. Investment by businesses and exports are

expected to lead this growth, although it will not be that fast given the global headwinds that UK businesses face.

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Figure 6: GDP and GDP growth rate, 2005–15

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2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

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Year

GDP Real GDP growth rate

GDP composition by sector

Although on the whole the UK economy continues to benefit from robust economic growth, the major part of this growth

occurs in London and the South East. Traditionally, industrial activity has been concentrated in the northern parts of the

country, while the southern region has been driven by the services sector. As a result of the relative decline in the

importance of the industrial sector and surging activity in the services sector over the past few decades, the South has

flourished while the North has developed at a much slower pace. While the industrial sector accounted for close to 34.0%

of GDP in 1990, its share was down to 21.6% in 2011. The services sector’s contribution stood at 77.7%, while the

remainder was contributed by agriculture.

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Figure 7: Sector-specific contribution to GDP, 2011

Agriculture, 0.70%

Industry, 21.6%

Services, 77.7%

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Agriculture

Agriculture in the UK is technology-intensive, with only 1.4% of the population required to meet close to 60% of the

country’s food requirements. However, the increasing dominance of the services sector and the traditional strength of the

UK’s industrial sector mean that the agricultural sector contributed just 0.7% to GDP in 2011.

As a result of the UK’s high population density and relative scarcity of land, only around a third of total production is

devoted to arable crops, while the rest is devoted to livestock. As a result of its geographical location, fishing is also a

significant industry in the UK. Agricultural output registered a CAGR of around 6% during 2006–11.

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Figure 8: Agricultural output (£bn), 2006–11

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Industry

Much has been made of the steady decline in the relative contribution of the industrial sector toward GDP over the past

couple of decades. The main commodities produced by the industrial sector are machine tools, electric power

equipment, automation equipment, railroad equipment, ships, aircraft, motor vehicles and parts, electronics and

communications equipment, metals, chemicals, coal, petroleum, paper and paper products, textiles, and clothing. The

UK has a large number of globally recognized industrial brands, and its main exports include manufactured goods, fuels,

chemicals, food, and beverages.

In 2011, industrial production recorded growth of 5.4%. The deceleration in industrial production started in the latter partof 2011 because of poor demand for UK goods in the eurozone due to the ongoing sovereign debt crisis. Industrial

output recorded a CAGR of 2% during 2006–11.

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Figure 9: Industrial output (£bn), 2006–11

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Industry output Growth rate

Services

The UK’s services sector has been consistently growing in importance over the past decade and, as is the case with

most developed countries, it dominates in comparison to the other sectors. London is arguably the world’s largest

financial center, and thus the UK services sector is dominated by financial services, especially insurance and banking. In

recent years, tourism and education have emerged as important contributors to the economy, with the UK growing in

popularity among those with disposable income globally and the student community in particular. Public services and

defense have also contributed significantly to the sector’s recent growth, as the global financial crisis hit financial

services relatively hard. In 2011, services output increased by 3.8%. Services output recorded a CAGR of 3% during

2006–11.

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Figure 10: Services sector output (£bn), 2006–11

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Serv ices output Growth rate

Fiscal situation

Although the deficit fell from 3.65% of GDP in 2003 to 2.9% in 2007, it increased to 5.05% of GDP in 2008 owing to

large-scale government expenditure programs. Due to lower tax revenues, the government’s finances have also taken a

hit from increased state spending, which is intended to boost the economy. This increased expenditure included the

bailing out of ailing banks, and the fiscal deficit therefore increased to 11.7% in 2009.

The UK’s budget deficit fell from almost $240.8bn in 2009 to just below $227.7bn during 2010–11 after a host of

expenditure cuts were ordered by Prime Minister David Cameron. These resulted in the UK registering a fiscal deficit of

10.65% of GDP during 2010–11. Although the fiscal deficit fell in 2010, it was still higher than the 3.0% stipulated by the

European Monetary Union’s Stability and Growth Pact. The budget deficit was expected to be just below 10% for

FY2011.

Current account

The UK has faced persistent current account deficit since the 1990s. In the earlier years, this did not bother

policymakers; however, its growing magnitude has become a matter of serious concern, as the widening current account

deficit will also raise the country's already high external debt. However, according to the Office for National Statistics, the

UK current account recorded a deficit of $46.57bn in 2011, a decrease of 40.3% compared to 2010.

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Exports and imports

As would be expected, the list of the UK’s major trade partners almost exclusively consists of European Union (EU)

member nations. As a member of the single European market and beneficiary of the resulting free movement of goods

and services, the UK and its European trade partners have greatly profited by trading with each other. The UK economy

is dependent on international trade not just for the supply of goods and services, but for maintaining economic growth.

The primary exports of the UK include fuels, chemicals, manufactured goods, beverages, and food. According to HM

Revenue & Customs, the main destinations for goods and services produced in the country in 2011 were the US (which

accounted for 15% of the UK’s total exports), Germany (13%), France (9%), the Netherlands (9%), Ireland (7%), Belgium

(6%), Italy (4.0%), and Spain (4%).

The UK’s main imports include fuels, manufactured goods, machinery, and food products. In 2011, the UK relied on

Germany for 15% of its total imports and the US for 9%. In the same year, other countries the UK sourced its imports

from included China (9%), the Netherlands (8%), France (7%), Belgium (6%), and Italy (4%). Total trade in the UK came

down from $1.57tn in 2008 to $1.37tn in 2011. Exports rose from $631.9bn in 2010 to $647.3bn in 2011, while imports

increased from $713.9bn to $720.1bn in the same year.

Figure 11: The UK's external trade position, 2007–11

722.7 741.9

581.1631.9 647.3

819.1 827.7

640.4

713.9 720.1

1,541.81,569.6

1,221.5

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Year

Exports Imports Total trade

External debt

The external debt level of the UK is one of the highest both in Europe and the world. The country's external debt was

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around 473.0% of GDP in 2008 and was nearly 2.5 times greater than that of France or Germany, the countries with the

highest external debt in the EU after the UK. According to Country Statistics MarketLine, the UK’s external debt

increased from $9.4tn in December 2010 to $9.8tn in 2011, growth of 4.6%.

International investment position

Structural reforms during the 1980s promoted competitiveness and allowed the UK to become the EU’s leading

destination for inward investment. According to the United Nations Conference on Trade and Development Investment

Report 2011, the UK’s global ranking fell from third in 2009 to seventh in 2010 as foreign direct investment (FDI) inflows

came down from $71.1bn in 2009 to $46bn in 2010. The 49% drop compared with a global average of 37% shows the

declining attractiveness of the UK as an FDI destination.

Credit rating

Due to its ballooning fiscal deficit, the UK's coveted AAA rating is at risk. Both Fitch and Moody's have warned the UK

regarding the same. The recent decision by Moody's to place the UK on so-called negative watch is a warning sign that

the UK could be stripped of AAA status. Fitch warned that the economy has very limited fiscal freedom to absorb further

adverse economic shocks in light of already elevated debt levels and a potentially weaker than forecasted economic

recovery. Standard & Poor’s, the third major rating agency alongside Moody's and Fitch, already downgraded the US

economy last summer owing to its burgeoning fiscal deficit. There is a high probability that the UK will be stripped of its

AAA- rating over the next two years.

Monetary situation

Key monetary indicators

Inflation

Inflation was 4.5% for 2011, but eased later in the year as the austerity measures introduced by the government began

to take effect, with rising unemployment and contracting household incomes. Inflation is expected to crawl back to its 2%

target rate by the end of 2012 or early 2013. A moderate increase in consumer spending in late 2012 is expected due to

falling inflation figures.

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Figure 12: Consumer price index and consumer price index-based inflation, 2005–15

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Year

Consumer pr ice index Inf lat ion

Interest rates

Since March 2009 the BoE has kept its base interest rate at a historic low of 0.5%, and is not anticipated to alter interest

rate policy at present. The MPC approved a quantitative easing program worth £50bn from February 2012.

Employment

The UK’s labor force numbers around 31.76 million, representing close to half of the total population according to the CIA

World Factbook. The services sector accounts for 80.4% of the total labor force, followed by the industrial sector with

18.2% and the agricultural sector with just 1.4%. The labor force participation rate stood at around 61.8% in 2011, and

has been around this level over the past decade and a half. The participation of women in the labor force is relatively

strong, with 55.5% of the total labor force consisting of women as of 2011, although British women have traditionally

earned a much lower average wage than their male counterparts.

The labor market in the UK has benefited from the creation of the single European market, the world’s largest free trade

area, which covers 500 million individuals and is characterized by the free movement of capital, goods, services, and

people. In addition, the UK manages to attract skilled labor from countries all across the world as a result of its high

standard of living and levels of pay.

However, the economic slowdown has adversely affected the creation of jobs in the country. The unemployment rate

was close to 5.6% in 2008 and reached around 7.6% in 2009. Nearly 2.5 million people were unemployed in 2010, which

was the highest level in 12 years. The unemployment rate climbed to 7.9% in 2010 and 8.1% in 2011. According to

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MarketLine forecasts, it is expected to be around 8.3% by the end of 2012 and 8.4% by 2013. The country’s

unemployment level remains very high and is a cause for concern in the near term.

Figure 13: Unemployment in the UK, 2005–15

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Total unemployment Rate of unemployment (%)

Outlook

Prime Minister David Cameron and Chancellor George Osborne have unveiled a host of measures to cut the fiscal

deficit. These include a 26% decrease in the central government's contribution to local councils by 2015, a 24% cut to the

foreign and commonwealth office, and another 24% cut to the Department for Culture, Media, and Sport. According toMarketLine, real GDP is expected to grow at a weak rate of around 0.6% in 2012, recovering from recession by Q3 2012,

with stronger growth anticipated in the latter part of 2012, rising to an average of around 1.3% in 2013. Business

investment and exports are expected to lead this growth; however, it will not be that quick given the global headwinds

that UK businesses face. Financial strain on households due to gloomy prospects for earnings and house price growth,

combined with lofty household debt levels and an uncertain employment scenario mean consumer spending will be

constrained. Inflation is anticipated to come down to 2.4% in 2012 and to 1.9% in 2013 according to MarketLine

estimates. Nevertheless, the outlook is expected to change for the better, particularly if the eurozone crisis reaches a

timely and satisfactory conclusion.

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The disappointing growth experienced in recent years is reflected in weak productivity growth and relatively high

unemployment, all the implications of poor macroeconomic policies. Policies should be aimed at reducing the burden of

business regulation, pursuing a more sweeping approach to longer-term tax reform, and taking further action to help

reduce barriers to employment.

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SOCIAL LANDSCAPE

Summary

The UK is one of the most densely populated developed countries in the world. The standard of living enjoyed by the UK

is among the best in the world. Apart from the civil liberties and the respect for human rights afforded to individuals by the

authorities and government system, those living in the UK have the advantage of access to one of the best systems of

social welfare in the world. The education system is world-renowned and attracts students from all over the world. The

system of healthcare has been recently restructured to be able to provide higher quality healthcare to everyone. The

majority of the population relies on public healthcare services. Apart from this, there are special projects that have been

undertaken to take care of children, the unemployed, the disabled, and the aged.

The UK is home to people from a number of countries. White people comprise over 92% of the total population, while the

ethnic minority groups are dominated by those from the Indian subcontinent, China, the Caribbean, and Africa. One ofthe most important demographic characteristics of the UK’s population (and one that is proving to be a cause for

concern) is the age structure. The UK’s population is rapidly aging, which poses a number of social, economic, and

political challenges.

Evolution

Since World War II, the UK has developed into a multicultural, multi-ethnic, and secular country with a large white

majority and minority communities from all over the world. The standard of living is among the highest globally and the

system of social welfare is also one of the best in the world.

In contrast with some other European countries, immigration is contributing to a rising population, accounting for about

half of the population increase between 1991 and 2001. The country’s net migration rate came to around 2.6 migrants

per 1,000 population in 2011. Labour came into power in the UK shortly after World War II. The party focused on an

approach that leaned toward the left, in line with public opinion at the time. The years between the world wars saw the

Conservative Party associated with widespread poverty and mass unemployment, so the Labour government focused on

industrial development and the creation of a solid social infrastructure. The concept of the welfare state began to be

introduced and several industries were nationalized. The establishment of the National Health Service (NHS) in 1948 is

considered to be one of the party’s biggest achievements.

The victory of Margaret Thatcher and the Conservative Party in the 1979 elections brought about a change of direction in

the UK economy. The Thatcher government was more focused on involving the private sector and developing the

economy as a whole rather than on the creation of a welfare state. More recently, the Labour government of the late1990s and 2000s adopted the "third way" approach, which involved a mixture of the previous approaches to governance.


Demographic composition

Composition by age and gender

The UK is home to close to 63.0 million people spread across a land area of just 243,610 sq km, making it among the

most densely populated developed countries in the world with around 259 people per sq km. England is by far the most

populous of the UK’s constituent countries, with 83.6% of the total population, followed by Scotland with 8.6%, Wales

with 4.9%, and Northern Ireland with 2.9%.

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As with many other Western European countries, the UK is already starting to face the challenges posed by a rapidly

aging population. The causal factors behind the UK’s aging population are simple to work out. Essentially, people in the

UK are living longer as the years go by, and they are also having fewer children. Life expectancy has been increasingslowly but steadily, and as of 2011 estimates life expectancy at birth stood at 78.05 years for the average male and 82.4

years for the average female. However, estimates predict that by 2014 the proportion of the population aged above 65

years will be greater than the proportion of the population aged 16 years and below. The fertility rate currently stands at

1.9, the death rate at 9.3, and the birth rate at 12.2, giving a clear idea as to how much of an impact the trend of couples

having fewer children is having on the UK’s demographic profile.

Religious composition

The largest religion in the UK is Christianity, accounting for 71.6% of the total population in 2001. Historically, the Church

of England and the Church of Scotland had significant roles to play in British society. The UK has evolved as a secular

society that embraces people belonging to various religions. Due to the large number of people resident in the UK whose

ethnic roots trace back to the Indian sub-continent, Muslims, Hindus, and followers of other religions accounted for 2.7%,

1.0%, and 1.6% of the total population respectively in 2001. Furthermore, 23.1% are unspecified or do not follow any

religion.

Figure 14: Major religions in the UK, 2001

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Migration

The UK maintains strict laws with regards to the misuse of the asylum system and illegal immigration. The government

recognizes the need for a system of "managed migration," wherein the needs of the economy determine migration policy

and those with specific skill sets are welcome within the country. In 2010, net migration stood at just under 252,000, with

the net migration rate at 2.59 migrants per 1,000 people as of 2012.

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Education

System of education

Schooling is compulsory for all children aged between five and 16, and most children attend government-funded schools.

The UK is famous for its educational institutions, especially its higher education institutions, which attract students from

all over the world.

The systems in place in England, Wales, and Northern Ireland are broadly similar to each other; however, Scotland has a

different educational system. The Education Reform Act of 1988 introduced the National Curriculum for state primary and

secondary schools in England, Wales, and Northern Ireland. Independent schools, which do not depend on the

government for financing, can decide on their own curriculum.

In general, the National Curriculum attempts to focus on a greater depth of knowledge across a narrower range of

disciplines, while the Scottish curriculum attempts to focus on a broader range of disciplines. The National Curriculum

covers core subjects, foundation subjects, and basic curriculum subjects. Core subjects include science, mathematics,and English; foundation subjects include history, geography, art and design, music, technology, ICT, and modern foreign

languages; and basic curriculum subjects include citizenship, religion, and physical education.

Primary and secondary education

Parents may choose to enroll their children in pre-school activities such as playgroups or nursery school before sending

them to primary school. Children usually begin attending primary school between the ages of four and six. Parents can

send their children to a local school, which must accommodate them without imposing any special conditions. The first

year of secondary education usually starts between the ages of 11 and 13. Students who go on to pursue higher

education are usually between the ages of 17 and 19.

Tertiary education

The majority of students who wish to pursue higher studies use the Universities and Colleges Admissions Service,

although for certain courses different admissions services may be required. While the UK’s universities are not owned by

the state, most are financed by the government. In general, the system of higher education in the UK is considered to be

of very high quality and has historically attracted students from all parts of the globe.

Healthcare

The NHS was initially established in 1948 as the single authority for public health in the UK. However, since the

devolution of powers, the constituent countries of England, Scotland, Wales, and Northern Ireland each have their own

NHS that is mainly funded through public taxation. While independent healthcare organizations do exist across the UK,

the health services of the constituent countries provide the majority of healthcare services.

Since devolution, local bodies have taken over the duty for ensuring healthcare services for all . Primary Care Trusts in

England, Health Boards in Scotland, Primary Care Partnerships in Northern Ireland, and local health groups in Wales are

some of the forms of different healthcare services centers. Although the system of public health in the UK is effectively

run by the four independent services of the constituent countries, the services generally do not discriminate against

residents of the other constituent countries. All residents of the UK, residents of countries that belong to the European

Economic Area, and residents of countries that have bilateral healthcare agreements with the UK are eligible for NHS

care.

In order to ensure that healthcare delivery is up to suitable standards, there are different agencies that monitor

healthcare service providers in the constituent countries. The Healthcare Commission is entrusted with the responsibility

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of assessing and reporting on the performance of the NHS and private healthcare service providers in England and

undertaking national thematic reviews of the system in Wales. The Healthcare Inspectorate, Wales, monitors the

performance of NHS bodies in Wales, and the private sector is the responsibility of the Care Standards Inspectorate forWales. Similarly, NHS Quality Improvement Scotland and the Health and Personal Social Services Regulation and

Improvement Authority are the performance-monitoring bodies in Scotland and Northern Ireland respectively.

In April 2012, the reforms bill on health and social care was finally passed. The main focus of the bill is to curtail

burgeoning costs against the backdrop of the UK’s aging population. The government argues that the reforms will reduce

costs by 45% while giving more choices to the patient. The bill has been passed, but it remains to be seen if it can bring

any significant changes to the strained NHS.

Social welfare

By and large, central government is in control of social welfare. The government operates primarily through the

Department for Work and Pensions (DWP), the largest government department of the UK, for the planning and executionof social welfare services. The main target groups of the DWP are the following:

• children

• pensioners

• disabled people and those responsible for caring for them

• unemployed people of working age.

Nationwide initiatives

Child Support Agency

The Child Support Agency (CSA) is responsible for running the child support system, which involves ensuring that

parents who do not have custody of their children contribute toward their offspring's upkeep. The CSA calculates child

maintenance (based on current legislation and rules) and is responsible for the collection and transfer of payments from

the non-resident parent to the person who is responsible for the day-to-day care of the child.

The Pension Service

The Pension Service provides state financial support to over 11 million pensioners delivered at a national and local level

and in partnership with other organizations. The Pension Service also helps people to plan and provide for retirement.

Disability and Carers Service

The responsibility of the Disability and Carers Service is to support and help to provide for the various needs of disabled

people and those who care for them, irrespective of whether or not they work. The service does this primarily through the

provision of attendance allowance, disability living allowance, carer's allowance, and vaccine damage payments.

Jobcentre Plus

Jobcentre Plus helps people who are dependent on government welfare to make the transition from welfare into work,

and helps employers fill vacancies at the same time.

The Health and Safety Commission

The aim of the Health and Safety Commission is to maintain citizens’ health and safety by ensuring that there is sufficient

control over the risks that employees may face in dynamic workplaces.

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Performance

Healthcare

According to MarketLine, total healthcare expenditure in the UK amounted to more than $231bn in 2010 and stood at

around 10.8% of GDP, a marginal increase from 10.43% in 2009. Public healthcare expenditure as a percentage of total

healthcare expenditure has traditionally been high, hovering between 81% and 85% over the last decade and a half,

reflecting the dependence of the population on public healthcare services.

According to 2010 healthcare data from the World Bank, per capita spending in the UK on healthcare stood at $3,503, up

from $3,440 in 2009. The UK also has a shortage of healthcare professionals compared to other developed European

Union nations. The government reduced spending on the NHS by over 13% for 2010–11, and at the same time the

capital budget for the NHS in England came down by more than a fifth, amounting to a £1.4bn reduction. According to

government sources, the money will be used for other public projects. In April 2012, the bill to reform the NHS was

passed to reduce management expenditure, infuse competition among healthcare providers, and to offer more choices to

patients.

Income distribution

Standard of living

The latest available data reveal that although GDP per capita at purchasing power parity is quite high at $35,900, poverty

still exists; however, the UK has been successful in limiting disparities of income and wealth and restricting poverty in the

country to some extent. On the Gini coefficient, which ranges from zero (perfect equality) to one (perfect inequality), the

UK scored 0.34 in 2008. However, it is expected that the Gini coefficient will increase in the coming years to more than

0.40 with widening income gaps. According to government estimates in January 2010, nearly 13 million (or one in five)

people live in poverty in the UK. Furthermore, over 3.8 million children live in poverty in the UK, mainly because of

factors including family breakdown and poor education.

Education

The literacy rate in the UK is 99% of the total population. The state consistently allots funds amounting to more than 5%

of GDP toward education, and the total amount spent in 2010 was around $148.8.4bn, which is expected to rise to more

than $156.0bn by 2012.

Outlook

The government faces a number of challenges when it comes to maintaining the level of public services on offer. Given

the fact that the budget deficit is a clear point of concern for the authorities, they will face the challenge of maintaining the

current levels of expenditure on social welfare projects. In recent times, government expenditure and revenues have both

increased dramatically, but expenditure has outpaced revenues to quite an extent. Furthermore, the government

introduced reforms for the NHS that are expected lower expenditure for the government and offer more choices for the

patient. According to government sources, the money will be used for other public projects.

The government has publicly declared its goal of completely eliminating child poverty by 2020. Despite recent progress,

there is still much to do if this target is to be met. Another challenge facing the government is that of income inequality.

The previous Labour government employed certain redistributive measures through reforms to the tax and benefits

system in an attempt to redistribute income to pensioners and single parents with children.

Moreover, special attention must be given to improving the educational results of young people from low socioeconomic

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Social Landscape

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backgrounds. A more equitable allocation of school funding would help to bridge the gap in the quality of education

provided in localities of differing economic statuses. However, according to government estimates in January 2010,

nearly 13 million (or one in five) people lived in poverty in the UK. Furthermore, it was seen that over 3.8 million childrenlived in poverty in the UK, mainly because of factors including family breakdown and poor education.

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Technological Landscape

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TECHNOLOGICAL LANDSCAPE

Summary

The UK is at the forefront of research and development (R&D) and innovation. The government has helped to establish

an environment conducive to the development of new technologies in all sectors of industry. Expenditure on R&D and

other measures to encourage R&D within the private sector have borne fruit, and the UK has emerged as a key exporter

of technology. The Department for Innovation, Universities and Skills (DIUS) is the government department that oversees

the progress of the UK in this regard. The DIUS envisions its role as involving the creation and maintenance of a “world-

class research base” and utilizing this research base to “support innovation across all sectors of the economy.”

In July 2004, the Science and Innovation Investment Framework 2004–14 was published, which highlighted the

government’s plans for the future. One of the main objectives was to raise the ratio between R&D across the economy

and GDP (known as the level of knowledge intensity), which stood at 1.9% in 2004, to the 2.5% mark by 2014. Accordingto the fifth annual Science and Innovation Investment Framework 2004–14 report for 2009, the UK remains second only

to the US in worldwide scientific excellence, despite increasing competition from other countries. It is also the most

efficient and productive nation in terms of research in the G8.

A few industries in particular stand out in terms of their innovative progress. Firms in the pharmaceutical, defense, e-

commerce, and telecommunications spheres are all competitive with their counterparts across the globe. In the face of

increasing global competition, it is innovation that will help developed countries stay competitive with each other and with

the emerging economic powers. According to the Innovation Union Scoreboard 2011, the UK was ranked sixth in terms

of its innovation performance, and scored above the EU average, but lagged behind Germany, which placed fourth.

Evolution

The Royal Society, which is the national academy of science in the UK and the Commonwealth, is the most prestigious

source of innovation in the UK. The Royal Society was set up in 1660, and in 1850 the government recognized the

institution and started giving grants for scientific R&D. From then on, grants were made consistent through the

establishment of the Government Grant System for Scientific Development. In subsequent years, many research centers

were established in various scientific streams. Some of the main R&D centers include the Biotechnology and Biological

Sciences Research Council, the Council for the Central Laboratory of the Research Councils, the Medical Research

Council, the National Environmental Council, and the Particle Physics and Astronomy Research Council. There are also

many private R&D centers in UK.


Intellectual property

The UK Intellectual Property Office (UK-IPO), an executive agency of the DIUS, is the official body responsible for

granting intellectual property rights in the UK, including trademarks, designs, patents, and copyright. Direct administrative

responsibility for the examination and issuing of patents lies with the UK-IPO. The UK does not have a general statutory

register of copyright, although the UK-IPO is responsible for maintaining registers of trademarks, designs, and patents.

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Table 9: Comparative performance on receipt of patents, 2003–11

Year UK France Germany Japan US

2003 3,622 3,868 11,444 35,515 87,893

2004 3,443 3,380 10,779 35,348 84,270

2005 3,142 2,866 9,011 30,341 74,637

2006 3,581 3,431 10,005 36,807 89,823

2007 3,292 3,130 9,051 33,354 79,526

2008 3,087 3,163 8,914 33,682 77,502

2009 3,174 3,140 9,000 35,501 82,382

2010 4,302 4,450 12,363 44,813 107,792

2011 4,307 4,531 11,920 46,139 108,626

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R&D

The DIUS came into being in June 2007, taking over some of the responsibilities of the disbanded Department of Trade

and Industry and the Department of Education and Skills, such as responsibilities for science and innovation and higher

education and skills. The DIUS is involved with the creation and maintenance of a “world-class research base” and the

utilization of this research base to “support innovation across all sectors of the economy.”

Technology agreements and pacts

The UK has many science agreements with countries around the world, one of which is a bilateral agreement with China.In April 2007, the UK Office of Science and Innovation reached an agreement with the Ministry of Education in China to

fund and establish a networking scheme, with the intention of initiating and developing permanent partnerships between

British and Chinese scientific societies. Both countries agreed on the need to bring together their most accomplished

scientists in any field of science and technology. The implementing bodies in each country are the Royal Society and the

China Scholarship Council. The UK and the US made a clean energy pact agreement in April 2012 for making floating

turbines, and also a pact with Japan to develop weapons.

Performance

Opportunity sectors

Telecommunications, broadband, and Internet

The Office of Communications (Ofcom), which is the regulator for the telecommunications, television, radio, and wireless

communications industries in the UK, estimates that around £39bn was made by broadcasting and telecoms networks

and services in 2010 compared to £49bn in Germany and £44bn in France, and that on average a person in the UK

cumulatively spends more than seven hours a day watching or listening to media, browsing the Internet, and making

phone calls. According to Ofcom’s 2011 International Communications Report, the UK’s communications revenues are

the third highest in Europe, behind only Germany and France. Overall, prices in the UK compare favorably to those in

France, Germany, Italy, Spain, and the US, mainly on account of low mobile prices in the UK.

The UK has the lowest prices for standalone fixed voice services. The lowest price standalone broadband services were

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available in the UK and France. Mobile broadband prices in the UK were the second lowest after Italy. In the UK,

consumers spent an average of £434 per person during the year on telecommunications. According to Cisco Systems’

Visual Networking Index, the UK’s data volumes increased by 124% to an average of 266MB per mobile connection permonth in 2010, compared to 160MB for the US and 348MB for Japan.

Competition between service providers is tightening, with consumers benefiting directly through the continuous lowering

of prices and convenient package offerings. Service providers distribute packages that offer a combination of services to

consumers, such as broadband Internet, fixed line telephony, and cable television. In addition, telecoms service

providers have cut down on the prices charged for fixed and mobile calls in order to be able to compete with each other.

Mobile phones in the UK

The UK mobile phone market fell into decline in 2009. However, in 2010 it recovered, posting moderate growth. Strong

growth is predicted to continue to the end of the forecast period. The UK mobile phone market had total revenues of

$3.1bn in 2010, representing a compound annual growth rate (CAGR) of 4.5% between 2006 and 2010. In comparison,the French and German markets recorded CAGRs of 6.6% and 0.2% respectively over the same period, to reach values

of $4.3bn and $5.1bn in 2010. Market consumption volumes recorded a CAGR of 5% between 2006 and 2010, to reach

a total of 27.2 million units in 2010. The market's volume is expected to rise to 36.6 million units by the end of 2015,

representing a CAGR of 6.1% during 2010–15. The performance of the market is forecast to accelerate, with an

anticipated CAGR of 8.9% for 2010–15, which will drive the market to a value of $4.8bn by the end of 2015.

Comparatively, the French and German markets will record CAGRs of 6.4% and 5.8% respectively over the same period,

to reach values of $5.8bn and $6.8bn in 2015.

Internet access market

The UK Internet access market grew steadily through to 2010, but is expected to slowly decelerate toward the end of the

forecast period in 2015 according to the forecasts of MarketLine. The UK Internet access market had total revenues of

$8.8bn in 2010, representing a CAGR of 7.1% for 2006–10. In comparison, the French and German markets recorded

CAGRs of 17.4% and 37.5% respectively over the same period, to reach values of $13.8bn and $15bn in 2010. Market

consumption volumes recorded a CAGR of 9.1% between 2006 and 2010 to reach a total of 23.1 mil lion subscribers in

2010. The market's volume is expected to rise to 25.5 million subscribers by the end of 2015, representing a CAGR of

2.1% during 2010–15. The performance of the market is forecast to decelerate, with an anticipated CAGR of 1.5% during

2010–15, which will drive the market to a value of $9.5bn by the end of 2015. Comparatively, the French and German

markets will record CAGRs of 6% and 5.7% respectively over the same period, to reach values of $18.5bn and $19.8bn

in 2015.

Software market

The UK software market has decelerated in recent years, which culminated in a decline in market value in 2009. The

market recovered in 2010, and is expected to follow a more stable trend toward the end of the forecast period. The UK

software market had total revenues of $14.8bn in 2010, representing a CAGR of 3% between 2006 and 2010. In

comparison, the French and German markets recorded CAGRs of 3% over the same period, to reach values of $13bn

and $19.9bn in 2010. Network and database management sales proved the most lucrative for the UK software market in

2010, with total revenues of $3.7bn, equivalent to 24.7% of the market's overall value. In comparison, sales of general

business productivity and home use applications generated revenues of $3.4bn in 2010, equating to 23.2% of the

market's aggregate revenues. The performance of the market is forecast to accelerate, with an anticipated CAGR of

6.4% for 2010–15, which will drive the market to a value of $20.2bn by the end of 2015. Comparatively, the French and

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German markets will record CAGRs of 5.2% and 3.8% respectively over the same period, to reach values of $16.7bn

and $23.9bn in 2015.

Pharmaceuticals

The UK pharmaceuticals market witnessed moderate growth during 2006–10, with only a minor contraction in 2009. The

market is forecast to experience accelerated growth during 2011–15. The UK pharmaceuticals market had total revenues

of $23.4bn in 2010, representing a CAGR of 2.4% for 2006–10. In comparison, the French and German markets

recorded CAGRs of 2.7% and 1.7% respectively over the same period, to reach values of $35.9bn and $34.6bn in 2010.

The performance of the market is forecast to accelerate, with an anticipated CAGR of 4.2% for 2010–15, which will drive

the market to a value of $28.8bn by the end of 2015. Comparatively, the French and German markets will record CAGRs

of 2.3% and -0.7% respectively over the same period, to reach values of $40.2bn and $33.4bn in 2015.

Biotechnology

The UK biotechnology market experienced a decline in growth during 2008 and 2009. The market rebounded and grew

strongly in 2010, and is now expected to continue growing toward 2015. The UK biotechnology market had total revenue

of $7bn in 2010, representing a CAGR of 3.6% between 2006 and 2010. In comparison, the French and German markets

recorded CAGRs of 7.6% and 1% respectively over the same period, to reach values of $4.7bn and $4.5bn in 2010.

Medical/healthcare sales proved the most lucrative for the UK biotechnology market in 2010, with total revenues of

$4.8bn, equivalent to 69.1% of the market's overall value. In comparison, sales of service provider generated revenues of

$1.2bn in 2010, equating to 17.2% of the market's aggregate revenues. The performance of the market is forecast to

accelerate, with an anticipated CAGR of 4% for 2010–15, which will drive the market to a value of $8.5bn by the end of

2015. Comparatively, the French and German markets will record CAGRs of 5.8% and 7% respectively over the same

period, to reach values of $6.2bn and $6.3bn in 2015.

Aerospace and defense market in the UK

The UK aerospace and defense market recovered in 2010 after a decline in value in 2009. In the forecast period, the

market is expected to stabilize, with the annual rate largely remaining below 5%. The UK aerospace and defense market

had total revenues of $31.5bn in 2010, representing a CAGR of 2.9% between 2006 and 2010. In comparison, the

French and German markets recorded CAGRs of 2.3% and 3.8% respectively over the same period, to reach values of

$38.4bn and $34.9bn in 2010. The defense segment was the most lucrative in 2010, with total revenues of $17.8bn,

equivalent to 56.3% of the market's overall value. The civil aerospace segment contributed revenues of $13.8bn in 2010,

equating to 43.7% of the market's aggregate value. The performance of the market is forecast to accelerate, with an

anticipated CAGR of 4.9% for 2010–15, which will drive the market to a value of $40.1bn by the end of 2015.

Comparatively, the French and German markets will record CAGRs of 3.6% and 2.9% respectively over the same period,

to reach values of $46bn and $40.3bn in 2015.

R&D

R&D expenditure

According to the Innovation Union Scoreboard 2011, which is a report that benchmarks the innovation performance of

the EU countries against emerging economies such as China, India, Russia, and Mexico as well as other major R&D

spenders such as the US, Japan, Canada, and Australia, the UK ranked sixth in terms of innovation performance, putting

it above the EU average.

According to the Science and Innovation Investment Framework for 2004–14, the government stated its objective of

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raising the level of knowledge intensity, which stood at 1.9% in 2004, to the 2.5% mark by 2014. R&D expenditure as a

percentage of GDP stood at 1.82% in 2010 as per the World Bank.

Knowledge base

The policy of the DIUS toward science is driven by the overall objective of maintaining its world-class science and

research base. Seven research councils funded by the DIUS are responsible for allocating public funds to support the

initiatives of research projects and teams. The unit works alongside the Department for Business Enterprise and

Regulatory Reform to promote innovation in business. The DIUS believes that, in the face of increasing global

competition, innovation is one of the keys to competitiveness that will help improve the quality of life and sustain

economic development in the UK, as well as supporting it in facing challenges such as pollution and climate change.

Outlook

The UK has the world's largest aerospace industry outside the US. It is one of the country's few globally competitivemanufacturing sectors, supporting more than 276,000 jobs with turnover of around £22bn ($33bn) per year. Apart from

being a key supplier of aerospace requirements, the country also excels in the fundamental areas of research.

Furthermore, the country also develops advanced technologies for nanomaterials and the usage of wave and tidal

energy. As the UK is at the forefront of new technologies, there is a good possibility of it developing relatively nascent

fields such as nanotechnology, space research, space tourism, and alternative energies.

The Technology Strategy Board, a government entity, awarded £2.5m to wave and tidal energy technology projects in

January 2011. This grant is expected to help finance three wave and tidal energy R&D projects, and was awarded to

Bauer Renewables Ltd, Pelamis Wave Power Ltd, and Marine Current Turbines Ltd. The total funding of the project

(including the funding from the participating companies) is expected to be around £9m. Furthermore, three universities

along with seven UK companies are expected to participate in the project. The board has indicated that this was its

second investment, after it made a £7m investment in wave and tidal energy in July 2010. These grants are expected to

give a fillip to R&D in the renewables space.

In 2009, the top 1,000 companies in the UK invested more than £25.3bn ($42bn) in developing new products and

services and improving productivity according to the 20th annual R&D scoreboard, which surveyed the top 1,000 UK and

top 1,000 global corporate investors in R&D.

According to the Innovation Union Scoreboard 2011 the UK ranked fourth in terms of quality of human resources, fourth

for open excellent research systems, second for linkages and entrepreneurship, fourth for finance and support

dimension, 11th for firm dimension, 13th for intellectual assets, ninth for economic effects, and 20th for innovators

dimension. The report indicated a contraction of 3.3% in terms of investment by the business sector in R&D for 2010,which is cause for concern. However, R&D expenditure in the public sector increased by 0.8% in 2010.

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Legal Landscape

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LEGAL LANDSCAPE

Summary

The judicial system in the UK is considered to be among the most fair and transparent in the world. Scotland and

Northern Ireland each use a different legal system to that employed in England and Wales, but all are based on the same

fundamental elements. Despite the reputation that the judiciary has established for itself, the public perception of the

legal system in the UK is rather poor. This is more due to high profile incidents involving law enforcement staff than the

judiciary.

There are a number of laws governing business in the UK. These laws are by and large conducive to the business

environment. The most important laws relate to the incorporation of business, taxation, monopolies, and restrictive trade

practices, intellectual property rights (IPR), and labor laws.

Evolution

There are three different legal jurisdictions in the UK, which each have their own legal system; these are based on

English law, Northern Irish law, and Scots law. English law uses a common law system, while the law of Northern Ireland

is based on the common law system and is partly influenced by English law. Scots law is influenced both by the ancient

Roman law and by civil law, and as a result it is called a mixed legal system. Laws pertaining to the commercial and

business sector are common for the whole region. Although the labor law was formed in 1823, all laws were amended

after the formation of the European Union (EU). Similarly, all laws relating to company law, commercial law, competition

law, and IPR have been amended.


Structure of the judicial system

The UK does not have a single criminal or penal code, and there is an emphasis on the separation of the judiciary and

the prosecuting authorities. England and Wales, Scotland, and Northern Ireland have separate legal systems. Common

law principles apply for English and Northern Irish law, while civil law principles along with some elements of common

law form the bedrock of Scots law. For England, Wales, civil cases in Scotland, and Northern Ireland, the Supreme Court

is the highest court. Furthermore, for criminal cases in Scotland, the highest court is the High Court of Justiciary. Data

from the European Commission for the Efficiency of Justice indicate that Scotland has 4.5 judges per 100,000 people,

Wales has 3.6, and England and Northern Ireland have 2.5.

In the past, the structure of the judicial system has been criticized by many for being archaic and for lacking

transparency. In response to this criticism, the Constitutional Reform Act 2005 was passed, laying the foundation for the

establishment of the Supreme Court of the UK, which started functioning in 2009 and took over the House of Lords'

jurisdiction as the highest court in the land. The Supreme Court hears all appeals from England, Northern Ireland, and

Wales, and civil appeals from Scotland.

Legislation affecting business

A lot of foreign firms have licensing agreements with manufacturers in the UK. The courts enforce the licensors’ rights,

but when these interfere with free trade within the EU, the single market prevails under the doctrine of "exhaustion of

rights." This applies to all forms of IPR. If a court has reason to believe that a company is using trademark to stop

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imports, it is likely to dismiss the claim of infringement. Registration, which is possible with patents, trademarks, and

industrial design rights, is advisable whenever possible.

There are no statutory restrictions on the size of royalties or on other licensing arrangements. Regulatory considerationsdo not significantly change the advantages of licensing both in terms of exports or production through a wholly owned

subsidiary or joint venture. Inward licensing of technology is significant in electronics, biotechnology, mechanical

engineering (including vehicles), and chemicals. No government approval is needed for licensing agreements; however,

an agreement can be challenged by the Competition Directorate of the European Commission. There is no need to

register trademark licenses; however, it is advisable to do so.

Forms of incorporation

In general, business entities in the UK can choose to register as private limited companies, public limited companies,

partnerships, or as branches of companies that have a foreign base. Most foreign companies that operate in the UK

choose to do so as private limited companies, meaning they may not look to the public for financing through the issue ofshares or bonds. Public limited companies can issue shares and bonds, and can choose whether to list themselves on

the stock exchange or remain unlisted.

Labor law

The development of labor laws in the UK was facilitated by the country's traditionally strong trade unions and, since

1973, by the UK’s membership of the EU. The Law of Contract formed the basis of most labor laws in the UK up until the

late 1950s. In the early 1960s, labor laws developed through statutes, statutory regulations, and case law. Labor laws in

the UK are broadly the same across all the constituent countries.

According to EU labor law, the maximum length of a working week is 48 hours in seven days, with a minimum rest of 11

hours in each 24 hour period. The UK permits those who are willing to work more than 48 hours to do so via theEuropean Working Time Directive. Statutes such as the Employment Rights Act 1996, the Employment Act 2002, and

several other legislative provisions outlaw discrimination on the grounds of race, religion, sex, sexual orientation,

disability, and, most recently, age. A number of key changes were made to British labor laws during the Labour Party's

reign in the late 1990s and 2000s, such as the introduction of a national minimum wage, more generous maternity and

paternity benefits, and stricter measures to combat discrimination.

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Legal Landscape

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Table 10: Year of ratification of fundamental labor rights conventions

Convention Year

Elimination of forced and compulsory labor: Convention 29 1931

Freedom of association and collective bargaining: Convention 87 1949

Freedom of association and collective bargaining: Convention 98 1950

Elimination of forced and compulsory labor: Convention 105 1957

Elimination of discrimination in respect of employment and occupation: Convention 100 1971

Elimination of discrimination in respect of employment and occupation: Convention 111 1999

Abolition of child labor: Convention 138 2000

Abolition of child labor: Convention 182 2000

Intellectual property

Patents, trademarks, service marks, copyrights, and design rights are legally recognized in the UK. Important laws

include the Registered Designs Act 1949, the Patents Act 1977 (since amended by the Patents Act 2004), the Copyright,

Designs, and Patents Act 1988, and the Trade Marks Act 1994. As in most countries, owners can be compelled to grant

patent licenses when considered to be in the public interest, but this rarely occurs in the UK. Usually, the justification is

that the patent is not worked (that is, the product is not marketed) in the UK.

There is also a special provision by which the government can use, or authorize others to use, any patented invention or

registered design “for the services of the Crown." In practice, these Crown rights are mostly used for inventions with

military applications, although the Department of Health has used Crown rights at times to procure medicines cheaply for

its hospitals.

Tax regulations

Corporate income tax

Corporate income tax in the UK is imposed at a rate of 20% for profits between £0 and £300,000. Furthermore, the rate

of 20% also applies to profits between £300,000 and £1.5m. Companies with profits over £1.5m are charged a tax rate of

24%. A company is considered to be UK resident either if it is registered in the country or if it is controlled by its core

managerial personnel out of the UK.

Individual income tax

An individual who is resident, ordinarily resident, or domiciled in the UK must pay income tax and capital gains tax on

income or gains earned worldwide. Taxation for individuals in the UK follows a system of marginal taxation, whereby

income up to £34,370 is taxed at a rate of 20% and income between £34,371 and £150,000 is taxed at a rate of 40%.

Any income beyond £150,000 is taxed at a rate of 50%. A resident of the UK is a person who is present in the country for

183 days or more in a fiscal year, or a person who has visited the UK for more than 90 days per year in four consecutive

years.

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Capital gains tax

A capital gains tax is imposed at a rate of 18–28% for individuals, trustees, and personal representatives on taxable

gains.

Indirect tax

The standard VAT rate is 20.0%. A zero rating applies to the export of goods, some international services, food, water,

passenger transport, and some other items. Exemptions from VAT include health, education, insurance, exchanges in

land, and certain financial services, although the option to tax is present in some cases. A reverse charge applies with

respect to some services received from abroad. The increase in annual VAT registration and deregistration limits from

£73,000 to £77,000 and £71,000 to £75,000 respectively will be applicable from April 2012.

Trade regulations

The Competition Act 1998 introduced the concept of abuse of monopoly, which is central to EU law. Under the Enterprise

Act, the Office of Fair Trading may refer to the Competition Commission (CC) in cases where the structure of a market or

conduct of suppliers or customers seems to be harming competition. Following a referral, the CC conducts a detailed

investigation. If it finds an adverse effect on competition, it seeks remedies via undertakings or orders. A CC investigation

may take no more than two years. A right of appeal has been introduced for market investigation references, in that

those affected by the decision may request a review from the Competition Appeal Tribunal, which is an independent

body. The sectoral regulators in telecommunications, gas, electricity, water, rail, and aviation may make market

investigation references. The secretary of state may intervene only in market investigation cases that involve national

security.

Performance

Effectiveness of the legal system

The UK was ranked as the 14th freest economy in the Heritage Foundation's and the Wall Street Journal’s 2012 Index of

Economic Freedom, and seventh out of the 43 countries in the European region. Meanwhile, the country was ranked

seventh in the World Bank's Doing Business indicators for 2012. The UK’s index score of 74.1 was higher than the

European average of 66.1, and also above the global average of 57.9. This score indicates a highly conducive

environment for business. The UK ranked highly in terms of business freedom, trade freedom, monetary freedom,

property rights, financial freedom, and freedom from corruption, but did not score as highly in terms of fiscal freedom and

freedom from government intervention. In the Doing Business 2012 report, the UK was ranked 19th for starting a

business, 10th for protecting investors, 22nd for dealing with construction permits, 68th for registering property, first for

getting credit, and sixth for resolving insolvency.

Additionally, according to Doing Business 2012, only six stages, 13 days, and 0.7% of per capita gross national income

are needed for a person to start a business in the UK. In contrast, the averages among the countries in the Organization

for Economic Co-operation and Development are five stages, 12 days, and 4.7% of per capita gross national income.

Outlook

The government is focused on creating the best business environment in the G20. Through reforms and deregulation,

the UK government wants to encourage more investment in the country, and the latest incentive is a further cut in

corporate tax, which will be reduced to 22% by 2014. The patent box regime (an incentive scheme that would encourage

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businesses to retain and commercialize existing patents and to develop new innovative patented products), will be

applicable from 2013. Moreover, the patent box would incentivize businesses to bring in high value jobs and activity

linked with the development, manufacture, and exploitation of patents in the UK. In addition, the changed ControlledForeign company regulations that will be applicable from April 2013 should make the UK a more competitive destination

for business, as well as reducing ways to evade tax. There will be further talks on research and development tax credit

regimes, with repayable credit for loss makers. Moreover, the government is keen to reduce the top income tax rate to

45% to make the UK’s tax regime competitive with other G20 nations. However, the UK government needs to continue

with deregulatory reforms in order to attract investment.

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Environmental Landscape

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ENVIRONMENTAL LANDSCAPE

Summary

In the UK, the Department for Environment, Food and Rural Affairs (DEFRA) holds the responsibility for drafting and

implementing policy with regards to environmental protection and sustainable development. DEFRA identifies its priority

as “the need to tackle climate change internationally and through domestic action to reduce greenhouse gas emissions,

and to secure a healthy, resilient, productive, and diverse natural environment.” Environmental policy in the UK now aims

to tackle air, water, noise, and land and soil pollution as separate problems.

The UK subscribes to environmental policies set by the European Union (EU), and has ratified the Kyoto Protocol. In

recent times, the country has taken some proactive efforts to create a successor agreement to the treaty. It has also

made a number of internal and external commitments that aim toward a reduction in various types of pollutants.

Evolution

The first initiative geared toward the environment in the UK was the establishment of the Control of Pollution Act 1974,

followed by the Environmental Protection Act 1990 (EPA), the Water Resources Act 1991, and the Land Drainage Act

1991. Environmental conservation activities in the UK were increased with the establishment of the Environmental Act

1995. This act brought the following institutions under its control: the National Rivers Authorities, Her Majesty's

Inspectorate of Pollution, the waste regulation authorities in England and Wales, and the London Waste Regulation

Authority.


Environmental regulations

DEFRA is the government department responsible for environmental concerns in the UK. DEFRA’s aim is to “enable

everyone to live within our environmental means.” Traditionally, environmental policy in the UK has been based on the

"command and control" principle, whereby possible polluters are given certain quotas or standards and the authorities

carefully monitor these and deal strictly with any infringements. The concept of integrated pollution control prescribed in

the EPA looks at dealing with pollutants in such a way that their harmful effects on the environment as a whole are

reduced.

Policy

Participation in global efforts, agreements, and pacts

The previous Labour government identified climate change as a grave threat facing the world. It introduced the Climate

Change Program in 2000, which was aimed at helping the UK meet its Kyoto Protocol targets. The government is

confident that the UK is well on its way to achieving these targets, and has been working with the EU to take further

action. The UK has been successful in ratifying the Kyoto Protocol for the second time and extending it beyond 2012.

As with all EU policymaking, the UK has a key role to play in the development of European environmental standards. In

May 1999, the promotion of sustainable development initiatives was specifically set as an EU objective. Subsequently,

the EU Sustainable Development Strategy was adopted in June 2001 to provide a governing structure to the economic,

environmental, and social development of the EU and to help to integrate new environmental directives into other policy

areas. The EU has recognized four key areas of climate change as the basis for sustainable development, namely nature

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and biodiversity, natural resources and waste, health, and quality of life.

The EU Biodiversity Strategy has been established to ensure the protection and conservation of biodiversity. Along with

this strategy, the EU has in place two pieces of legislation that act as its main policy instruments to promote and preservenature: the Wild Birds Directive, which dictates that EU countries must set up special areas for endangered species of

birds, prohibit activities that act as a threat to these birds, and limit the hunting of birds; and the Habitats Directive, which

ensures that flora and fauna are preserved in specially demarcated areas, forming a network of such areas known as

Natura 2000.

To prevent threats to public health, the EU has set up the Registration, Evaluation and Authorization of Chemicals

system, under which producers and importers of around 30,000 substances are or will be required to register these

substances. In addition, they will be required to provide information about the specific properties of these chemicals, how

to handle them safely, and what effects and uses they have, and to pass this same information on to organizations or

individuals that use these chemicals in their production processes.

To comply with EU standards with regards to the disposal of waste and the management of natural resources,

constituent countries must try to put into practice various alternatives to adding to landfill sites. Incineration is a technique

that is commonly used in this regard, as it can be used to produce energy, although it must be done in line with EU

guidelines. In addition, waste prevention and effective recycling and composting techniques have also been encouraged.

Moreover, rules regarding the disposal of electrical and electronic items, batteries, automobiles, and tires have been laid

down, and targets have been set for the amount of packaging waste that must be recycled.

Some of the major international environmental treaties ratified by the UK are shown in Table 11.

Table 11: Year of ratification of major international environmental treaties

International treaty Year

Vienna Convention for the protection of the Ozone Layer, 1988 1987

Montreal Protocol on Substances that Deplete the Ozone Layer 1988

Framework Convention on Climate Change 1993

Convention on Biological Diversity 1994

United Nations (UN) Convention to Combat Desertification in those CountriesExperiencing Serious Drought and/or Desertification, Particularly in Africa 1996

UN Law of the Sea 1997

Kyoto Protocol to the Framework Convention on Climate Change 2002

Cartagena Protocol on Biosafety 2003

Stockholm Convention on Persistent Organic Pollutants, 2001 2005

Performance

Environmental impact

The UK has made significant improvements in reducing the impact of economic growth on the environment. It achieved

strong progress in controlling major air pollutants and agrochemicals. This progress reflects both the reshaping of the

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economy and the strengthening of the UK’s environmental policies in the EU context. To help stem the rapid pace of

global warming, the EU and its individual members have committed to meeting the targets set by the Kyoto Protocol. The

UK has agreed to reduce greenhouse gas emissions by 8% from 1990 levels between 2008 and 2012. The 2009

Renewable Energy Directive sets a target for the UK to achieve 15% of its energy consumption from renewable sources

by 2020 compared to 3% in 2009, and the amount of biofuel in the transport fuel mix is to be a minimum of 5% by 2014

from the present 3%.

The EU has also established the EU Emissions Trading System (EU ETS), which is aimed at helping the EU nations

meet their Kyoto Protocol targets. Individual firms within the EU are aiming not to exceed the quotas that have been set

for them by their respective governments, and some firms are even profiting out of the imposition of these quotas by

selling the unneeded share of their allowed quota to firms that are exceeding their limits. Hefty fines are imposed on firms

that exceed the quota limit they have been allocated.

By 2005, the UK government had managed to cut down the amount of commercial and industrial waste generated in

landfill sites to 85% of the 1998 level. Similarly, an effort was made to reduce the environmental impact of household

waste, and in 2005 not less than 25% of total household waste was either recycled or composted, with government plans

for this to reach 33% by 2015.

The Kyoto Protocol was drawn up in 1997 in Kyoto, Japan, with the purpose of arresting climate change by compelling

signatory nations to reduce the emissions of six greenhouse gases. After seven years of debate, the protocol finally

became international law in early 2005. Many industrialized countries are bound to reduce their emissions of greenhouse

gases by 5.2% from their 1990 emission levels during 2008–12. The EU was given a group target of an 8% reduction,

which it hopes to achieve through the assignment of individual rates to its member countries; to this end, the UK was

given a 12.5% emissions reduction target.

In its attempts to meet its target, CO2 emissions in the UK came down from 583.1 million metric tonnes in 2004 toaround 538.6 million metric tonnes in 2010.

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Figure 15: Carbon dioxide emissions (million metric tonnes) and growth (%), 2005–10

-10.0%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

480.0

500.0

520.0

540.0

560.0

580.0

600.0

2005 2006 2007 2008 2009 2010

Gr ow t h ( % )

M i l l i o n m e t r i c t o n s

Year

Volume Growth rate

Renewable energy market in the UK

The UK renewable energy market has enjoyed double digit rates of annualized growth in recent years. This trend is

anticipated to continue over the forecast period. The UK renewable energy market had total revenue of $4.5bn in 2010,

representing a compound annual growth rate (CAGR) of 18.1% for 2006–10. In comparison, the French and German

markets recorded CAGRs of 7.3% and 12% respectively over the same period, to reach values of $7.9bn and $16.7bn in

2010. Market consumption volumes recorded a CAGR of 7.8% between 2006 and 2010, to reach a total of 26.4 billion

kWh in 2010. The market's volume is expected to rise to 35.1 billion kWh by the end of 2015, representing a CAGR of

5.9% for 2010–15. The performance of the market is forecast to decelerate, with an anticipated CAGR of 11.1% for

2010–15, which will drive the market to a value of $7.6bn by the end of 2015. Comparatively, the French and German

markets will record CAGRs of 8.9% and 9.9% respectively over the same period, to reach values of $12.2bn and

$26.8bn in 2015.

Wind energy market

The UK wind energy industry is expected to experience accelerated revenue growth and decelerated consumption

volume growth during 2010–15. The UK wind energy industry had total revenues of $1.3bn in 2010, representing a

CAGR of 29% for 2006–10. In comparison, the French and German industries recorded CAGRs of 52.1% and 8.7%

respectively over the same period, to reach values of $1.1bn and $6bn in 2010. Industry consumption volumes increased

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with a CAGR of 21.2% between 2006 and 2010, to reach a total of 8.7 billion kilowatt hours in 2010. The industry's

volume is expected to rise to 13.6 billion kilowatt hours by the end of 2015, representing a CAGR of 9.4% during 2010–

15. The performance of the industry is forecast to accelerate, with an anticipated CAGR of 35.5% for 2010–15, which will

drive the industry to a value of $5.9bn by the end of 2015. Comparatively, the French and German industries will record

CAGRs of 7.8% and 1.7% respectively over the same period, to reach values of $1.5bn and $6.6bn in 2015.

Biofuel Market

Despite huge decline in 2009, the UK biofuels production industry has experienced growth overall in recent years, as

greater emphasis has been placed on green energy. The industry is expected to accelerate toward 2015 and post very

strong double digit growth. The UK biofuels production industry had total revenues of $202.1m in 2010, representing a

CAGR of 3.5% for 2006–10.

In comparison, the French and German industries recorded CAGRs of 42% and 2% respectively over the same period,

to reach values of $2,707m and $3,730.9m in 2010. Industry production volumes recorded a CAGR of 4.5% between

2006 and 2010 to reach a total of 208.3 thousand tons in 2010. The industry's volume is expected to rise to 353.4

thousand tons by the end of 2015, representing a CAGR of 11.2% during 2010–15. Biodiesel production had the highest

volume in the UK biofuels production industry in 2010, with 146.2 thousand tons, equivalent to 70.2% of the industry's

overall volume. In comparison, production of ethanol had a volume of 62.1 thousand tons in 2010, equating to 29.8% of

the industry total.

The performance of the industry is forecast to accelerate, with an anticipated CAGR of 15.9% for 2010–15, which will

drive the industry to a value of $422.9m by the end of 2015. Comparatively, the French and German industries will record

CAGRs of 10.2% and 14.2% respectively over the same period, to reach values of $4,406.3m and $7,240.4m in 2015.

Durban conference on climate change

The UN Framework Convention on Climate Change (UNFCCC) sets an overall framework for intergovernmental efforts

to tackle the challenge posed by climate change. It recognizes that the climate system is a shared resource, the stability

of which can be affected by industrial and other emissions of carbon dioxide and other greenhouse gases. The

convention has a universal membership, with 192 countries having ratified it.

The main issues tackled in the 2011 conference were the reduction of temperature; the reduction of carbon emissions;

substantial financing to prevent deforestation; and adaptation, technology development, and transfer. The UK played a

central role in galvanizing support for extending the Kyoto Protocol beyond 2012. The UK supported ratification of the

Kyoto Protocol second commitment period, and worked to secure a mandate for a comprehensive legally binding

instrument in protocol form by 2015.

Outlook

The UK government started a green initiative of budgetary support to increase environmental awareness in the country in

2008. The government’s main objectives were to equip the country for the challenges of the future, confront climate

change, and to end child poverty in the medium term. The UK adopted the Climate Change Act 2008, which made it the

first country in the world to have a legally binding long-term framework to cut carbon emissions. Under the act, the UK

government has to report annually to lawmakers on its progress in meeting its carbon budgets.

According to Chris Huhne, the former secretary of state for energy and climate change, the UK will endeavor to reduce

its emissions of greenhouse gases by 50% compared with 1990 levels by 2025. The government has set an overall

target of an 80% reduction in emissions of the pollutant compared with 1990 levels by 2050. The goal of the 50%

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reduction by 2025 is part of the fourth carbon budget under the Climate Change Act, which was approved by the former

Labour government in 2008.

Under the Kyoto Protocol, the UK has to cut i ts emissions by 12.5% compared with 1990 levels by 2012. On a Kyotobasis, the country’s emissions were 19.4% below 1990 levels in 2009 without emissions trading. Furthermore, as per the

EU ETS (post-2012), the UK will auction 100% of its allowances to the large electricity generation sector. This indicates

that power generation giants in the UK will have to bid for CO2 emissions rights, rather than getting them free based on

past emissions levels.

The future energy policies of the government will focus on both reducing energy bills as well as carbon emissions. The

best way for the government to implement a greener and cheaper climate policy would be getting the costs of renewable

energy down by creating and supporting infrastructure for growth of the renewable energy market.

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Appendix

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APPENDIX

Ask the analyst

MarketLine’s Country Analysis Practice consists of a team of economists, analysts, and researchers, all with expertise

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Appendix

Documents

UK pestel